Lender Alert: Commercial Finance Licensing Legislation In New York State Merits Watching
A bill recently introduced in the New York State Senate (S6688) would vastly expand the reach and scope of the licensing regime applicable to effectively all forms of commercial financing transactions. The current lender license requirement in New York State has a fairly limited reach, extending to small consumer and small commercial loans (arguably, truly small business or quasi-consumer loans). The current determining factors require that loans must be both smaller than $50,000 and at a rate above 16 percent to trigger the licensing requirement. Given these parameters, most equipment finance transactions and commercial loans escape the existing licensed lender law. The proposed law would capture a substantial portion of the finance industry and create a licensing requirement in New York State for non-bank lenders and leasing companies—and, as a result, potentially limit the number of finance companies available to businesses in New York.
The expansive nature of the bill comes in several areas. First, it dispenses with the prior transaction size limits and expands the reach of the licensing in New York to transactions of $500,000 and under without regard to interest rate. Second, unlike many of the other licensing regulations nationally, the law as proposed is unambiguous in its attempt to capture all forms of financing. The law targets any “Commercial Financing Product,” which is expressly defined to include all forms of loans, but also all forms of receivable financing (including factoring) and any leasing transaction. The proposed law provides exemptions only for banks, credit unions, and insurance companies (and a very limited class of loans). Further, the law includes the solicitation of such transactions and extends to brokers. The law provides for a safe harbor for parties entering into or soliciting fewer than five transactions in any 12-month period.
The licensing process itself is similar to other licensing regimes, requiring evidence of capital, registered offices in-state, background checks, and similar conditions. What is more concerning are some of the restrictions the law imposes. Licensees are prohibited from requiring or using confessions of judgment up front and are also prohibited from taking any instrument in which blanks are left to be filled in after execution. This prohibition on “blanks to be filled in” could be especially problematic for certain forms of documentation and collateral that are required to be endorsed in blank in order to effectively enforce. However, the most problematic point of the law as drafted is the consequence for non-compliance. Unlike many lending license laws that provide for fines and penalties as the primary consequence (although the law does provide for fines), the proposed law would render the underlying financing transaction unenforceable, specifically under Section 363 L, which provides that:
“Any commercial financing product made by a Person not licensed under this article, and not exempt, to a business or Commercial enterprise located in this state shall be void, and the Provider shall have no right to collect or receive any principal, interest, fees or charges whatsoever. No action to enforce a transaction made in violation of this subdivision may be maintained.”
While some lenders and lessors might choose in certain circumstances to enter into a transaction without a license in other jurisdictions and risk a fine, the analysis is very different where the failure to be licensed is a summary judgment level defense by an obligor. This sort of draconian penalty will force lenders and lessors to consider registration even with limited contact with New York, since the need to obtain the license will be a barrier to entering into transactions that can’t be later rectified by a subsequent application for a license. Even worse, prior transactions could potentially operate as a reason to deny a license.
The law as currently drafted is only in the earliest stage of the legislative process and is currently in the Rules Committee of the New York State Senate. While the law as presented has a long way to go before becoming law, members of the lending, finance, and equipment leasing industries will want to pay close attention if, and as, the bill progresses through the legislative process. Unless substantial revision is made to the bill as drafted, most importantly the unenforceability provision, the law will make compliance the rule, not the option. We will be monitoring this legislation closely as it moves through the legislative process and will continue to provide updates, to the extent the law progresses further. The full text of the proposed law can be found at https://www.nysenate.gov/legislation/bills/2019/s6688