New York is enacting laws that mandate consumer-style disclosures for commercial financing transactions. The state’s Department of Financial Services initially delayed compliance with these requirements until final implementation regulations were issued. On February 1, 2023, the Final Regulations were published, and they are set to take effect on August 1, 2023.
The Final Regulations introduce significant changes compared to the proposed rules, which were influenced by public feedback. Key highlights include:
Scope of Application
The New York Law will now apply only when the recipient’s business primarily manages or directs from New York. Also if the recipient is a legal resident of New York. This is a departure from previous proposed versions, which required disclosures if either the provider or recipient was located in New York.
Subsidiary Exemption
The Final Regulations clarify that not only financial institutions but also their subsidiaries are exempt from the law.
Notice Requirements
The regulations modify the notice requirements related to transfers to align with Uniform Commercial Code (UCC) norms.
Broker Compensation Disclosures
While broker compensation disclosures are still required under the Final Regulations, the initial strict formatting requirements have been relaxed.
Signature Requirements
The Final Regulations allow for more flexibility in signature requirements. Permitting disclosures to be provided electronically or through other reasonable means.
It is important to note that certain entities and transactions are exempt from New York’s regulations, such as depository institutions and their majority-owned subsidiaries, transactions secured by real property, certain technology services providers, and funders regulated under the Federal Farm Credit Act. Additionally, the regulations do not apply to individuals or entities conducting five or fewer commercial financing transactions in New York within 12 months.
Existing State Disclosure Regulations Comparison
New York joins a growing list of states, including California, Utah, and Virginia, that have enacted laws mandating consumer-style disclosures for commercial financing transactions. While New York Law shares similarities with California’s law, there are some notable differences. New York’s Final Regulations apply to transactions of $2.5 million or less. Whereas California’s regulations only apply to transactions of $500,000 or less. Additionally, Utah recently implemented registration and disclosure requirements for certain commercial financing transactions up to $1 million.
The regulations in New York apply when a recipient’s business is primarily directed or managed in the state. Furthermore, when the recipient is a legal resident of New York. Providers can rely on written representations or other information provided during the application process to determine the applicability of the regulations. This aligns with a similar provision in California’s regulation.
Legislators and regulators across the United States are increasingly extending consumer-style requirements to commercial financing, particularly for smaller-dollar transactions. Maryland, Missouri, New Jersey, and North Carolina are among the states that have considered similar bills during their 2022 legislative sessions. This indicates a trend that is likely to continue through this year.
The Consumer Financial Protection Bureau (CFPB) is actively seeking to expand its oversight of commercial financing. The CFPB is finalizing a rule that will require commercial funders, both banks, and non-banks, to collect and report detailed demographic and financial data for certain commercial financing applications. This rule, originating from the Dodd-Frank Act, will provide regulators with comprehensive data on commercial lending practices, leading to increased scrutiny in the industry.
Funding Deals with CFGMS
As more states follow California, New York, Utah, and Virginia in implementing state-level disclosure requirements for commercial financing transactions, and with federal regulators paying closer attention to commercial lending practices, the landscape of commercial financing will undergo significant changes. Borrowers and funders alike should stay informed about these evolving regulations to ensure compliance and transparency in their financial transactions.
CFGMS ISO Partners can benefit from direct access to our dedicated compliance department which ensures that any inquiries or apprehensions regarding state regulations are promptly addressed. We commit to assisting in funding merchants operating in states with disclosure laws. We offer our expertise and support throughout the process.