What Commercial Finance Companies Need to Know About New Commercial Financing Disclosure Rules

3 minute read | March.13.2023

There has been increased focus on commercial financing transactions over the past few years. States have been moving to introduce consumer lending disclosure regimes to commercial financing. Several states, including California and New York, have imposed new disclosure requirements. At least one state has imposed registration requirements on non-bank commercial financing providers. Depending on the location of customers that receive commercial financing, state laws may require specific disclosures. The highlights below focus on New York’s requirements, which became effective February 1, 2023, but has a compliance date of August 1, 2023.

What happened?

New York’s Commercial Finance Disclosure Law (“CFDL”) imposes consumer-like disclosure requirements similar to the federal Truth-in-Lending Act (“TILA”) requirements on commercial financing transactions. However, unlike TILA, the CFDL does not require periodic statements.

The New York Department of Financial Services (the “Department”) recently adopted the long-awaited regulations, outlining specific disclosure requirements. The final regulation imposes column-by-column and row-by-row disclosure content and formatting requirements for various types of commercial financing transactions. Required content includes, but is not limited to the following:

  • Disclosure of annual percentage rate (“APR”)
  • Allowed tolerances
  • Estimated monthly cost, finance charge, and term
  • Estimated payments and reasonably anticipated true-ups for sales-based financing.

In addition, the regulation has specific signature and reporting requirements.

Which commercial financing transactions are covered?

CFDL applies to commercial financing providers of closed- and open-end loans, merchant cash advance companies, factoring companies, providers of buy-now-pay-later products, and a host of other entities. The CFDL governs transactions of $2.5 million or less and requires disclosures to be provided to businesses principally directed or managed from New York, or in the case of a natural person, the recipient must be a New York legal resident.

Despite its broad reach, the CFDL exempts certain financial institutions, technology service providers that lease software or provide other services, leases under the UCC, real estate-secured commercial financing, and providers that make less than five commercial financing transactions per year.

How will this impact commercial finance companies?

Commercial financing providers that fail to comply with the new disclosure requirements risk civil penalties up to $2,000 per violation or $10,000 for any intentional violation. The Department may also order an injunction if it finds a provider has knowingly violated the law. Importantly, the CFDL allows providers to correct any “bona fide errors” in the disclosures, provided that the pertinent corrections are made, and recipients are notified within 60 days of discovery—thereby avoiding liability.

Sales-based financing providers can anticipate that compliance will be more challenging for them because they will need to calculate the estimated APR using a “historical method” or “opt-in method” described in the regulation.

What’s next?

California (effective December 9, 2022), Utah (effective May 4, 2022) and Virginia (effective July 1, 2022) require similar commercial disclosure rules. California and Utah laws also apply to commercial financing offered to businesses principally directed or managed from the state. Virginia’s law applies only to sales-based financing transactions, which are transactions in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient. Further, the Utah and Virginia rules require that the covered providers register as such in the states.

We expect state regulators to begin enforcing the disclosure requirements under these new rules.

State commercial financing legislation is also making its way through other states.[1] As states enact laws that govern commercial financing, providers should understand the differences, and act swiftly to come into compliance with the requirements.

Contact Melissa Baal Guidorizzi, Sherry-Maria Safchuk, Magda Gathani, Taylor Sullivan, and Jackie Schwizer if you have any questions.

[1] As of March 7, 2023, seven states have commercial financing bills pending that would create disclosure and, in some cases, registration requirements.