The CFDL requires providers of commercial financing to provide consumer-style cost of credit disclosures to recipients, and it authorizes the DFS to promulgate implementing regulations. Our prior alert discusses the CFDL’s applicability and its exemptions. On October 20, 2021, the DFS issued a notice of proposed rulemaking under the CFDL, and following multiple rounds of public comment adopted its final regulations on February 1, 2023. The final regulations are codified in Part 600 of Title 23 of the New York Compilation of Codes, Rules, and Regulations.
The DFS’ final regulations, spanning more than 50 pages, address seven categories of commercial financing transactions: (1) sales-based financing (e.g., merchant/business cash advances), (2) closed-end financing (e.g., term loans), (3) open-end financing (e.g., revolving lines of credit), (4) factoring transactions, (5) lease financing, (6) general asset-based financing, and (7) a catchall for all other commercial financing transactions that do not fit within one of the other six categories.
The final regulations require providers of commercial financing of the types described above in amounts of $2,500,000 or less to provide consumer-style cost of credit disclosures to recipients at the time a specific offer of commercial financing is extended.
The final regulations prescribe column-by-column and row-by-row disclosure formatting and content requirements for each category of commercial financing, signature requirements (including electronic signatures), and rules for calculating the $2,500,000 transaction size threshold. The regulations require disclosures of annual percentage rates (APRs), including for non-loan categories, and include category-specific rules for calculating or estimating APRs, finance charges, itemizations of amount financed, and certain other items. They also establish processes for providers of sales-based financing (e.g., merchant/business cash advances) that use the opt-in method to project sales volumes to report to the DFS data about the accuracy of their estimated disclosures. Special rules also apply to brokers.
Compared to the proposed September 14, 2022 modifications, notable changes embodied in the final regulations include:
- Disclosures are required only if a recipient’s business is principally directed or managed from New York or a recipient (if a natural person) is a legal resident of New York (in contrast to the prior version of the regulations, which also would have required disclosures for out-of-state recipients if a provider was principally directed or managed from New York).
- Exemption from the CFDL for financial institutions (e.g., banks, trust companies, industrial loan companies (ILCs), credit unions, etc.) was expanded to also provide relief for majority-owned subsidiaries of financial institutions.
- A recipient may continue to make payments to its original obligee before receiving notice of an assignment, rather than requiring a recipient to receive 15-days’ prior notice.
- Specific language for disclosing broker compensation is no longer necessary, but providers must still accurately disclose how and by whom a broker will be compensated.
The final regulations became effective immediately and provide for a six-month grace period to comply. It is important to align your systems, procedures, and disclosures with these regulations during this grace period. Commercial financing disclosure requirements are also in effect in other states, including California, Utah, and Virginia.
For assistance navigating these regulations and developing your own commercial financing disclosures, please contact Alexander J. Callen or Josh Burlingham.