On September 21, 2021, New York Department of Financial Services announced a new proposed regulation intended to improve transparency for small businesses seeking commercial financing. The new proposed regulation requires companies that offer commercial financing in amounts under $2.5 million to make standardized disclosures about the terms of credit. These standardized disclosures are expected to assist businesses and individuals in understanding and comparing the terms of different commercial financing offers.
There is no standardized federal framework for how lenders provide information about offers of commercial financing. This is in contrast to the federal laws and regulations that prescribe how lenders make disclosures about loans to individuals for personal or household purposes. As small businesses work to recover from the financial crisis caused by the pandemic, increased transparency can help them make better decisions.
To address the lack of standardized disclosures in the commercial context, the New York State legislature passed a law earlier this year, codified at Article 8 of the New York Financial Services Law (the “Commercial Finance Disclosure Law” or “CFDL”), mandating disclosures for commercial financing effective January 1, 2022. The New York State Department of Financial Services’ (DFS) proposed regulation implements the CFDL.
Among its provisions, the regulation:
- Provides detailed definitions for terms used in the CFDL, and in the regulation itself;
- Explains how providers should calculate the finance charge and annual percentage rate;
- Sets forth formatting requirements for disclosures required by the CFDL, both generally and specifically for the following types of financing:
- Sales-based financing;
- Closed-end financing;
- Open-end financing;
- Factoring transaction financing;
- Lease financing; and
- General asset-based financing;
- Describes how the CFDL’s disclosure threshold of $2.5 million is calculated;
- Details certain duties of financers and brokers involved in commercial financing; and
- Prescribes a process under which certain providers calculating estimated annual percentage rates will report data to the Superintendent relating to the actual retrospective annual percentage rates of completed transactions, in order to facilitate accurate estimates for future transactions.
The proposed regulation is subject to a 60-day comment period following publication in the State Register, which is forthcoming. The Department of Financial Services will then review all received comments and issue a final regulation.