Proposed New York State Senate Bill S5470 (“the bill”) has been passed by both houses of the New York State Legislature and is pending presentation to Governor Andrew Cuomo for signature. It is beyond the scope of our review (and the prophetic powers of the authors) to speculate on the likelihood of the governor’s signing the bill into law, so we’ll focus on the effect of the bill, assuming it is signed into law in its current form.

This bill would impose a disclosure requirement upon certain New York commercial lenders. This proposal follows a trend exemplified most notably in California, which amended the California Financing Law to require licensed commercial lenders and brokers to issue new disclosures to commercial borrowers in that state, including on loans made via an internet platform.

The required disclosures of the bill approximate those in the loan estimate form issued to home buyers by residential mortgage lenders under the federal Truth in Lending Act. The bill has several exceptions, leaving many in the commercial lending community unaffected and placing substantial regulatory burdens on the remaining segment.

Which Lenders (and Related Parties) Would Not Be Affected?

As currently drafted, the bill would not apply to:

1. Financial Institutions. The bill defines “financial institution” as “(i) a bank, trust company, or industrial loan company[1] doing business under the authority of, or in accordance with, a license, certificate or charter issued by the United States, this state or any other state, district, territory, or commonwealth of the United States that is authorized to transact business in this state; (ii) a federally chartered savings and loan association, federal savings bank or federal credit union that is authorized to transact business in this state; or (iii) a savings and loan association, savings bank or credit union organized under the laws of this or any other state that is authorized to transact business in this state.” Any financial institution meeting this definition is exempt.
2. Farm Lenders. Any lender regulated under the Federal Farm Credit Act is exempt.
3. Mortgage Lenders. Any transaction secured by real property (i.e., a mortgage) is exempt, which eliminates another significant portion of secured transactions from the scope of the bill.
4. Commercial Lessors. Any transaction that would constitute a “lease” as defined in Section 2-A-103 of the Uniform Commercial Code (UCC) is exempt. A Lease under UCC 2-A-103 is defined as:
5. • “(j). ‘Lease‘ means a transfer of the right of possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease.  Unless the context clearly indicates otherwise, the term includes a sublease.”

The term “lease” does include a “finance lease” as defined under UCC 2-A-103(g).

1. Infrequent Lenders. Any loan made by a lender who lends not more than five times per 12-month period or less is exempt.
2. High Value Loans. Any individual loan in excess of $500,000.00 is exempt. (Note here that, due to the bill’s exact phrasing, any lender intending to make a $500,000.00 loan must increase the loan amount to $500,000.01 to exempt itself from disclosure requirements.)
3. Supporting Entities. Persons solely providing technological support to exempt lenders are themselves exempt from compliance.

These exemptions generally narrow the list of affected companies to independent lenders and leasing companies that regularly make loans for $500,000 or less and/or provide non-exempt leases or other financing not secured by real estate, as well as their agents, brokers and representatives.

It should be noted that the popular “Equipment Financial Agreement” (EFA) would not be an exempt transaction (unless it was over $500,000) and would be subject to the disclosure requirements of the bill. The bill also extends the compliance requirement to any third party that is not itself a lender but “solicits and offers” financing that would otherwise be subject to compliance, which suggests that even third-party loan brokers would be subject to compliance.

What Loans Are Covered?

The bill further limits its scope to five types of commercial finance: (1) “sales-based” financing, (2) open-end finance (credit lines), (3) closed-end finance (term loans including non-exempt leases and EFAs), (4) factoring transactions, and (5) other, non-exempt commercial financing as defined in the bill but not satisfying the definition of any of the foregoing categories.

“Sales-based financing” is defined as a “transaction that is repaid by the recipient to the provider, over time, as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient. Sales-based financing also includes a true-up mechanism by which the financing is repaid as a fixed payment but provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.”  [all emphasis added].

“Open-end financing” means an agreement for one or more extensions of open-end credit, secured or unsecured, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes. Open-end financing includes credit extended by a provider under a plan in which: (i) the provider reasonably contemplates repeated transactions; (ii) the provider may impose a finance charge from time to time on an outstanding unpaid balance; and (iii) the amount of credit that may be extended to the recipient during the term of the plan (up to any limit set by the provider) is generally made available to the extent that any outstanding balance is repaid.

“Closed-end financing” means a closed-end extension of credit, secured or unsecured, including equipment financing that does not meet the definition of a lease under section 2-A-103 of the UCC, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes.  Closed-end financing includes financing with an established principal amount and duration.

“Factoring transaction” is defined as “an accounts receivable purchase transaction that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods the recipient has supplied or services the recipient has rendered that have been ordered but for which payment has not yet been made.” [all emphasis added].

Proposed Disclosure Requirements

Under a closed-end financing transaction, the provider would be required to disclose at the time of extending a specific offer for closed-end financing the financing amount, disbursement amount after fees (net proceeds), total cost of financing expressed as a dollar cost, estimated annual percentage rate and specifically using only those words or the abbreviation APR (in accordance with the prescribed formula for estimation), total repayment amount, term, payment amounts (those fixed and variable), description of all other possible fees and costs, prepayment charges (if any) and a general description of the collateral and/or security for the financing [all emphasis added].

For factoring, sales-based, and open-end transactions, the requirements are generally the same and more or less analogous to those of the closed-end financing, except to the extent that circumstance prevents a specific disclosure (e.g., the APR on a revolving credit line), in which case the lender is required to make a good faith estimate.

If any commercial financing will pay off existing credit facilities with the same lender, the lender is also required to make the following disclosures (in addition to the foregoing) upon the making of such renewal financing: the amount being used to pay off the existing facility, including prepayment charges and unpaid interest.

Timing and Effectiveness of Disclosure:  A Potential Change in Business Practices

This bill also requires the recipient of the financing to “sign off” on the required disclosures before it proceeds further with the commercial financing transaction application.  Specifically, the bill provides the following regarding signoffs:

• 809. Required signature. the provider shall obtain the recipient’s signature, which now may be fulfilled by an electronic signature, on all disclosures required to be presented to the recipient by this article before authorizing the recipient to proceed further with the commercial financing transaction application. (emphasis added)

Although not crystal clear, this provision appears to suggest that the disclosure signoff cannot be met by signing the actual underlying finance documents (modified to provide the required disclosure) and that the signoff must be made beforehand and therefore in a separate document.  In fact, §811 of the bill provides that the superintendent may promulgate rules and procedures consistent with this bill that include developing forms to allow the recipient to compare its financing options.

Based upon the foregoing, it would appear that the New York State Legislature intends the disclosure to be in a separate document from the underlying financing documents, affording a recipient the ability to evaluate loan proposals from multiple lenders. This new requirement will impact the business practices of non-exempt lenders, particularly the timing of disclosure of financing information and documents to be executed.

Penalties for Non-Compliance

Penalty for non-compliance with any of the foregoing is a $2,000 fine (for violation only) or a $10,000 fine (for a “willful” violation), assessed by the superintendent of the New York State Department of Financial Services, per violation, irrespective of how many borrowers were affected. The superintendent may also impose additional injunctive relief at its discretion.

Outlook 

Despite that commercial enterprises in New York are generally deemed to be sophisticated parties, transacting business on an equal footing, the bill presumes that the lender is at all times the party with the resources and information necessary to provide the described disclosures. The reality is that, particularly with respect to receivables purchases and factoring transactions, the “borrower” (i.e., the seller) often has more information about the proposed transaction than does the lender. The net effect of the bill is simply to shift a greater amount of the cost and risk for any covered commercial financing from one party to the other, despite the ready availability of accounting, financial, and legal counsel available to all parties.

While the exemptions carve out a huge swath of the commercial lending community right from inception, it is safe to assume that even exempt lenders are wary of the introduction of disclosure requirements for any commercial transaction. With the door potentially opened by this bill, it may only be a matter of time before similar requirements are proposed to cover all commercial transactions, without exemption.

As of this writing, the bill has been passed by both houses of the New York State Legislature, but it has not yet been presented to the governor for signature.

We will continue to monitor the status of New York State Senate Bill S5470, as well as any other similar proposals coming up for consideration, and provide updates as circumstances warrant.

Clearly, before you alter your business practices, create new documents, or modify your existing documents, we recommend you consult with an attorney who is familiar with all required compliance details and to confirm that the bill was signed into law.

For the complete text of the bill, go to https://www.nysenate.gov/legislation/bills/2019/s5470

[1] Industrial loan companies (or “industrial banks,” as they were known in New York) are no longer a charter option under New York banking law but still exist in other jurisdictions.