Gov. Andrew Cuomo recently signed legislation (Senate Bill S5470) that imposes new disclosure obligations on New York commercial lenders. The new disclosures are akin to those provided to home buyers by residential mortgage lenders under the federal Truth in Lending Act.
Commercial Lenders Subject to New Requirements
S5470 requires providers of commercial financing to disclose certain information to the borrower upon a specific offer of financing. The term “commercial financing” refers specifically to open-end financing, closed-end financing, sales-based financing, factoring transactions, or other forms of financing the proceeds of which the recipient does not intend to use for personal, family, or household purposes.
Notably, the law contains exemptions for financial institutions, certain technology service providers, lenders regulated under the federal Farm Credit Act, commercial financing secured by real property, leases as defined in the Uniform Commercial Code (UCC), providers making five or less commercial financing transactions in a year, and individual commercial finance transactions over $500,000.
The term “financial institution” is defined as “(i) a bank, trust company, or industrial loan company 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.”
The disclosures a lender may be required to provide will vary according to the nature of the transaction. Below is a brief summary of the disclosures required for each type of covered transaction:
- Sales-based financing: the total amount of financing and the disbursement amount; finance charge; estimated APR; total repayment amount; estimated term; payment amounts, other potential fees; prepayment penalties; and description of collateral.
- Closed-end commercial financing: The total amount of financing and the disbursement amount; finance charge; APR; total repayment amount; term; payment amounts, other potential fees; prepayment penalties; and description of collateral.
- Open-end commercial financing: The maximum amount of financing and the amount scheduled to be drawn at offer; finance charge; APR; total repayment amount; term; payment frequency and amounts, other potential fees; prepayment penalties; and description of collateral.
- Factoring transactions: The amount of the receivables purchase price paid to the recipient and the amount disbursed to the recipient; finance charge; estimated APR; total payment amount; other potential fees; and description of the receivables purchased and any additional collateral.
- Other forms of financing: The total amount of financing and the disbursement amount; finance charge; APR; total repayment amount; term; payment amounts, other potential fees; prepayment penalties; and description of collateral.
- Renewal financing: The amount of new financing used to pay off prepayment charges or unpaid interest; and the total amount reduced from the disbursement amount. This disclosure is triggered when a recipient renews funding with the same provider and the proceeds from the new commercial financing are used to pay off the balance from the previous financing.
The law also requires that the lender obtain the recipient's signature on all required disclosures before proceeding with a commercial financing transaction application. Lenders are authorized to disclose additional information; however, that information must be separate from the required disclosures. Under S5470, a lender who chooses to disclose additional metrics of financing cost are prohibited from using the words "rate" and "interest" unless describing APR.
Penalties for Non-Compliance
Failure to comply with the new disclosure law may result in a civil penalty of up to $2,000 for each violation or $10,000 for each willful violation. S5470 also authorizes the superintendent to provide further relief for knowing violations, including injunctions, on behalf of impacted borrowers.
The new commercial lender disclosure law is slated to take effect on June 21, 2021.
If you have any questions or if you would like to discuss the matter further, please contact me, Howard Bader, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.