NY forces disclosure of small business loans and non-traditional financing
New York Gov. Andrew Cuomo (D) on December 23 enacted the Small Business Truth in Lending Act, which requires new consumer-type disclosures for business finance, including sales-based finance, such as Merchant Cash Advances (MCA) and invoices. factoring.
the act, which takes effect on June 21, 2021, also delegates regulatory and enforcement authority to the state’s Department of Financial Services (DFS).
New York is the second state to pass such legislation, preceded by California in 2018.
The law will have a significant impact on the financing of small businesses in New York, making federal Truth in Lending Act disclosure mandatory for business transactions, including non-traditional financing arrangements and open lines of credit.
Trade finance providers will need to weigh the costs and benefits of compliance versus limiting their financing offerings in New York City.
Conversely, funding recipients will get additional information (if imperfect) but will have fewer funding options if providers stop offering regulated funding options in New York.
What the law requires
The act applies to sales-based financing or merchant cash advances, accounts receivable factoring, open credit extensions (including most lines of credit), closed credit extensions (including equipment financing), as well as renewal or refinancing financing.
It exempts financings over $ 500,000, financial institutions and chartered banks, transactions secured by real estate or leases, and suppliers from only five financing transactions per 12 months.
Funders, including brokers, are required by law to disclose the following information when proposing funding: 1) the actual disbursement amount; 2) all financing costs, including reduced purchase prices for MCA and factoring; 3) annual percentage rate (APR); 4) total amount of reimbursement; 5) term; 6) payment amounts, including average projected payments per month; 7) all other potential charges, including drawing charges and late fees; 8) repayment or refinancing costs; and 9) warranty or warranty requirements.
Since MCA grants are inherently dependent on the recipient’s daily or weekly income levels and have no fixed term, the law allows MCA donors to only disclose an estimated APR based on the recipient’s projected sales. , referred to as “expected sales volume”.
MCA suppliers can choose between two methods of calculating the recipient’s projected sales volume – the historical method or the opt-in method – and must notify the DFS of their selection.
The historical method is based on the average historical sales of the funding recipient during a specified period. However, the donor must use the same fixed period for all of its financing operations.
The opt-in method allows the supplier to determine at its discretion the projected sales volume for each transaction, but the supplier must submit an annual report to DFS containing all of its expected APRs as well as the actual APRs of completed transactions. If the DFS determines that the difference between the estimated and actual APRs is “unacceptable”, it may require the supplier to use the historical method in the future.
The law contains similar detailed disclosure requirements for other financing transactions, including factoring and lines of credit, which vendors are encouraged to review with a lawyer. It should be noted that renewal financing providers should disclose the amount used to repay existing financing, including whether and to what extent the renewal financing is being used to pay unpaid financing charges.
The DFS is authorized to impose civil penalties of $ 2,000 per violation, $ 10,000 per “intentional” violation and an injunction for “knowing” violations.
Questions raised by the law
MCA’s treatment of disclosures – particularly its application of fixed funding parameters (like APR and a term) to an inherently contingent form of funding – raises several questions.
First, one of the purposes of the law is to allow funding recipients to compare funding offers, but an accurate apples-to-apples comparison is nearly impossible when suppliers can choose between different methods of calculating projected sales volumes. and, therefore, APRs and conditions.
Second, providing an estimated term and APR in an MCA transaction is at odds with established New York jurisprudence against the inclusion of a fixed term, reflecting the sale nature of the transaction.
Third, the record keeping realities of many small funding recipients are such that the information required for the historical method is often not available or is difficult to determine in the short time frame of these transactions. However, choosing the opt-in method could lead the DFS to conclude that the provider is not complying with the law.
Fourth, it remains to be seen how the DFS will define what is an “unacceptable” gap between estimated and actual APRs for providers who choose the opt-in method and whether providers will voluntarily submit annual reports to DFS to take advantage of the. opt-in more flexible approach to the method.
Finally, the law says nothing about its jurisdictional scope and whether funding recipients have a private right to sue.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Mendy piekarski is a commercial and stock market litigation partner with Thompson Hine LLP in New York. He also advises alternative trade finance and merchant cash advance companies on various legal and regulatory matters.