New York DFS Proposes Regulation to Implement TILA-Like Requirements on Small Business Loans
On September 21, 2021, New York’s Department of Financial Services (DFS) announced proposed regulations that clarify the small business Truth in Lending disclosure requirements that go into effect on January 1, 2022. The proposed regulations come just in time as non-banks and fintechs are attempting to prepare to comply with the commercial financing law with limited guidance.
Commercial Financing Law
As we discussed in the past, in late December of 2020, the New York Legislature passed SB5470, which mandates Truth in Lending-like disclosure requirements for commercial financing transactions. On February 16, 2021, former New York Gov. Andrew Cuomo signed into law SB898, which amended the commercial financing law by broadening the scope of the previous legislation and extending the effective date. Initially, the law only applied to commercial transactions of $500,000 or less and was set to take effect 180 days after the bill became law. SB898 expanded the scope to cover transactions up to $2.5 million and set an effective date of January 1, 2022.
The commercial financing law authorizes DFS to promulgate regulations to facilitate implementation, but regardless of whether DFS provides additional guidance, the law still takes effect on January 1, 2022. Because the law leaves unanswered questions regarding the form and substance of the required disclosures, the absence of DFS regulations has posed significant compliance concerns for companies trying to craft policies and procedures that comply with the requirements.
The newly proposed regulations provide instructions for companies in the small-business finance space on how to comply with the new disclosure requirements. For example, the proposed regulations:
Provide guidance on defined terms and define “finance charge;”
Clarify how to calculate and disclose APR;
Set general formatting requirements that apply to all commercial financing transactions;
Set specific formatting requirements for sales-based financing, closed-end financing, open-end financing, factoring transaction financing, lease financing, and general asset-based financing;
Detail the reporting and review process, which will take effect in 2023, for providers that elect to use the opt-in method for calculating estimated APR; and
Describe the method for calculating whether a commercial financing transaction falls within the $2.5 million disclosure threshold.
After the proposed regulation’s publication in the New York State Register, there will be a 60-day comment period. DFS will then issue a final regulation after reviewing comments.
Regardless of when DFS issues the final rules, non-banks and fintechs must continue to prepare for the new law to take effect. Although the proposed regulations provide guidance, finance companies should anticipate some changes between the proposed and final rules.
With DFS’s reputation for methodical and aggressive enforcement, and with the hefty financial consequences that could result from a failure to comply with the new law, it is critical that providers review their existing portfolios, train employees, and work with legal counsel to develop policies and procedures to comply with the disclosure requirements.
Caroline Waters also contributed to this article.