Fintechs and other nonbanks are required to provide consumer-style disclosures when offering to extend the financing for small businesses in NY. The regulations of an alternative financial transaction can become tricky to navigate without proper legal guidance.
For other more lucrative financial products offered outside the traditional banking systems, an alternative financial transaction such as check-cashing services, deposit advance services, etc., may have been your go-to alternative financing options.
However, bear in mind that companies offering these services face strategic and legal considerations unique to their business model because they operate in different regulatory environments and often have focused product offerings.
Let’s look at some laws and regulations that govern alternative financial laws in New York.
The New York Commercial Financing Disclosure Law, which targets fintech lenders more than other banks that provide commercial financing, has disclosed requirements for commercial financing transactions. Including all and any alternative financial transaction.
Some of which is that commercial financing providers will have to provide detailed consumer-style disclosures for transactions of $500,000 or less- they include loans, sales-based financing like merchant cash advances (MCA), and factoring transactions. The new requirements are modeled on disclosures required for consumer credit in lending ACT, despite the evident differences between consumer and commercial credit terms.
The new commercial financing disclosure law- CFDL, became effective on June 21, 2021, though its legislation extended the effective date to January 1, 2022.
Though the CFDL authorized the promulgation of the New York Department of Financial Services – NYDFS, the new regulations were to become effective whether or not NYDFS promulgated the regulations.
Commercial Financing Providers
The New Commercial Financing Disclosure Law
CFDL comes at a time of readily-available commercial financing products through new market entrants and online platforms. This disclosure law acts as a significant step towards applying additional commercial financing regulatory requirements.
Previously, commercial funding has been subject to far less regulatory oversight than consumer credit, indicating a broader trend to impose regulatory oversight on small businesses.
For starters, CFDL exempts regulated lenders under the Federal Farm Credit ACT and entities making five or fewer commercial financing transactions in New York in an annual period.
When a borrower gets a specific financing offer, CFDL requires financing providers to provide disclosures to potential financing recipients. The CFDL defines a provider as both the entities extending financing together with any intermediaries presenting and soliciting specific financing offers on behalf of third parties.
Alternative Financial Transaction In New York
The CFDL exempts depository financial institutions, including trust companies, industrial loan companies, credit unions, state-chartered and federally banks, etc. hence it impacts fintechs and other nonbanks involved in commercial financing.
CFDL includes a limited exemption for entities acting as technology service providers for exempt entities when these entities have no interest and show no arrangement to acquire a stake in the extended commercial financing entity.
Moreover, the disclosure law does not exempt intermediaries who affirmatively present specific commercial financing offers for exempted entities.
Hence, if you are a technology company or a fintech company representing financing offers on behalf of third parties, you should consider consulting legal advice from a BBLaw firm to assess whether you fit into any CFDL exemptions.
Commercial and financial providers should be aware of and prepare to comply with new requirements while expecting the federal government and the states to monitor this area actively.
Commercial financing transactions
The new commercial financing disclosure law does not subject individual commercial financing of over $500,00 and transactions secured by leases and real estate properties- as defined in section 2-A-103 of the UCC, to its requirements.
CFDL applies to open-end financing, sales-based financings like MCA’s, factoring financing, and closed-end financing
Though CFDL’s disclosure requirements are similar to those of the consumer financing disclosure in regulation Z and lending Act (TILA), they vary slightly depending on the form of transaction. Commercial financing providers are generally required to provide the below information:
- The finance charge;
- The total amount financed- if the amount varies from the total amount, you are to provide the amount disbursed;
- The periodic payment amounts;
- Any collateral or other security interests;
- Other charges or fees that have not been disclosed;
- The repayment charges;
- The financing term or the estimated sales-based financing term;
- The total repayment amount; and
- The APR; is calculated according to regulation Z and TILA, or the estimated sales-based financing and factoring financing APR.
In several instances, CFDL requires an estimate of APR, especially in sales-based and factoring transactions; this is because these types of transactions may not have easily quantifiable periodic payment amounts or fixed terms.
When calculating an APR, providers can either choose the “historical” method or the “opt-in” process; they also need to report their estimation method selected to the NYDFS.
The historical method involves calculating the average historical sales volume, while the opt-in procedure is based on the projected sales volumes.
Providers must provide an estimated APR as a “single advance, single payment transaction” and as outlined in appendix J of regulation Z.
It is recommended that providers that use the opt-in approach provide data to the NYDFS every year so that their predicted APR accuracy may be reviewed.
Enforcement And Administrative Provisions
NYDFS, authorized by CFDL, promulgated regulations concerning the required CFDL calculations, enforcement, the required disclosure formatting, and the defined terms in the CFDL.
NYDFS imposes penalties of up to $2,000 per violation and $10,000 per willful violation when a provider violates CFDL, or may also order an injunction when the provider knowingly violates CFDL.
BBLaw offers a no-obligation free initial consultation so that you may speak with one of our attorneys about your legal options at any stage of your company.
Our staff of seasoned attorneys works hard to broaden their understanding of New York’s alternative financial legislation, as well as the new and evolved services offered by fintech platforms.
In light of the ever-changing federal and state laws and regulatory demands, we offer our clients with specialized legal counsel. Visit this page to contact us or to get a free trial. Get in touch with us or download our free trial here.