By: Stuart J. Wells, Thomas M. Pinney and C. Jason Kim
On December 23, 2020, New York Governor Andrew Cuomo signed into law Senate Bill S5470B (Small Business Truth in Lending Law), which imposes new requirements on certain providers of commercial financing. Aimed at protecting small business owners, the Small Business Truth in Lending Law requires key financial terms such as the amount financed, fees and annual percentage rate (APR) to be disclosed at the time a credit provider or broker makes an offer of financing of $500,000 or less. New York is now the second state after California to require Truth in Lending-type disclosures for small business loans by online and other non-bank lenders.
Who is subject to the disclosure requirements?
The new law is sweeping. It applies to any “provider” of “commercial financing.” The term “provider” is broadly defined to include “any person who extends a specific offer of commercial financing” to a small business. “Commercial financing” is also broadly defined to include loans, factoring, future receivable purchases or any “other form of financing” that is intended to be used for a commercial purpose. Thus, factors, merchant cash advance (MCA) companies and other non-traditional financiers will likely be subject to the new disclosure requirements.
There are numerous exemptions, including banks, trust companies, industrial loan companies and incidental lenders making five or fewer commercial financing transactions in New York in a year. However, this does not necessarily mean that transactions involving banks are exempt from the disclosure requirements of the new law. A non-bank that enters into an agreement with a bank to arrange for the extension of commercial financing via an online lending platform would still be subject to the new law.
Importantly, the law does not apply to individual commercial finance transactions over $500,000 or to transactions secured by real property such as mortgage loans, but on January 6, 2021, legislation was proposed to expand its application to transactions up to $2 million.
What disclosures are required?
The law categorizes commercial financing into five types of transactions: (i) sales-based financing (future receivable purchase financing); (ii) closed-end financing (term loan); (iii) open-end financing (credit line); (iv) factoring; and (v) other forms of financing. While each type of transaction has specific disclosure requirements (see chart below), the law requires all providers to disclose finances charges, fees and, most importantly, the actual or estimated APR:
How will the disclosure requirements be implemented and enforced?
The law authorizes the Superintendent of the New York State Department of Financial Services (NYDFS) to promulgate rules and regulations necessary to effectively administer the law. Those regulations include, among other things, rules regarding calculation of the required disclosures, the formatting of the disclosures and defining terms used in the law. In other words, much is yet to be determined about how the new disclosure law will be implemented and enforced.
The law does not provide for a private right of action, but it authorizes the NYDFS to impose penalties for violations which may include civil penalties of up to $2,000 for each violation or up to $10,000 for each willful violation, as well as injunctive relief on behalf of any recipient affected by the violation.
What effect will the disclosure requirements have on small business financing?
Since 2008, alternative financing for small businesses has grown rapidly and, today, by some estimates, exceeds $19 billion annually. Except for a hodgepodge collection of state usury laws and inconsistent enforcement of those laws by the courts, the industry has operated without regulatory scrutiny. Suddenly, that has changed. The Securities and Exchange Commission has sued one company, Par Funding, for misleading investors about the nature of its products, the New York Attorney General has sued another company, RCG Advance, for allegedly misrepresenting the terms of its transactions to merchants and the Federal Trade Commission has instituted similar suits against RCG Advance and Yellowstone Capital. New York’s new disclosure law represents the latest in a growing trend to regulate the world of small-business financing.
The law is intended to make it easier for small business owners to understand and compare different types of financing by requiring disclosures in similar terms. While well intended, it may be difficult for certain lenders to comply with the new law or for the NYDFS to even develop rules to effectively administer the law. For example, it may be difficult to calculate the APR for financing that has frequent and variable payments or remittances such as traditional factoring.
The new law will undoubtedly increase the cost of financing for small businesses and create difficulties for factors, MCA companies and other alternative financing companies in calculating the APR and determining other disclosure requirements such as the term of the commercial financing or breaking out the financing costs. Whether it has the desired effect of protecting small businesses remains to be seen.
If you have further questions regarding these bills, please contact Stuart J. Wells (wellss@whiteandwilliams.com; 917.330.0765), Thomas M. Pinney (pinneyt@whiteandwilliams.com; 215.864.6371) or C. Jason Kim (kimcj@whiteandwilliams.com; 212.714.3077).
This correspondence should not be construed as legal advice or legal opinion on any specific facts or circ*mstances. The contents are intended for general informational purposes only and you are urged to consult a lawyer concerning your own situation and legal questions.
FAQs
The new law applies to nonbank commercial lenders that make small business loans of up to $2.5 million. According to the Act, certain providers of "specific offers of commercial financing" must provide Truth in Lending-like written disclosures to any recipient of such an offer at the time it is extended.
What is the small business truth in lending law in NY? ›
Aimed at protecting small business owners, the Small Business Truth in Lending Law requires key financial terms such as the amount financed, fees and annual percentage rate (APR) to be disclosed at the time a credit provider or broker makes an offer of financing of $500,000 or less.
What is the New York small business Disclosure law? ›
Providers of commercial financing that are subject to the New York State Commercial Finance Disclosure Law (CFDL) must provide disclosures to potential recipients of commercial financing at the time a specific offer of financing is extended to a recipient, pursuant to new regulations adopted by the New York Department ...
Does the Truth in Lending Act apply to business loans? ›
The Truth in Lending Act (and Regulation Z) explains which transactions are exempt from the disclosure requirements, including: loans primarily for business, commercial, agricultural, or organizational purposes. federal student loans.
What transactions are exempt from the Truth in Lending Act? ›
THE TILA DOES NOT COVER: Ì Student loans Ì Loans over $25,000 made for purposes other than housing Ì Business loans (The TILA only protects consumer loans and credit.) Purchasing a home, vehicle or other assets with credit and loans can greatly impact your financial security.
Does TILA apply to small business loans? ›
The CFPB reasoned that TILA only applies to consumer credit and doesn't create preemption for commercial financing, to which TILA does not apply.
What is an example of a violation of the Truth in Lending Act? ›
Some examples of violations are the improper disclosure of the amount financed, finance charge, payment schedule, total of payments, annual percentage rate, and security interest disclosures. Under TILA, a creditor can be strictly liable for any violations, meaning that the creditor's intent is not relevant.
What is Section 11 of the New York General business law? ›
Serving civil process on Sunday. All service or execution of legal process, of any kind whatever, on the first day of the week is prohibited, except in criminal proceedings or where service or execution is specially authorized by statute.
What is Section 7 A of the Small Business Act? ›
Its name comes from section 7(a) of the Small Business Act, which authorizes the agency to provide loan guarantees to participating SBA lenders that work directly with American small businesses. Small business applicants work directly with a participating SBA lender and not with SBA.
Is New York a mandatory disclosure state? ›
The Property Condition Disclosure Act requires the seller of residential real property to cause this disclosure statement or a copy of thereof to be delivered to a buyer or buyer's agent prior to the signing by the buyer of a binding contract of sale.
15 USC 1662 states that no advertisem*nt concerning consumer credit may state that a specified down payment amount is required in connection with the extension of consumer credit unless the creditor usually and customarily arranges down payments in that amount.
What are the 6 things they must disclose under the truth in the lending Act? ›
Lenders have to provide borrowers a Truth in Lending disclosure statement. It has handy information like the loan amount, the annual percentage rate (APR), finance charges, late fees, prepayment penalties, payment schedule and the total amount you'll pay.
Can states enforce truth in the lending Act? ›
Congress adopted a narrow standard for TILA preemption that displaces State law only in the case of “inconsistency.” This means that States have broad authority to establish their own protections for their residents, both within and outside the scope of TILA.
What does 15 US code 1662 mean? ›
In this way, USC 15 Section 1662(b) protects consumers from predatory lenders who use advertising to get people in debt. If you see an advertisem*nt that promises credit in exchange for a down payment or that guarantees a certain amount of money after the application, it may run afoul of the Truth in Lending Act.
What is exempt from TILA? ›
The following loans aren't subject to Regulation Z laws: Federal student loans. Credit for business, commercial, agricultural or organizational use. Loans that are above a threshold amount.
Which transaction is not covered under the TILA respa rule? ›
The TILA-RESPA rule applies to most closed-end consumer credit transactions secured by real property, but does not apply to: HELOCs; • Reverse mortgages; or • Chattel-dwelling loans, such as loans secured by a mobile home or by a dwelling that is not attached to real property (i.e., land).
What does the Truth in Lending Act apply to? ›
The provisions of the act apply to most types of consumer credit, including closed-end credit, such as car loans and home mortgages, and open-end credit, such as a credit card or home equity line of credit.
What does the Truth in Lending law require? ›
The Truth in Lending Act (TILA) protects you against inaccurate and unfair credit billing and credit card practices. It requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans.
What is the Truth in Lending Act for dummies? ›
The federal Truth-in-Lending Act (TILA) requires lenders and dealers to provide you with certain disclosures – before you sign your contract – that explain your auto loan's costs and terms. When you're purchasing a car or vehicle, TILA requires that your lender or dealer provide you with specific disclosures.
Who must follow the Truth in Lending Act? ›
Among other requirements, the Act requires creditors who deal with consumers to make certain written disclosures concerning finance charges and related aspects of credit transactions (including disclosing an annual percentage rate) and comply with other mandates, and requires advertisem*nts to include certain ...
