New York enacted the Commercial Finance Disclosure Law (“CFDL”), Financial Services Law (“FSL”) §§ 801-812 on December 23, 2020, to require consumer style disclosures for commercial finance transactions. The disclosures cover, among other things, the finance charge and the estimated annual percentage rate to be calculated in accordance with Regulation Z (12 CFR 1026.22) which is the regulation promulgated under the Truth in Lending Act. The CFDL was to go in effect in January 2022 subject to adoption of regulations promulgated by the New York State Department of Financial Services (“DFS”). About one year ago, the DFS issued a proposed set of regulations for comment in the state register which met with severe criticism. On September 14, 2022, the DFS proposed posted a new draft of regulations in the state register and the comment period is for 60 days. The new proposed regulations provide that the regulations will not go into effect until six months after they are adopted by notice in the state register.
The following transactions and entities constitute exceptions under the CFDL: (a) financial institutions; (b) a person acting in its capacity as a technology services provider, such as licensing software and providing support services, to an entity exempt under this section for use as part of the exempt entity’s commercial financing program, provided such person has no interest, or arrangement or agreement to purchase any interest in the commercial financing extended by the exempt entity in connection with such program; (c) lenders regulated under the federal Farm Credit Act (12 U.S.C. Sec. 2001 et seq.); (d) commercial financing transaction secured by real property;
(e) true leases as defined in section 2-A-103 of the Uniform Commercial Code; (f) any person or provider who makes no more than five commercial financing transactions in New York State in a twelve-month period; (g) an individual commercial financing transaction in an amount over $2,500,000.00; or (h) a commercial financing transaction in which the recipient is a dealer as defined in §415 of the New York Vehicle and Traffic Law, or a dealer’s affiliate, a rental vehicle company as defined in §396-z of the New York General Business Law, or a rental car company’s affiliate pursuant to a commercial financing agreement or commercial open-end credit plan of at least $50,000.00, including any commercial loan made pursuant to such a commercial financing transaction.
Among other things, the proposed regulations provide that the disclosures apply if one of the parties to the transaction “is principally directed or managed from New York, or the provider negotiated the commercial financing from a location in New York.”
Under §600.1(j) of the proposed regulations a broker is defined as:
…any person other than a financer, recipient, or recipient’s agent, who, for a fee, commission, or other consideration, participates in any financing negotiation; counsels or advises the recipient about financing options; participates in the preparation of any financing documents, including financing applications; or contacts the financer on behalf of the recipient other than to refer the recipient, gathers financing application documentation or delivers the documentation to the financer; communicates financing decisions or inquiries from the financer to the recipient; or obtains the recipient’s signature on financing documents.
Note the broad description of a broker as one who for a fee or other consideration participates, counsel or advises the recipient, prepares any financing documents including the application, or contacts the financer other than to refer the recipient, gathers or delivers the financing documentation, communicates the financing decision to the recipient or obtains the recipient’s signature on the documents.
While the broker is not required to make any disclosures under the new regulations, the provider is required to give the disclosures to the recipient when the financial offering is made and accordingly, if the offer is conveyed by the broker, the disclosures must appear in the offering documents. The financer must disclose the broker’s fee, as applicable, in one of the three following formats:
- “The broker’s compensation in this transaction is being paid by the provider and may be based upon the transaction size and profitability to the provider”;
- “The broker’s compensation is paid by you, and the amount of compensation is disclosed in the Itemization of Amount Financed”; or
(c) “The broker is not being compensated.”
Further, disclosure of the broker fee is required for all commercial finance transactions subject to the CFDL: sales-based financing, closed-end financing, open-end financing, factoring, lease financing, general asset-based financing and all other types of commercial financing transactions.
Among the comments to the prior version of the regulations was a request that the New York regulations be as consistent as possible with the California regulations adopted earlier this year and which go into effect on December 9, 2022. The DFS response was that while it will try to do so, the California and New York laws are not identical and both are subject to future amendment so it is not possible to agree that the regulations will be identical.