Commercial lenders will face less stringent disclosure requirements after New York’s Commercial Finance Disclosure Law takes effect Aug. 1 thanks to requirement reductions and more exemptions.
Those reductions and exemptions were among the changes to the final version of the Commercial Finance Disclosure Law (CFDL) regulations released Feb. 1, commercial lending legal experts said during a July 12 webinar hosted by the Equipment Leasing and Finance Association.
“In the draft just before the final regulations, it was introduced that you would have to provide a disclosure form not only to every recipient that was managed or principally directed from New York, as well as any legal resident borrower that was a legal resident of New York, but you would also have to comply if the [finance] provider was principally directed from New York,” Robert Cohen, partner at Moritt Hock & Hamroff, said. Increased disclosure requirements from state and federal regulators largely cost lenders more time, resources and money, Cohen said.
“That was all removed in the final regulations, which is obviously a great sigh of relief for New York lenders, because they would have had to comply with every loan that they were making, regardless of the state, and they would have to do a disclosure,” Cohen said.
Removal of the requirement for New York-based lenders to complete a disclosure form on every transaction is one of several further changes made ahead of the law’s passing. Another material change from the first draft is the removal of several notice requirements concerning loan servicing, Cohen said.
“All those servicing notices were removed in the final regulations, which is fantastic,” he said. The law now allows that “until a recipient receives notice of an assignment, they are free to pay the originator, who is the original provider on the loan documents.”
New York disclosure requirements
Still, commercial lenders will be required to disclose the following information, according to the New York Department of Financial Services (NYDFS):
- Total amount of commercial financing and the disbursement amount, if different, after any deductions or withholdings;
- Finance charge;
- Annual percentage rate using only the words annual percentage rate or the abbreviation “APR”;
- Term of the financing contract;
- Total repayment amount (disbursement plus finance charge);
- Description of the collateral requirements or security interests, if any;
- For fixed payments, the payment amount and frequency (daily, weekly, monthly) and if the term is longer than one month, the average monthly payment amount; and
- For variable payment amounts, the full payment schedule or description of the method used to calculate the amounts and frequency of payments and, if the term is longer than one month, the estimated average monthly payment amount.
New requirements
Brokers and lenders utilizing brokers will also be required to comply with requirements related to commercial lending transactions, Robert Hornby, member of New York-based CSG Law, said during the webinar.
“They added this requirement that the provider must inform the recipient in writing of how and by whom a broker is going to be compensated. … But it doesn’t necessarily say in there you have to say who the broker is,” he said. “If the compensation is coming out of the financing, then you’re going to have to list the broker and the fees on the itemization form.”
“If this is the situation where the broker may be compensated either by the provider or through an annual compensation program, you must disclose that in writing, as well as the method in which they’re getting paid and by whom.”
Exemption expansion
Under the final regulations of New York’s CFDL, the NYDFS further expanded the list of exemptions to include:
- Financial institutions;
- Technology service providers;
- Lenders regulated under the federal Farm Credit Act;
- Commercial financing transactions secured by real property;
- Any “true” lease under the Uniform Commercial Code;
- Any person or provider who makes no more than five commercial financing transactions in New York in a 12-month period;
- An individual commercial financing transaction over $2.5 million; and
- Commercial financing transactions in which the recipient is a motor vehicle dealer or rental company.
The NYDFS also defines financial institutions as banks, trust companies, industrial loan companies, federally chartered savings and loan associations, federal savings banks, or federal credit unions and bank subsidiaries in New York. Independent specialty finance companies doing business in New York are not exempt from the new reporting requirements.
The decision to include bank subsidiaries and credit unions differs from similar regulations in California and also came during the last round of regulations, Hornsby said.
When brokers and non-exempt lenders collaborate on a deal, the disclosure process also requires both parties to coordinate the transaction, Moritt Hock & Hamroff’s Cohen said.
“If there’s an independent lender working with a broker, then the broker is required to provide the disclosure,” he said. “However, they must get it from the lender. … And the broker has to keep track of how they sent it to the recipient.”
