[co-author: Shelby Lomax]
A new year brings new compliance requirements for non-banks and fintechs conducting business in New York, including Merchant Cash Advance (MCA) companies. On December 23, 2020, New York Gov. Andrew Cuomo signed SB5470 expanding the New York Financial Services law to require non-banks and fintechs to provide small businesses with lending disclosures similar to those required under the Truth in Lending Act. This new disclosure law is set to take effect on June 21, 2021.
Although disclosure requirements are not new in the consumer finance space, New York is only the second state to require similar disclosures for small business financing. In 2018, California enacted similar legislation. The California law, however, is not set to become effective until six months after the California commissioner of the Department of Financial Protection and Innovation implements enacting regulations.
Here’s What You Need to Know
The disclosure requirements primarily apply to alternative finance companies, such as MCA providers, whose transactions do not exceed $500,000. The law covers every type of “commercial financing,” including sales-based financing and factoring transactions.
Starting in June 2021, non-banks and fintechs will be required to provide disclosures to small businesses at any point in an application where a “specific offer” of financing is extended, and the disclosure must conform to formatting determined by the superintendent of the Department of Financial Services. The disclosure generally must include:
- The total amount of the commercial financing, and if different, the disbursement amount;
- The finance charge;
- The APR or estimated APR for sales-based or factoring transactions;
- The total repayment amount;
- The term of the financing or estimated term for sales-based transactions;
- The payment amounts;
- A description of all other potential fees and charges;
- Prepayment penalties, if any; and
- A description of collateral requirements or security interests, if applicable.
Merchant Cash Advance and Factoring Transactions
Although the law is straightforward when it comes to traditional lending, it is less clear for sales-based or MCA transactions. In order to comply with the law, MCA providers have two options for calculating the estimated APR and term, the historical method or opt-in method. Providers must select one option to use for all MCA transactions and inform the superintendent of the method used. If a provider elects to use the opt-in method, it must annually report data to the superintendent and undergo a review process.
As for factoring transactions, providers are to calculate the estimated APR as a “single advance, single payment transaction” per the federal Truth in Lending Act Appendix J. In doing so, the purchase amount is considered the financing amount, the payment amount is the purchase amount minus the finance charge, and the term is the due date of the receivables. As an alternative approach, a provider can estimate the term by taking a historical view of payments. The provider can calculate the average payment period using historical payment data from the party owing the A/R in question, not to exceed the previous 12 months.
Non-banks and fintechs that offer financing options to small businesses in New York need to begin preparing by reviewing their existing portfolio to determine what business transactions occur in New York, training employees, and working with legal counsel to ensure they have procedures in place to provide the proper disclosures. Moreover, there is much that we still don’t know about the form and substance of the final disclosure requirements, such as the formatting of disclosures, review process for the opt-in method, and the geographical scope of the law. Nevertheless, companies in the small-business finance space should begin preparing to comply with these new requirements. We will be monitoring for any new developments.