On September 21, 2021, the New York Department of Financial Services (DFS) announcement proposed regulation that clarifies the truth disclosure requirements on small business loans that come into effect on January 1, 2022. The proposed regulation comes just in time as non-banks and fintechs try to prepare to comply with the law on trade finance with limited guidance.
Commercial finance law
As we have discussed in the past, in late December 2020, the New York legislature passed SB5470, which imposes Truth-like disclosure requirements in loans for commercial finance transactions. On February 16, 2021, former New York Governor Andrew Cuomo signed into law SB898, which amended the Trade Finance Law by expanding the scope of the previous legislation and extending the date of entry into force. Initially, the law only applied to business transactions of $ 500,000 or less and was to come into force 180 days after the bill came into force. SB898 expanded the scope to cover transactions up to $ 2.5 million and set an effective date of January 1, 2022.
The Trade Finance Act allows DFS to promulgate regulations to facilitate implementation, but whether or not DFS provides further guidance, the law is still effective January 1, 2022. As the law leaves questions unanswered. Regarding the form and substance of the information required, the lack of DFS regulation has posed significant compliance issues for companies attempting to develop policies and procedures that comply with the requirements.
The proposed new regulations provide instructions to businesses in the small business financial sector on how to comply with the new disclosure requirements. For example, the proposed regulation:
Provide advice on defined terms and define “finance charges”;
Clarify how to calculate and disclose the APR;
Define general formatting requirements that apply to all trade finance transactions;
Define specific formatting requirements for sales-based financing, closed financing, open financing, factoring transaction financing, lease financing and general asset-based financing;
Detail the reporting and review process, which will take effect in 2023, for vendors who choose to use the enrollment method to calculate the estimated APR; and
Describe the method for calculating whether a trade finance transaction falls below the $ 2.5 million disclosure threshold.
After publication of the proposed settlement in the New York State Registry, there will be a 60-day comment period. The DFS will then issue a final rule after reviewing the comments.
To take with
Regardless of when the DFS releases final rules, non-banks and fintechs must continue to prepare for the new law to take effect. While the proposed regulations provide guidance, finance companies should anticipate certain changes between the proposed and final rules.
With DFS ‘reputation for methodical and aggressive enforcement, and with the dire financial consequences that could result from failing to comply with the new law, it is essential that providers review their existing portfolios, train employees, and work with a legal counsel to develop policies and procedures to comply with disclosure requirements.
Caroline Waters also contributed to this article.
© 2021 Bradley Arant Boult Cummings LLPRevue nationale de droit, volume XI, number 272