New York’s Commercial Financing Disclosure Law SB 5740
UPDATED AND CLARIFIED
NEW REGULATION GOVERNING MERCHANT CASH ADVANCE POSITIONS IN THE STATE OF NEW YORK
June 2, 2021
SB 5740 is New York State’s new law (commencing January 1st, 2021), requiring non-conventional lenders, including funders of Merchant Cash
Advance, to make certain disclosures in the contract paperwork, available for a small business borrower to make informed borrowing decisions. Examples of required disclosures include revealing the total cost of financing as well as presenting the small business borrower with a defined APR (Annual Percentage Rate).
SB 5740 applies to Merchant Cash Advance. In fact, New York law writers took the time to list a Merchant Cash Advance as one kind of non-bank lending the Statute is designed to govern.
For more information and context surrounding SB 5740 and its disclosure requirements, please see our first article in this series titled: “New York Passes Merchant Cash Advance Regulation Requiring Transparency & Disclosures”
WHY WAS SB 898 PASSED INTO LAW IN NEW YORK?
On February 16th, 2021 New York Governor Cuomo signed SB 898 into New York Law.
SB 898 is a Statute specifically created to provide clarity and further scope surrounding the passing of another Statute, SB 5740.
New York law SB 5740 is designed to create transparency around loans originated in the State of New York and provided to small businesses via unconventional non-bank lenders, SB 5740 passed in December of 2020.
On its own, SB 5740 reads somewhat ambiguous, with limited reach. Comes along SB 898 (about two months after SB 5740 passed) providing more context into SB 5740 while simultaneously increasing its regulatory reach.
Summarized SB 5740 requires non-bank New York lenders to provide certain disclosures about the terms of a loan it provides to small business borrowers from around the United States.
We delved into and analyzed all of SB 5740 in the first article in this series. There we raised certain questions, more specifically as to SB 5740 and its
implementation, enforcement, and protocol for compliance. The intent of SB 898 as passed by the New York Legislature is to answer some of these questions and to provide SB 5740 with a far broader reach to include more loan transactions within its purview and includes Merchant Cash Advance transactions.
WHAT IS UPDATED IN THE NEW LAW?
SB 5740 will go into effect as law on January 1st, 2022.
Compliance with SB 5740 Doesn’t Make the Loan Legal
SB 898 includes language that states categorically that a lender’s compliance with SB 5740 does not mean the underlying loan transaction is therefore legal. Put another way, the new law of SB 5740 does not give a non-bank lender a pass. Fraud is still fraud. Misrepresentation is still misrepresentation and thus even total compliance with the SB 5740 disclosures will not waive fraudulent or legally questionable transactions. SB 5740 does not make illegal transactions suddenly legal.
Increased Powers Provided to NY Dept. of Financial Services:
SB 898 continues and provides The New York Department of Financial Services additional power for seeking restitution for victims of fraud.
Licensing Still Required
SB 898 further clarifies SB 5740 by stating compliance does not remove the requirement for proper and adequate licensing as required.
Compliance with SB 5740 Does Not Cure Usury
SB 898 continues its explanation of SB 5740 stating categorically that mere compliance with SB 5740 will not cure a breach of New York Usury Laws. Thus, a breach of usury remains usurious and compliance with SB 5740 will not cure such usury.
SB 5740 Applies to All Commercial Loans Under $2.5MM
Originally, SB 5740 governed loans of less than $500,000.00. Now, as amended by SB 898, the law applies to commercial lending transactions, including Merchant Cash Advance, of less than $2,500,000.00. Thus, expanding the Statutes reach. It is worth noting that under New York Usury laws, the charging of interest in excess of 25% on a loan less than $2,500,000.00 is considered criminal usury. Ostensibly now, non-conventional loans under $2.5MM in New York are subject to both SB 5740 and to New York criminal usury.
One little quirk exists though, what if the loan is for exactly $2,500,000.00? The law would seem to point to the fact that a transaction in the exact amount of $2.5MM is still governed by SB 5740, but not governed any longer under criminal usury since in New York criminal usury is capped at $2,499,999.00
Exemption For Fellow Car Dealerships
S.B. 898 explains that a car dealer is exempt from the disclosure requirements of SB 5740 provided the recipient of the financing is also a car dealer or a car rental company and where their dealings lead to a transaction that exceeds $50,000.00.
APR Calculation Further Explained
SB 898 instructs that an APR (annual percentage rate) must be calculated in accordance with the Truth in Lending Act (TILA) as applied on a federal level and in accordance with Regulation Z. Interestingly, Regulation Z is a law that protects consumers from misleading information when applying for credit. SB 898 goes even further by stating that this calculation method is required regardless of whether the underlying transaction requires federal-TILA like disclosures or Regulation Z. In any event SB 5740 applies requiring this calculation for the transaction at issue. This is an important distinction for it is saying that TILA and Regulation Z apply equally to business borrowers as it does to consumer borrowers and hence any argument or debate to the contrary is null and void.
Grant Phillips, Esq. – Founder and Managing Partner at Grant Phillips Law, PLLC
CONTACT THE AUTHOR:
For questions related to this article, kindly contact the author, Mr. Grant Phillips, Managing Partner at Grant Phillips Law, PLLC, a New York Law Firm specializing in representing Merchants across the United States struggling with a Merchant Cash Advance.
Grant can be reached at [email protected] or at 516.670.5165. Please visit our website at www.grantphillipslaw.com for additional resources and information.
Grant Phillips Law, PLLC is an MCA Law Firm based in New York City with clients across the United States. We represent Merchants struggling with Merchant Cash Advances.
“A Merchant Oriented Law Firm.”