New York Enacts APR Disclosure Laws
NEW YORK PASSES
MERCHANT CASH
ADVANCE REGULATION
COMMENCING – JANUARY 1st 2022
“New York State Adopts Truth In Lending (TILA) – Like Disclosure Law for Business Loans, including Merchant Cash Advance and Purchase of Future Receivables.”
The Birth of S.B 5470
On December 23rd of 2020, New York State Governor Andrew Cuomo signed Senate Bill 5470 or S.B. 5470 into law. https://www.nysenate.gov/legislation/bills/2019/s5470
What is S.B 5470?
S.B. 5470 is a New York law requiring non-bank lenders to provide corporate borrowers specific disclosures in the loan paperwork and prior to formal consummation of the loan. The law was enacted in order to create more transparency for small business borrowers surrounding their application for credit from non-conventional banking institutes.
What is the Intent of the New Law?
The intent of S.B 5470 is to provide corporate and small business borrowers with more transparency surrounding their taking of credit, in order to allow for better, more informed decisions, a clearer understanding of how much is being borrowed and under what terms and to provide a corporate borrower with the ability to compare different offers of credit.
Does it apply to a Merchant Cash Advance?
Yes. The newly enacted law specifically names a Merchant Cash Advance as one specific form of corporate financing that S.B. 5470 governs.
It’s About Disclosure and Transparency
The new law imposes multiple disclosure requirements similar to TILA (Truth in Lending), on funders and providers of corporate financing including Fintech, Factors, and Merchant Cash Advance transactions. Prior to enactment, there was no uniform methodology for the disclosure of vital components of the credit being extended to businesses, such as the total amount being borrowed, the total amount of repayment, the total interest cost, annual percentage rate, and a host of other disclosures, to be discussed later in this article. Now, however, S.B 5470 provides certain protection for corporate borrowers, by virtue of the mandatory disclosure requirements it places on funders and providers of corporate financing when such financing is less than $500,000.00.
When does S.B. 5470 Commence?
The new TILA-like Disclosure requirements were signed into law on December 23rd of 2020 with an original commencement date of June 21, 2021. However, since passing S.B. 5470 the New York Senate has provided additional guidance and updates (In March 2021), and included in this update is a new date for commencement of the law to begin January 1st, 2022.
Whom does S.B 5470 Govern?
The Disclosure Law applies to non-exempt “providers” of “commercial financing.” This definition will be expanded upon further into this article.
What are the Keys to S.B. 5470?
To be compliant with New York’s S.B 5470 Disclosure Laws, providers of corporate finance that is less than $500,000.00, such funders and providers must:
- Disclose Key Transaction Terms to corporate borrowers and;
- Obtain the Borrower’s Signature prior to Consummating a Transaction.
How will the new law be governed and monitored?
The protocol and format of how lenders will issue, maintain and comply with the new law and the manner by which lenders will be monitored, will be prescribed by The New York Department of Financial Services (DFS). At the time of writing this article, the DFS has yet to issue guidance or provide instruction on Format and Compliance.
Ground Breaking Protections for Corporate Borrowers.
Notwithstanding the lack of DFS guidance thus far, the law is categorical in its underlying intent and drive. New York is looking out for small businesses at home and across the country. S.B 5470 is groundbreaking in so far as it mandates that certain disclosures be provided to corporate borrowers, thereby providing a corporate borrower with protection from lending abuses perpetrated on small businesses and merchants across the United States.
New York Joins California in Passing Disclosure Law.
New York follows the State of California by enacting this type of law and like California, New York’s newly enacted statute applies to a Merchant Cash Advance. Like California, New York is trying to clean up its reputation as the bedrock and home of most Merchant Cash Advance, Confessions of Judgments, and other predatory loan type scams. New York State has spoken. It is standing up and telling providers and lenders of credit to businesses, to disclose critical terms and to be transparent and accurate or face consequences.
What is the Protocol for S.B 5470?
While S.B. 5470 is yet to commence, questions arise. More specifically, questions about protocol and details about the mechanics of how, where, and when to disclose exist. While details such as these remain outstanding, the law is nevertheless a massive win for small businesses and record-setting by virtue of the existence of a law that provides protection to small businesses against lending abuses.
From Conversation to Law
The law is not a finished product. However, it makes tremendous strides in curbing predatory and corporate lending abuses. Prior to enactment, issues of predatory lending, for example with a Merchant Cash Advance, were merely part of the discussion. Now there is the law. S.B. 5470 governs providers and funders of credit to small businesses, including Merchant Cash Advance arrangements and other forms of agreements for the purchase of future receivables and by requiring such lenders to comply with the S.B. 5470 disclosure requirements, a merchant and corporate borrower are afforded real legal protection.
Can S.B. 5470 Catch Up to Fiscal Invention?
Perhaps. Time will tell. With the advent of financial technology, providers and lenders of corporate finance have become more sophisticated and continually seek to “invent” new and complex lending structures that bad actors can use to engage in predatory and lending abuses. S.B 5470 seeks to govern these creations and inventions by requiring the disclosures delineated in more detail further into this article.
New York Protecting Small Business
The New York Truth in Lending/TILA Disclosure Law, shows a clear and unambiguous intent on the part of the New York Legislature. No more predatory loans! Not here. This directive includes its chief protagonist, namely the infamous Merchant Cash Advance. New York has begun to regulate the Merchant Cash Advance industry and together with California, provides fiscal protection to corporations and businesses (Emphasis added). S.B. 5470 goes a long way to right potential corporate lending abuses. It educates the merchant borrower, allowing for an informed and educated decision when shopping for a business loan, by forcing providers and lenders of corporate credit to disclosure material information and will expand to govern future potential lending abuses as more transaction types fall within the ambit of the law.
Will S.B. 5470 Eliminate All Corporate Lending Abuses?
Don’t expect the law to eradicate all corporate lending abuse, however. We expect to continue to see certain illegalities and abuses such as the inclusion of a Confession of Judgment or other illegal documents in Merchant Cash Advance lending packets and other parts of the Merchant Cash Advance contract with possible illegal clauses, notwithstanding the new laws. Unfortunately, human greed cannot be regulated absolutely. However, regulation will bring uniform standards and better choices for borrowers, eradicating many Merchant Cash Advance scams and revealing those transactions which in fact and law are loans merely discussed as an MCA.
Is a Merchant Cash Advance Legal?
Provided certain disclosures are met pursuant to S.B. 5470 and that risk to changes in receivables are carried and borne entirely by the lender, coupled with several other legal criteria (the specifics of which are not applicable for this article), and it is possible for a bona fide Merchant Cash Advance, (i.e. in compliance with all laws) to exist.
How can Charging Interest Exceeding 100%+ be Legal?
The world of Merchant Cash Advance is one of ambiguity, deceit, and “invented” to deliberately extract the maximum amount of interest, fees, commissions, and charges possible from small businesses. To qualify one need only show three (3) months of corporate bank statements that reflect some inflow of revenue. That is pretty much the qualification. There are no true underwriting standards or uniform qualification process. Rather do you own a business and does it have enough revenue to pay the lender their usurious interest over a very finite and short period of time? If yes, well done, you qualify.
What about Usury?
How can Merchant Cash Advance lenders charge corporate borrowers what they do? The Courts have held a Merchant Cash Advance (a real MCA) i.e. the purchase of future receivables is not a loan.
Why is an MCA Not a Loan?
In order to be a loan, money must be given and repaid no matter what. With a legal Merchant Cash Advance, Courts hold that the money received by the corporate borrower is not being loaned but is rather money provided today for the rights to receive a massive chunk of the corporation’s future receivables. The difference when calculated as an APR will often exceed 100 to 350%. Nevertheless, the law in New York says that the true purchase of receivables is a financial structure that the law does not recognize as a loan. Since a bona fide MCA structure is not recognized by the law as a loan, it is not deemed to be a loan and thus not governed by usury and hence the massive amounts of interest/repayment.
Little Nuance – Massive Destruction
This little nuance has caused the destruction of thousands upon thousands of small American businesses of all kinds. Tragically, Merchant Cash Advances have been solely responsible for the destruction of thousands of businesses across the The United States by virtue of the arduous and overbearing repayments demanded on a daily basis, causing many businesses to lose revenue and ultimately their businesses. With an MCA, not a loan, bad acting MCA lenders are afforded a loophole whereby the charging of criminal usury is “permitted,” by simply calling the contract an agreement for the purchasing of future receivables, despite their treating the MCA exactly like a conventional loan that is repayable absolutely without contingency.
S.B. 5470 is not a panacea.
What happens when a Merchant cannot keep up with daily or weekly ACH payments? What happens if a Merchant Defaults on a Merchant Cash Advance that lacked the necessary disclosures? What happens if the business is destroyed due to an illegal loan, merely disguised as a receivable purchase? Will the new law prevent all abuses? Unlikely. However, it’s a massive step in the right direction, and the fact that S.B. 5470 specifically names Merchant Cash Advances and Purchase of Future Receivable Agreements in the list of commercial financing structures it governs, is comforting. New York is making progress in its fight against predatory lending and illegal Merchant Cash advances. First the repeal of a Confession of Judgments (August 31, 2019) and now S.B 5470. This is real progress.
One of the most remarkable components of S.B.5470 is its
disclosure requirement of an ANNUAL PERCENTAGE RATE
(“APR”)
Why the New Law?
In 2019, after a massive media depiction of the abuses of Confessions of Judgments by Merchant Cash Advance funders in the State of New York, COJ’s were prohibited from being used against a non-New York resident as of August 31st, 2019. Notwithstanding these changes, abuses by predatory lenders have continued unabated, thereby forcing the New York State Senate to impose the New TILA-like Disclosure Laws. In a Merchant Cash Advance, a merchant borrower must try and decipher fifteen (15) plus pages of fine print that contain complex, ambiguous and possible life changing clauses and conditions, designed to maximize profit and simultaneously hide the actual cost of financing. The new law goes beyond the repeal of Confession of Judgments. The disclosures will be uniform and clear. Hopefully painting a clear picture for the merchant borrower of how much is being paid, what the APR is, when it is being paid and other vital components making up a Merchant Cash Advance.
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S.B.5470 EXPLAINED IN DEPTH
REGULATION:
On December 23rd of 2020, the State of New York enacted and Governor Cuomo signed S.B. 5470 into law. S.B 5470 forces funders and providers of commercial and corporate financing, including Merchant Cash Advance and Factoring Agreements to Disclose Key Terms pertaining to the contemplated financing and obtain the borrower’s signature, before the transaction is consummated. The disclosure requirements apply to all forms of corporate financing, loans, and Merchant Cash Advance that are for $500,000.00 or less.
SIMILAR CALIFORNIA LAW:
In 2018, the State of California enacted a very similar disclosure requirement for commercial financing whereby such arrangements require multiple disclosures related to the contemplated financing. It is interesting to note that since enactment, the California version has undergone multiple amendments all in the name of clarification, and thus one can expect the same to take place with the New York version. Please note, while similar, the New York and California TILA-like Disclosure Requirements do differ somewhat. However, the idea and intent behind both the New York and California laws is disclosure! In other words, both States require specific disclosure of certain terms pertaining to the proposed financing and loan provided for by a corporate-financier/lender/funder/provider and or purchaser of future receivables. The law clearly governs commercial and corporate financing and does not apply to consumer or individual loans. The disclosure requirements contained in S.B 5470 mirror some disclosures contained in the Truth in Lending Act (TILA) – a Federal Disclosure Law.
POSSIBLE AMENDMENTS TO THE NEW LAW:
While not stated categorically, the New York Governor did hint at possible changes to the law as written. In a note filed together with the proposed law, Governor Cuomo stated that he “secured an agreement with the New York Legislature,” to make certain technical changes to the new law in order to “better provide clarity and align to existing requirements under Federal Laws, including the Truth in Lending Act.” No one knows at this time what, if any changes or amendments will be made to the law during the 2021 legislative session. It is important to keep in touch with your legal advisor and Merchant Cash Advance Defense Attorney to determine such changes and what effect they will have on your commercial loans and MCA’s. The new law will formally take effect on the 21st day of June 2021 and will govern non-exempt “providers” of “commercial financing” forcing them to disclose critical terms related to the contemplated financing transaction and obtain the borrower’s signature prior to completing a transaction.
WHO MUST COMPLY WITH THE NEW LAW?
S.B. 5470 demands that providers of commercial financing provide specific disclosures to borrowers at the same time they present an offer of financing. As stated previously, the manner by which to disclose these financing terms and the format to use, is to be arranged and enacted by the New York Department of Financial Services.
WHAT IS COMMERCIAL FINANCING UNDER THE NEW LAW?
Commercial Financing–
meaning: open-end financing, closed-end financing, sales-based financing, factoring transaction, or other forms of financing, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes. For purposes of determining whether financing is commercial financing, the provider may rely on any statement of intended purposes by the recipient of the financing. The Statement may be a separate statement signed by the recipient; may be contained in the financing application, financing agreement, or other document signed or consented to by the recipient, or may be provided orally by the recipient so long as it is documented in the recipient’s application file by the provider. Electronic signatures and consents are valid for this purpose. Please note: The provider of financing is not required to determine whether the proceeds of commercial financing are in fact used in accordance with the recipient’s statement of intended purposes. S.B 5470 further defines “commercial financing” to include providers as well as third-party solicitors of:
Sales-Based-Financing–
meaning: a financial transaction repaid by the borrower to the provider/lender, over a period of time, where repayment is in the form of a percentage of receivables/revenues and where said repayment amount may decrease or increase based on actual receivables/revenues of the borrower, See N.Y. Financial Services § 801(j). Sales-Based-Financing also includes loan structures where repayment is a fixed amount but includes provision for a reconciliation of the repayment amount, whereby the reconciliation adjusts the payment to a percentage of actual revenue. Accordingly, S.B 5470 applies to Merchant Cash Advances.
Factoring Agreements–
meaning: a financial transaction tied to the revenues and receivables that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods the recipient has supplied or services the recipient has rendered that have been ordered but for which payment has not yet been made, See N.Y. Financial Services § 801(a).
Open-End Commercial Financing–
meaning: an agreement for one or more extensions of open-end credit, secured or unsecured, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes. Open-end financing includes credit extended by a provider under a plan in which: (i) the provider reasonably contemplates repeated transactions; (ii) the provider may impose a finance charge from time to time on an outstanding unpaid balance; and (iii) the amount of credit that may be extended to the recipient during the term of the plan is generally made available to the extent that any outstanding balance is repaid, See N.Y. Financial Services § 801(c).
Closed-End Commercial Financing–
meaning: a closed-end extension of credit, secured or unsecured, including equipment financing that does not meet the definition of a lease under section 2-A-103 of the uniform commercial code, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes. Closed-end financing includes financing with an established principal amount and duration. See N.Y Financial Services § 801(d).
Other Forms of Commercial Financing–
meaning: any other form of commercial financing as determined by the New York Dept. of Financial Services.
WHO IS A RECIPIENT UNDER THE NEW LAW?
A person who applies for commercial financing and is made a specific offer of commercial financing by a provider. A recipient may also be an authorized representative of the recipient/borrower. Please note, a person acting as a broker cannot be a recipient.
For more details, See N.Y. Financial Services § 801(i) – defining a “recipient” as a “person” and later, See N.Y. Financial Services § 801(g) – defining a “person” as “an individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust or unincorporated organization including, but
not limited to, a sole proprietorship”). Accordingly, “Recipient” includes both individuals and Corporations.
WHO IS A PROVIDER UNDER THE NEW DISCLOSURE LAW?
As one can see, S.B. 5470 defines “Commercial Financing” broadly and INCLUDES PURCHASES OF FUTURE ACCOUNT RECEIVABLES as well as factoring arrangements. Accordingly, despite several of the required disclosures being difficult to apply to a typical Merchant Cash Advance (to be discussed further in this article), the fact remains that S.B. 5470 applies to a Merchant Cash Advance and thus, an MCA that is for $500,000.00 or less, will require the disclosures, pursuant to the newly passed law.
WHO DOES THE NEW LAW TARGET?
S.B. 5470 applies broadly to entities that “extend” specific offers of commercial financing or that “solicit and present” specific offers of commercial financing on behalf of a third party. This language indicates a clear intention on the part of New York lawmakers to include Merchant Cash Advance Companies Merchant Cash Advance Lenders, Merchant Cash Advance Providers as well as Lending Platforms, Peer to Peer Lending Platforms as well as other forms of Marketplace Loans.
Interestingly the law counts Bank Strategic Partnerships within its reach. This means that the New York – Truth in Lending-like newly passed Disclosure Law applies to Merchant Cash Advance Companies that partner with Federally Chartered Banks. For example, Merchant Cash Advance Lender X partners up with Bank Y to
offer loans and MCA’s to small businesses across the United States. X has the clientele and Y has the capital. No matter. Both Merchant Cash Provider/Funder X and Bank Y are within the ambit of the new Disclosure Law alike. Notwithstanding this, S.B. 5470 does not seek to stifle or prevent such arrangements, rather the Statute takes the time to express its support for the notion of a so-called “True Lender.” Meaning, if Bank Y is a True Bank Lender and also has a relationship with a Merchant Cash Advance Funder, the mere relationship or the mere fact that their relationship engages in transactions that likely fall within the scope of the Statute, requiring disclosures, does not, therefore, mean that the bank or its Merchant Cash Advance strategic partner are necessarily providing commercial financing. More specifically it states; “For the avoidance of doubt, the extension of a specific offer or provision of disclosures for a commercial financing, in and of itself, shall not be construed to mean that a provider is originating, making, funding or providing commercial financing.” Fintech companies are also within the scope of the new Financial Disclosure Law. A good rule of thumb is to ask whether the institution and or the commercial financing transaction contemplated, or both, are somehow exempt from the new Statute. Unless the Lender, Bank, MCA Funder, MCA Provider, MCA Platform, and or Fintech Company is exempt from providing the borrowing Merchant certain disclosures, pursuant to the new law (to be discussed further in this article), the entity and contemplated transaction is governed by the new law and those entities must comply by providing the necessary and required disclosures. For further detail, see N.Y. Financial Services § 801(h) – defining a “provider” to be “a person who extends a specific offer of commercial financing to a recipient. Important: Unless an exemption exists, “provider” also includes “a person who solicits and presents specific offers of commercial financing on behalf of a third party.”
COMMERCIAL MORTGAGES ARE EXEMPT:
S.B. 5470 exempts Commercial Mortgage Loans. The statute does not impose new interest charging caps or pre-lending licensing obligations on Commercial Mortgage Lenders.
Take Note: New York State Law does include the requirement to obtain formal licensing in order to
provide certain commercial loans. This is discussed in what is known as NY’s Licensed Lender Law. Unfortunately, though, the requirement applies to lenders issuing loans of $50,000 or less.
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DISCLOSURE AND SIGNATURE REQUIREMENTS (THE CORE LAW)
- Lenders and providers of commercial financing governed by S.B.
5470 as analyzed above, will be required to disclose the following:
- The total amount of commercial financing (or the total amount of available credit) and, if different, the disbursement amount;
- The finance charge;
- The Annual Percentage Rate (APR), calculated using TILA and Regulation Z;
- The total repayment amount;
- The term of the financing;
- The amounts and frequency of payments;
- A description of all other potential fees and charges;
- A description of any prepayment charges; and
- A description of any collateral requirements or security interests.
Take Note: Additional forms of disclosures exist for Merchant Cash Advance, Factoring, and other forms of lending predicated upon the sale of future revenue and receivables.
MERCHANT CASH ADVANCE RENEWALS
Disclosure for a Loan Renewal: Providers and lenders requiring borrowers to pay off an existing commercial loan/commercial financing structure as a pre-condition to renewal, must disclose
- The amount of new financing applied to prepayment charges or interest under the financing being renewed and
- The dollar amount by which the new disbursement will be reduced to pay down any unpaid portion of the outstanding balance.
This will apply to Merchant Cash Advance Consolidations too, including Reverse Consolidations as well as to a general renewal of an existing Merchant Cash Advance Positions.
APR OF A MERCHANT CASH ADVANCE?
The new disclosure law requires an APR or Annual Percentage Rate to be provided with each loan, pursuant to the statute.
HOW CAN AN MCA DISCLOSE AN APR?
Since a bona fide Merchant Cash Advance is not permitted to designate a definite deadline for repayment because the transaction, if done legitimately, is supposed to be premised solely on possible and potential future receivables, no one knows of the time it will take to make the receivables to be provided to the lender. No one knows what will happen in the future and receivables may not even exist moving forward, a repayment timeline or deadline does not exist in a legal bona fide MCA and this begs the obvious question:
HOW TO CALCULATE AN MCA APR?
New York lawmakers seem aware of the potential issue raised above and have stated that a Merchant Cash Advance and other agreements to purchase future receivables or revenues, will require different or substitute disclosures. The devil is in the details and those details may only be revealed post-enactment and probably will be tweaked on a preliminary case basis. Coupled with the pending issuance of guidance provided for by the Department of Financial Services in New York and it will be remarkably interesting to see how the Merchant Cash Advance and Purchase of Future Receivables space discloses its APR.
THE MILLION-DOLLAR QUESTION:
What exactly the “differing and or substitute” disclosures are and how they will be inculcated into the overall law, is still up in the air. Will it provide a mechanism by which a Merchant Cash can actually calculate and reveal its true APR? Only time will tell. The mere fact that the law demands it, makes this all the more remarkable! Watch this space.
EXEMPT ENTITIES OF NOTE:
Exempt entities include state or federally chartered institutions like banks and saving and loan companies.
EXEMPT LENDER / PROVIDERS OF NOTE:
An exemption also exists for a person or provider that facilitates/provides no more than five (5) commercial lending transactions within the State of New York, over the course of twelve (12) months.
EXEMPT TRANSACTIONS OF NOTE:
S.B. 5470 does not apply to lending transactions
- Secured by real property,
- Leases (See Article 2A – New York UCC) and
- Individual loan transactions that exceed $500,000.00
EXPECTATIONS
S.B. 5470 will go into effect on January 1st, 2022. All non-exempt entities must be in compliance with the law’s disclosure and signature requirements at this time. As for Merchant Cash Advance and Purchase of Future Receivable agreements, we believe the New York Department of Financial Services will issue the Disclosure format and guidance before June 21st. Alternatively and if necessary, the lawmakers may need to amend or enact additional laws as necessary to effectuate compliance with S.B 5470 – INCLUDING Merchant Cash Advance and Revenue-based Sales agreement. The worst outcome will be a delay in enacting the law for a lack of guidance on format and application.
S.B 5470 – THE RIGHT DIRECTION:
In conclusion, this writer believes the New York Law is a massive step in the right direction towards regulating Merchant Cash Advances and the Purchase of Future Receivables and although questions remain as to practical application and format, the possible benefits of S.B 5470 far outweigh any lingering questions. Practical compliance will come and players will adapt or fail. The winner here is the small business owner. America’s small business community will be enabled with uniform data and parameters that create transparency and a fair marketplace while simultaneously holding non-compliant lenders accountable and even providing recourse to commercial borrowers via the regulatory and enforcement powers of the New York DFS. As for the current marketplace, we expect it to self-correct as each respective lender decides to adapt to the new law. We see the law’s enactment and the speed at which it passed, as the beginning of a trend and expect additional States around the country to enact similar legislation to New York’s S.B 5470. Credible lenders will likely welcome the opportunity too as a means to separating the good actors from the bad. Bottom line: S.B.5470 is here and it’s real. Compliance will be expected. Be sure your Merchant Cash Advance is legal and in compliance.
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Take note: This article is part 1 of 2. Be sure to read the second article following this. In article 2, we look at the guidance and amendments provided
and enacted since S.B. 5470 was signed into law.
CONTACT THE AUTHOR:
If you have any questions related to this article, kindly contact the author Mr. Grant Phillips, Managing Partner at Grant Phillips Law, PLLC, a New York City law firm specializing in representing Merchants struggling with Merchant Cash advances. Grant can be reached at [email protected] or at 516.670.5165. Please visit our website at grantphillipslaw.com for additional resources and information.
