New York Adopts Small Business Truth in Loan Disclosure Requirement Affecting Small Business Loans, MCAs, and Other Forms of Business Finance
A new year brings new compliance requirements for non-banks and fintechs doing business in New York City, including Merchant Cash Advance (MCA) companies. On December 23, 2020, New York Governor Andrew Cuomo signed SB5470 expand New York’s financial services law to require non-banks and fintechs to provide small businesses with loan information similar to that required under the Truth in Lending Act. This new disclosure law is expected to come into force on June 21, 2021.
While disclosure requirements are not new to the consumer finance arena, New York is only the second state to require similar disclosures for small business finance. In 2018, California adopted a similar law. California law, however, is not expected to come into effect until six months after the California commissioner for the Department of Financial Protection and Innovation implemented the regulations.
Here’s what you need to know
Disclosure requirements apply primarily to alternative finance companies, such as MCA providers, whose transactions do not exceed $ 500,000. The law covers all types of “commercial financing”, including sales-based financing and factoring transactions.
From June 2021, non-banks and fintechs will be required to provide information to small businesses at any time in an application where a “specific offer” of funding is extended, and the disclosure must conform to the format determined by the superintendent of the ministry. of Financial Services. Disclosure should generally include:
- The total amount of trade finance, and if different, the amount disbursed;
- The financial burden;
- The estimated APR or APR for transactions based on sales or factoring;
- The total amount of the reimbursement;
- The duration of the financing or the estimated duration for sales-based transactions;
- Amounts of payments;
- A description of all other potential fees and charges;
- Penalties for early repayment, if applicable; and
- A description of collateral requirements or collateral, if applicable.
Merchant cash advance and factoring operations
While the law is straightforward when it comes to traditional loans, 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 duration, the historical method or the opt-in method. Suppliers should select an option to use for all MCA transactions and advise the superintendent of the method used. If a supplier chooses to use the enrollment method, they must report the data annually to the Superintendent and undergo a review process.
For factoring transactions, vendors must calculate the estimated APR as a “one-time advance, one-time payment transaction” in accordance with Schedule J of the Federal Loan Truth Act. In doing so, the purchase amount is considered the finance amount, the payment amount is the purchase amount less finance charges, and the term is the due date of the receivables. As an alternative approach, a vendor can estimate duration by taking a payment history view. The supplier can calculate the average payment term using the historical payment data of the chargeable part of the customer account in question, not exceeding the previous 12 months.
To take with
Non-banks and fintechs that offer financing options for small businesses in New York should start preparing by reviewing their existing portfolio to determine what business transactions are happening in New York, train employees, and work with legal counsel to ensure they have procedures in place to provide the appropriate disclosures. In addition, we are still unaware of much about the form and substance of the final disclosure requirements, such as the formatting of disclosures, the process of reviewing the method of membership, and the geographic scope of the law. Nonetheless, businesses in the small business finance industry should start preparing to comply with these new requirements. We will monitor any new development.