Alert: NY’s New Commercial Financing Disclosure Law Applies to Factors

While much of the world was focused on COVID-19, political discord and protests, the New York state legislature surprisingly passed Senate Bill S5470B, which imposes Truth-In-Lending (TILA) style disclosure requirements on factors and commercial lenders.[1] Gov. Andrew Cuomo has yet to sign it, but there is no indication that he won’t. There was little fanfare during the legislative hearings. If passed, it would become effective within 180 days of his signature, unlike the process for California’s disclosure law, which was enacted in 2018.

The full text of the statute, including what has to be disclosed and to whom, can be found here.

In sum, the law requires that lenders and factors disclose typical TILA information for commercial financing transactions that are extended to small businesses. There are no promulgated disclosure forms, and “small businesses” are not defined in the statute, making it even more problematic. Presumably, the factor would disclose all of the relevant pricing information (purchase price, advance rate, per diem tiers and any other fees, such as misdirected payment fees, to be safe). The law requires the factor to basically estimate the effective annual yield through an APR even though factoring transactions do not loan money at a rate of interest.

While this proposed law applies to commercial deals, it does not apply to deals that are above $500,000, and there are some de minis exceptions for companies that do five or fewer New York deals within a 12-month period. Whether or not a non-New York factor doing a deal for a New York-based factoring customer, with documents governed by another state, would even count toward this five-deal amount is debatable. And it appears that perhaps a financier could escape the disclosure requirements simply by having a stated credit line amount above $500,000, even though both factoring and ABL lines are largely uncommitted (with the factor and ABL lender having discretion on what is or is not an eligible receivable, meaning you can ascribe to a $500,000+ line without ever being committed to fund a single receivable). The statute carries penalties equal to $2,000 for each violation or up to $10,000 for each willful violation. You should seek legal counsel for advice on complying with these disclosure requirements should the law be signed into effect by the governor.

We will continue to monitor the progress of the governor’s treatment of this legislation.

Jason M. Medley is a preferred attorney with the IFA and a Member of the national firm Clark Hill PLC. His colleague and co-author, Joann Needleman, is also a Member of the firm’s Banking and Financial Services Group. Both Jason and Joann are watching this legislation closely and advising clients of its impact upon their businesses. Rachel L. Arco is a finance-specific law clerk with Clark Hill PLC focusing her research and writing efforts on factoring issues. This article is not intended as legal advice and its dissemination shall not establish an attorney-client relationship. You are encouraged to seek independent legal counsel.

[1] The new law also applies to financing certain sales.