The New York Department of Financial Services issued a proposed regulation to implement S 5470 – B, which requires consumer-type disclosures for “trade finance” transactions of $ 2.5 million or less. The proposed regulation would give the provisions added by S 5470-B to the Financial Services Act the title of “Commercial Financial Disclosure Act” (CFDL). The CFDL enters into force on January 1, 2022. Comments on the proposal will be due no later than 60 days after the date of its publication in the State Register.
The CFDL defines “commercial financing” as “open financing, closed financing, sales-based financing, factoring or other form of financing, which the beneficiary does not intend to use. primarily the product for personal, family, or household use. The CFDL’s definition of “sales-based financing” encompasses cash advances to merchants. The CFDL includes exemptions for federally and state chartered banks, savings banks, credit unions, trust companies, and industrial loan companies and providers that do not complete more than five commercial finance transactions at New York over a 12 month period. It requires a supplier to provide specified information to a recipient “at the time of extending a specific offer” for open financing, closed financing, sales-based financing or a factoring transaction. Disclosures must be signed by the recipient and must not include additional information not required to be disclosed under the CFDL.
The information to be provided for all types of commercial financing includes “finance charges”, “annual percentage rate” and “amount financed”. Although CFDL’s definition of “finance charge” echoes TILA’s definition of “finance charge”, the proposed regulation includes additional amounts in the finance charge that vary depending on the type of trade finance.
In addition, the proposed regulations provide a definition of “amount financed” which varies depending on the type of commercial financing. Where the amount funded is greater than the amount of funding the recipient will receive, the proposed settlement requires additional disclosure, which must be in a form substantially similar to an example in the proposed settlement. Specific language is also required depending on whether or not the financed amount includes funds paid to brokers.
Likewise, although the estimated APR or APR for all trade finance should be calculated in accordance with TILA, the proposed regulation prescribes how the TILA methodology should be applied for different types of trade finance. The proposed regulations provide a definition of “amount financed” which varies depending on the type of commercial financing. The other information required will also vary depending on the type of business financing. For example, for factoring transactions, in addition to finance charges, estimated APR and funded amount, the information required includes an explanation of why the payee is not normally required to make payments under the contract, the estimated term and an explanation describing how the term was calculated, the surrender charges and the collateral requirements.
The proposed regulations include provisions that:
- Define the terms used in the CFDL and in the regulations
- Provide methodologies for calculating finance charges and the annual percentage rate
- Establish allowable tolerances
- Establish formatting requirements for the different types of funding covered by the CFDL
- Establishes the duties of trade finance providers and brokers
- Provides rules for determining if a transaction amount is within the $ 2.5 million threshold
Similar to New York, California has also enacted a law (SB 1235) that requires consumer-like disclosures for “trade finance” transactions, including merchant cash advances. Last month, the California Department of Financial Protection and Innovation released a second amendment to its proposed regulation to implement SB 1235.