Generally speaking, state regulation of commercial loans is relatively light and few states impose a licensing requirement for the origination of commercial loans. In two notable state developments, however, California and New York State will require loan “providers” to provide certain consumer-type information prior to completing trade finance transactions.
The California requirements will not take effect until the effective date of final implementing regulations promulgated by the California Department of Financial Protection and Innovation (DFPI), which has yet to occur. New York’s requirements come into effect on January 1, 2022. Notably, both laws exempt commercial financing secured by real estate, but it is not clear whether mezzanine loans are included in such exemptions.
New York law
New York law requires business credit “providers” to provide applicants with information similar to loan law when making a specific business finance offer for $ 2,500,000 or less. . “Suppliers” include both lenders and brokers. New York law applies to closed financing, open financing, sales-based financing, including cash advances to merchants and factoring transactions.
New York law provides for a de minimis exemption, “for any person or service provider who does not carry out more than five commercial financing operations in [New York] over a twelve month period. In addition, “financial institutions,” which include banks and certain other approved deposit-taking institutions licensed to do business in New York City, are also exempt from the new Commercial Loan Disclosure Act, but subsidiaries or affiliates of these exempt financial institutions are not exempt. Commercial mortgage financings over $ 2,500,000 are exempt from the law, as are transactions secured by real estate. It is not clear whether mezzanine loans in the amount of $ 2,500,000 or less would be covered under the new law.
New York law requires suppliers to provide the following type of disclosure, depending on the form of the transaction:
- The total amount of trade finance (or maximum amount of credit available) and, if different, the amount of disbursement;
- The financial burden;
- The annual percentage rate or APR, calculated largely in accordance with TILA and Regulation Z;
- The total amount of the reimbursement;
- The duration of the funding;
- The amounts and frequency of payments;
- A description of all other potential fees and charges;
- A description of all prepayment charges; and
- A description of any collateral or security requirements.
The California law (SB 1235), which was enacted on September 18, 2018 but does not come into effect until the DFPI promulgates the final regulations, amends the California Finance Lenders Law (CFL) to require “suppliers” licensed under CFL that facilitate “” commercial financing “for a” beneficiary “to disclose to the beneficiary at the time of the presentation of a specific commercial financing offer specific information relating to the transaction and to obtain the beneficiary’s signature on this disclosure before complete the trade finance transaction.
California law also applies, among other things, to commercial loans, certain open business plans, factoring, cash advances to merchants, and commercial asset loans. Unlike New York law which applies to brokers as well as lenders, under California law the term “provider” is primarily limited to entities providing credit, such as lenders / originators, but also includes a non-bank partner in a market loan arrangement that facilitates the arrangement of financing through a financial institution. In addition, California law defines “beneficiary” as the applicant for a business credit of $ 500,000 or less.
California law exempts, among other things, deposit-taking institutions and entities that do not conduct more than one trade finance in a 12-month period or that conduct five or less trade finance transactions in California in a 12-month period which are incidental to the activities of the entity relying on the exemption.
In addition, California law does NOT apply to transactions over $ 500,000 or to commercial loans or finance secured by real estate. It is not clear, however, whether mezzanine loans in the amount of $ 500,000 or less would be covered under California law.
Once implemented, California law will require the supplier to disclose, among other information:
- The total amount of funds provided;
- The total cost of financing;
- The duration or estimated duration;
- The method, frequency and amount of payments; and
- A description of the prepayment penalties.
The DFPI has published several proposed sets of regulations and solicited public comments on those regulations. The DFPI released its most recent version of the regulation for public comment on October 12, 2021, and the comment period ended on October 27, 2021. It is not known when the DFPI intends to promulgate a final regulation with a mandatory date of entry into force.
The link to California law is below:
To take with:
Until now, state regulation of commercial loans has been relatively light. California and New York laws are not only binding on lenders, they could herald future developments in this area.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.