As a general matter, state regulation of commercial lending is relatively light, and few states impose licensing requirement on commercial loan origination. In two noteworthy state developments, however, California and New York will require loan “providers” to furnish certain consumer-like disclosures to prior to the consummation of commercial financing 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 not yet occurred. The New York requirements take effect on January 1, 2022. Notably, both laws exempt commercial financing secured by real property, but it is unclear whether mezzanine lending is included in such exemptions.
The New York Law
The New York law requires “providers” of commercial credit to provide Truth-in-Lending Act-like disclosures to applicants at the time it extends a specific offer of the commercial financing in amounts of $2,500,000 or less. “Providers” include both lenders and brokers. The NY law applies to closed end financing, open-end financing, sales- based financing, including merchant cash advances and factoring transactions.
The NY Law provides a de minimis exemption, “for any person or provider who makes no more than five commercial financing transactions in [New York] in a twelve-month period.” Further, “Financial institutions”, which include banks, and certain other chartered depository institutions authorized to conduct business in New York, are also exempt from the new commercial loan disclosure law, but the subsidiaries or affiliates of such exempt financial institutions are not exempt. Commercial mortgage financings over $2,500,000 are exempt from the law as are transactions secured by real property. It is unclear whether mezzanine lending in amounts of $2,500,000 or less would be covered by the new law.
The NY law requires providers to furnish the following type of disclosures, depending upon the form of the transaction:
- The total amount of the commercial financing (or maximum amount of available credit) and, if different, the disbursement amount;
- The finance charge;
- The annual percentage rate or APR, calculated largely in accordance with 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.
The California Law
The California law (SB 1235), which was signed into law on September 18, 2018 but is not effective until the DFPI promulgates final regulations, amends the California Finance Lenders Law (CFL) to require “providers” licensed under the CFL who facilitate “commercial financing” to a “recipient” to disclose to the recipient at the time of extending a specific offer of commercial financing specified information relating to the transaction and to obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction.
The California law otherwise applies to, among other things, commercial loans, certain commercial open-end plans, factoring, merchant cash advances, and commercial asset- based lending. Unlike the NY law which applies to brokers as well as lenders, under the California law “provider” is primarily limited to entities extending credit, such as lender/originators, but also includes a non-bank partner in a market place lending arrangement who facilitates the arrangement of financing through a financial institution. Further, the California law defines “recipient” as the applicant of commercial credit of $500,000 or less.
The California law exempts, among others, depository institutions and entities that make no more than one commercial financing in a 12 month period or who make five or fewer commercial financing transactions in California in a 12 month period that are incidental to the business of the entity relaying on the exemption.
Further, the California law does NOT apply to transactions greater than $500,000 or to real estate-secured commercial loans or financings. It is unclear, however, whether mezzanine lending in amounts of $500,000 or less would be covered by the California law.
Once implemented, the California law will require the provider to disclose, among other information:
- The total amount of funds provided;
- The total cost of the financing;
- The term or estimated term;
- The method, frequency and amount of payments; and
- A description of prepayment penalties.
The DFPI has issued several sets of proposed regulations and has solicited public comment on these regulations. The DFPI issued its most recent version of the regulations for public comment on October 12, 2021, and the comment period ended on October 27, 2021. It is uncertain when the DFPI intends to promulgate final regulations with a mandated effective date.
The link to the California law is below:
Up to this point, state regulation of commercial lending has been relatively light. The California and New York laws are not only burdensome to lenders, they could be harbingers of developments to come in this area.