How do New York’s commercial financing disclosure laws apply to merchant cash advances?

SB 5740 is a New York rule for commercial lenders that don’t look like banks. Specifically, the rule covers merchant cash advance funders.

When a business is ready to borrow, the deal should give them a clear picture of what it’ll cost. How much will they pay overall, and what exactly is the rate they’ll owe? The financing contracts also have to let the small business owner compare deals from different lenders by revealing key details, including the financing’s total cost and its APR.

Looking at the rulebook, MCA lending is one of the business lending deals the law names.

Governor Cuomo made New York’s new lending rule official on February 16th, 2021, when he signed SB 898 into law.

SB 898 isn’t a sequel, so much as it’s the first bill’s decoder ring. SB 898 was designed to clear up the things that were fuzzy and cover whatever looked left out.

The state enacted the law in December 2020.

On its own, SB 5740 was almost too small. About two months later, SB 898 also made the first rule more far-reaching.

The main piece of SB 5740’s agenda wasn’t complicated. The lawmakers wanted New York’s lenders, who didn’t look like banks, to show terms when a small business borrowed. These lenders would have to share terms whether they loaned in New York or in other states.

The new law’s requirements for giving details to borrowers won’t kick in till January 1st, 2022.

Lenders Get No Free Pass

It doesn’t matter how fully a lender follows the rule’s disclosure laws. By itself, disclosure will not make an illegal or fraudulent business loan legal. The rule’s main point is to help a business think through their options. If a lender isn’t above board, they can still be pursued for fraud or misrepresentation.

The new law also widens the power the state’s Department of Financial Services holds over lenders. They can help people get compensation when they fall prey to a fraud now.

Disclosure also has limits on licensing: if a state still says a lender needs a certain license, and the lender doesn’t have it, the rule won’t excuse them.

Not everything can be taken care of by simply giving the facts. If a lender charges a rate beyond what the law allows, and the law says that’s usury, being clear about the numbers will not erase the violation.

The Cap on the Rule

At the start, the rule the lawmakers came up with in SB 5740 was meant to cover loans with a smaller footprint. It only held lenders accountable for deals under $500,000.00. Once SB 898 came out, though, the limits changed. Now, the rule covers any commercial lending (MCAs included) under $2,500,000.00.

It’s worth noticing how closely the cap on the rule matches the one in New York’s criminal usury rule. In general, when a non-bank lender’s agreement puts their rate above 25%, it looks like both rules kick in.

A side note is the small difference in size between New York’s lending rule and their criminal usury laws. Say a loan is exactly $2,500,000.00; it looks like SB 5740 kicks in, but the criminal usury rule stops at $2,499,999.00.

Not every small business loan gets the same treatment. One example shows how lawmakers made some exceptions from the rule. A car dealer who finances another dealership or a rental car company won’t have to follow the disclosure rules, but only if the loan is over $50,000.00.

The APR Disclosure

Beyond just saying the APR must be shown, SB 898 went even further. A key point in the rule is the APR disclosure has to use the standards laid out in TILA and the rules under Regulation Z. Regulation Z is a consumer protection safeguard against creditors who gave customers the wrong idea. This rule says small business borrowers have to be treated like consumers, even when they wouldn’t have gotten TILA disclosures. Whether or not the TILA standards should apply to small business loans has been one of the key debates. For at least one of these details, though, the question’s not up for debate anymore.