NYDFS Releases Pre-Proposed Rules To Implement New Commercial Finance Disclosure Law – Finance and Banking


United States: NYDFS Releases Pre-Proposed Rules To Implement New Trade Finance Disclosure Law

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The New York Department of Financial Services (NYDFS) has published “pre-proposed” rules under the New York Commercial Finance Disclosure Act which was enacted in late 2020. The pre-proposed rules are 45 pages long and were published on the NYDFS website September 21. Comments on the pre-proposed rules are due by October 1st. There will be a longer comment period once a proposed rule is posted in the state registry. The NYDFS aims to finalize the rules before the law goes into effect on January 1, 2022.

The pre-proposed rules give the state’s Trade Finance Disclosure Act, colloquially known as “NY TILA”, the official name for the “Trade Finance Disclosure Act (CFDL)”. The pre-proposed rules also define the terms and provide detailed requirements for the content and formatting of the disclosures required by the CFDL. The proposed definitions draw heavily from, but do not accurately reflect, those of the California Department of Financial Protection and Innovation (DPFI) for implementing its own trade finance disclosure law. The lack of uniformity between the regulations of the two states will make compliance difficult for commercial financiers subject to both laws. Where the NYDFS rules borrow most from California rules, the NYDFS tends to draw inspiration from the previous version of those rules, ahead of the second round of DFPI changes released on August 9, 2021. This raises the question of whether the NYDFS will incorporate the latest changes when the NYDFS releases the next version of its proposed rules.

Like California’s pending rules, the New York proposals would present disclosures in three columns, one for each (i) the name of the term disclosed, (ii) the value (amount, rate, etc.) of the term disclosed, and (iii) a description of the term in prescribed language. The content of many of the information required will vary depending on the type of contract (e.g. fixed rate or variable rate), so funders should develop multiple forms or a single form with multiple options within each funding category. (eg closed, open, sales-based, etc.). Like the California rules, the New York rules would impose font and column width requirements, including providing a 3: 3: 7 “safe harbor” ratio for the latter. The information that must be disclosed in each line of the disclosure form under the pre-proposed New York rules would not exactly match the information required by law, so a funder who started writing disclosure models based on the text of the law need to revise them according to the rules.

Safe Harbor template forms to ease the industry’s compliance burden are conspicuously absent from the NYDFS proposed rules. Since the NYDFS (like the DFPI) has not issued model forms in the sense of Annex H of Regulation Z, each commercial funder should independently formulate their own forms and hope that the NYDFS finds them compliant. Also missing is a clarification of New York’s connection to the recipient of the funding required to trigger the CFDL, which industry players and trade groups have requested. While the DFPI has offered helpful language clarifying that funding is subject to California law only when the recipient’s business is “primarily directed or managed from California” (and allowing the funder to rely on the business address or upon the written representation of the beneficiary), the NYDFS pre-proposed rules do not offer any further guidance.

In addition to the content and format of the disclosure, the pre-proposed rules clarify the NYDFS ‘expectations regarding the allowable tolerances for disclosed APRs, recipient electronic signatures, the calculation of the $ 2.5 million threshold to determine whether financing is subject to CFDL, additional assumptions for factoring transactions, obligations of commercial financiers and brokers when a broker is used, annual reporting requirements for a financier who has used the “opt-in method “to calculate the estimated APR, and other requirements. If adopted, the rules will be codified in a new part 600 of the NDYFS Bylaws.

While the pre-proposed rules are a step in the right direction, further guidance is needed in the near future if the industry is to comply with CFDL requirements by the effective date of January 1, 2022. .

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