Nonbanks face new disclosure rules on small-business loans in N.Y.

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New York is on the verge of becoming the second state in the nation behind California to require greater transparency from nonbank lenders making small-business loans.

This week the New York State Senate and Assembly passed twin bills that call for fintechs and other nonbanks to disclose metrics on each loan such as total cost of capital, the estimated annualized percentage rate and the total repayment amount including the finance charge.The point of the bill is to allow borrowers to compare multiple offers when shopping for loans.

Summary of New York legislation on small-business loans by nonbanks

The online lenders Kabbage and OnDeck Capital applauded New York’s passage of the legislation. Both companies are members of the Innovative Lending Platform Association, a four-year-old group of online lending and service companies that helped draft the legislation.

According to Sam Taussig, head of global policy at Kabbage, the intent of the bill is to give small businesses access to a uniform pricing-comparison model. Kabbage, like all members of the association, already discloses rate and total cost metrics to small-business customers seeking loans.

“They can have an apples-to-apples experience when comparing products,” Taussig said.

The bill, which does not apply to banks and credit unions, covers specific commercial lending products such as sales-based financing, closed-end financing and open-end financing. Supporters say it is especially crucial at this time as small-businesses are struggling to stay afloat in the pandemic economy.

OnDeck’s head of government relations, Patrick Cuff, said the legislation aligns with the firm’s purpose of providing small businesses with “efficient, accessible and transparent capital.”

“I think it’s about being a transparent actor and providing customers with clear and concise information about what the terms of the product will be,” he said.

Similar legislation was signed into law two years ago in California, which at the time was the first state to require small-business lenders to make standardized interest rate disclosures. But regulators in that state have not yet finalized rules that determine how disclosures will be made.

One key difference between the two states’ bills is the fact that New York’s includes APR information. California’s bill requires an annualized metric, but not a formal APR.

Scott Stewart, chief executive of the Innovative Lending group, said he hopes New York’s bill, which now awaits Gov. Andrew Cuomo’s signature, will spur California regulators to also require APR disclosures and encourage other states to pass similar legislation.

“It’s a huge win for small-business borrowers in New York and hopefully around the rest of the country as we begin to harmonize regulations in other states as well,” Stewart said.

Among those exempt from the bill besides banks and credit unions are: lenders regulated under the federal Farm Credit Act, anyone who makes no more than five commercial financial transactions in New York in a 12-month period and any individual financial transaction exceeding $500,000.

Neither the New York Bankers Association nor the state’s financial regulatory agency, the Department of Financial Services, provided comment on the legislation.

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Commercial lending Small business lending Nonbank State regulators Marketplace lending Compliance New York
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