At Least One Firm is Leaving New York before Disclosure Law Lands

New York MCA firms are in the dark. In January, the governor delayed implementation of the APR disclosure bill until 2022. But the bill leaves it to the Department of Financial Services (DFS) to finalize how it will all work and not everyone is confident the outcome will be positive for business in New York State.

For example, Greenwich Capital, a small business funding company, has decided to move from Manhattan to Hoboken, NJ in preparation for the law. They anticipate that the cost of compliance will be high enough to warrant a trip on the PATH starting now rather than when it may be too late to contemplate later.

“There’s a lot of ambiguity, and our five-year lease was up,” Rich Gipstein, General Counsel at Greenwich Capital, said. “We’ll be moving to Hoboken for the time being and see what’s going on with this law. But in the meantime, it’s a lot cheaper for us.”

Based on vague wording language like double-dipping, Gipstein said there is no clear way to tell who or what the law aims to regulate. At least for his firm, it’s better to sit this one out.

“I think there’s quite a lot left open, and it’s intended to be broad,” Gipstein said. “There won’t necessarily be much time to know what the law means until it’s effective. I think there will probably be some lead time, but likely not quite enough for most businesses in the industry to adapt.”

For example: when does a deal become a “specific offer” and come under the purview of the law? In an industry where deals are won through cold calling, social media blitzes, and emails, when would it become necessary to disclose an APR? In a DM on LinkedIn? Rich said it is unclear what a “provider” is, whether it be funders, brokers, or ISOs. In the bill, a provider is required to make commercial financing disclosure clear and let a recipient know at the time of the “specific offer” the all-inclusive rates of a product. Without clarity, it’s hard to predict what the cost of compliance will be.

“I think, from my reading of it and from my understanding of New York’s position, it would seem that they are trying to regulate both funders and brokers under the same regulation,” Gipstein said. “I think it’s possible that the legislature intentionally left some things vague for DFS to fill in. The law basically says, ‘there’ll be regulations that will make this make sense.'”

Gipstein said it’s common for politicians to leave it to the regulators to finish the job, after all, the DFS has its nose to the grindstone in the day-to-day. But when a law affects an entire industry like this, Gipstein said it is uncommon for changes to be left until the last moment.

“It’s more than just disclosure requirements; this is not similar to what California did,” Gipstein said. “The law also dictates how to calculate the projected sales volume. You’re required to either use the historical method, in which you must always use the same number of months leading up to the deal, or you can opt-out and use your own projection. But if you use your own projection, that opens you up to disclose the results of all your deals to the government… It’s almost like an annual audit.”

The historic method doesn’t really work, Rich said when the industry comprises atypical merchants who wouldn’t be looking for funding if traditional methods could predict their sales volume. When it comes to self-declaring and letting the government poke around: Gipstein said the way a funder evaluates deals is proprietary. It’s what sets them apart; it’s the value proposition.

Greenwich Capital isn’t alone in their assessment. The Small Business Finance Association (SBFA), a trade group comprised of similar financial companies, has also been vocal about the law’s perceived shortcomings.

“You have a group of companies that are pushing these types of disclosures, for no reason other than their own self-interest,” said Steve Denis, executive director of the SBFA, back in October. “We’re fine with disclosure, we are all for transparency, but it needs to be done in a way that we believe is meaningful to small business owners.”

Denis had further said that those firms taking credit for writing the laws are the same companies that will end up suffering under the strict tolerance of an APR rule.

“The companies pushing this, the trade associations pushing it, they like to take credit for writing the bill in California and writing the bill in New York: I don’t even think they’ve read it,” Denis said at the time. “It’s going to subject their own members to potentially millions if not hundreds of millions of dollars in potential liability [fines.]”

When the DFS finalizes the terms, it will likely make dealing with disclosure too costly to remain in New York State, Gipstein said.

Gipstein said we’ll have to wait and see if NY-based brokers will have to go through extra compliance even if their funders or merchants are out of state. The worst-fear scenario is a possibility that after New Years’ 2022, out-of-state funders will stop working with NY brokers entirely, just because they live in NY. Merchants in the state, subject to the law, may find commercial finance a barren marketplace.

“We’ve got a lot of different things to manage as we grow, and one of the things we don’t want to do is create is a large compliance department,” Gipstein said. “It’s just cheaper for us, after doing a cost-benefit analysis, to move to a different state. We’re probably not going to be a New York funder by 2022.”