California’s new law requires commercial finance disclosures

On September 30, 2018, California’s Governor signed into law Senate Bill No. 1235, requiring consumer-like disclosures to be provided to recipients of certain business-purpose financial services products (“commercial financing”). While this type of disclosure requirement is very familiar for providers of consumer products and services, it is the first of its kind for commercial financing. Financial services providers that offer products subject to the law will face the decision of, either, implementing regulatory compliance measures, exiting the California market, or restructuring their products to be outside the scope of the new law.

The requirement applies to a variety of commercial financing, including:

  • Closed-end commercial loans with a principal amount greater than $5,000 ;
  • Commercial open-end credit plans;
  • Merchant cash advances and factoring agreements; and
  • Certain lease financings.

This law applies to individuals or entities offering covered commercial financing (“Covered Providers”). Notably, Covered Providers includes sponsors of lending programs under a bank partnership agreement (between a bank and non-bank). More specifically, a Covered Provider includes a non-bank, which is a party to a “written agreement with a [bank] to arrange for the extension of commercial financing by the [bank] . . . via an online lending platform administered by the [non-bank].” However, the law specifies that extending “a specific offer of commercial financing or lending on behalf of a [bank]” is not to be construed as engaging in lending or originating the loan or financing.

Exemptions and exclusions apply to, among others:

  • Commercial financing provided by federal and state chartered banks;
  • Commercial financing greater than $500,000;
  • Closed-end commercial loans with a principal amount of less than $5,000;
  • Commercial financing secured by real property;
  • Certain commercial financing for a dealer or vehicle rental company; or
  • Anyone that does not make more than one commercial financing per year in California.

Although the bill was introduced to help small businesses better understand terms and costs of financing, the law does not appear to exempt commercial financing to large, sophisticated borrowers if the financing otherwise falls under the rule.

The law requires Covered Providers to provide recipients with disclosures – and to obtain a signature on such disclosures – including:  

  • The total amount of funds provided;
  • Information related to the payments to be made (e.g., loan term and the method, frequency, and amount of payments);
  • A description of the prepayment policies;
  • The total dollar cost of the financing; and
  • The total cost of financing expressed as an annualized rate (until January 1, 2024).

For Covered Providers offering factoring or engaged in asset-based lending, an alternative disclosure may be used that, among other things, uses an example of a transaction that may occur under the agreement for the amount of accounts receivables.

As written, the law leaves many open questions. The Commissioner of Business Oversight must adopt governing regulations setting forth more guidance regarding disclosure timing, calculations, and format, among other things. The compliance deadline will not be until such regulations are adopted.

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