California's governor signed into law on September 30, 2018, a bill that requires commercial finance companies to provide disclosures about the cost of financing to recipients. SB 1235 requires a commercial financing "provider" to make certain disclosures at the time it extends an offer. Commercial financing transactions subject to the requirements include commercial closed-end loans, open-end credit plans, accounts receivable purchase and factoring transactions, and lease financing transactions. The disclosure requirements apply only to an offer of commercial financing in an amount of $500,000 or less.
The new statute defines a "provider" broadly as an individual or company that extends a specific offer of commercial financing to a recipient. This definition would potentially encompass a non-bank lender, broker, or lead generator. In addition, the definition specifically targets bank partner origination agreements by defining "provider" to also include a non-bank entity that enters into a written agreement with a bank to arrange for commercial financing by the bank "via an online lending platform" administered by the non-bank entity.
Note that the definition of a "provider" under SB 1235 is broader than the definition of a "broker" under the California Financing Law (CFL), which currently does not include an entity arranging loans that will be made by a bank. Thus, a non-bank entity may be subject to SB 1235, without requiring a CFL license as a lender or broker. However, for those providers that are licensed under the CFL, compliance with SB 1235 shall be included as part of the California Department of Business Oversight's (DBO) standard licensing examinations.
SB 1235's requirements do not apply to (1) a provider that is a depository institution; (2) commercial mortgages and other transactions secured by real property; (3) certain commercial financing transactions involving motor vehicles; (4) a provider regulated under the federal Farm Credit Act; and (5) individuals and companies that make no more than one commercial financing transaction in California in a 12-month period or that make five or fewer commercial financing transactions in California in a 12-month period that are incidental to their business. Although unclear from the law's text, presumably, the exemption in (5) is available to individuals and companies that only "offer" financing the applicable number of times in a 12-month period, given that brokers and lead generators never "make" loans.
A provider subject to SB-1325 must disclose the following at the time of extending an offer and must obtain the recipient's signature on the disclosure prior to consummating the transaction: 1) the total amount of funds provided; 2) the total dollar cost of financing; 3) the term or estimated term; 4) method, frequency, and amount of payments; 5) a description of prepayment policies; and 6) until January 1, 2024, the total cost of the financing expressed as an annualized rate.
SB 1325 directs the DBO to adopt regulations defining the disclosure terms and how they should be calculated, as well as specific requirements for the time, manner, and format of disclosures. In particular, the DBO will need to determine how providers should calculate and express the annualized rate and the fees and charges to be included in the calculation. Similar disclosure regimes, including the federal Truth in Lending Act, apply only to consumer-purpose loans. SB 1235's disclosure requirements shall not become effective until after the DBO has published the implementing regulations. Once effective, a violation of the disclosure requirements shall constitute a violation of the CFL.
California Financing Law
The CFL provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, Property Assessed Clean Energy (PACE) program administrators, by the CA DBO. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan. The CFL authorizes the commissioner to bring an action to enjoin, as specified, against a person who, in the commissioner's estimation, has violated or is about to violate the CFL, and authorizes the imposition of civil penalties to that effect.
Additional information on the CFL is available here.
Business Lending Regulatory Landscape
While the new law imposes disclosure requirements for commercial financing transactions under California law, business lending may also fall under other state and federal laws. For example, applicable state licensing and usury laws often come into play. In addition, business-purpose credit transactions are subject to federal disclosure and anti-discrimination regulations. For example, the federal Equal Credit Opportunity Act (ECOA) imposes different adverse action notification requirements based on whether the business applicant had more than $1,000,000 in gross revenues during the prior fiscal year. Additionally, laws prohibiting unfair or deceptive acts or practices (UDAP), such as Section 5 of the Federal Trade Commission (FTC) Act and state mini-FTC Acts, may be applicable to business-to-business lending.