California's SB 1235 (Chapter 1011, Statutes of 2018) requires lenders, brokers, and other "providers" to make certain disclosures in connection with offers for commercial financing. SB 1235 requires the California Department of Business Oversight (DBO) to adopt regulations disclosing certain information to businesses seeking financing. The DBO is requesting public comment on draft regulations and sample disclosure forms to implement SB 1235. Comments are due on September 9, 2019.
SB 1235 defines a "provider" to mean any person that extends a specific offer of commercial financing to a recipient, and includes a non-bank company that enters into 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 company. The DBO's proposed regulations would clarify that the term "administered by" does not include an arrangement whereby the non-bank company "provides technology or support services" to the bank, as long as the non-bank company has no interest or arrangement to purchase any interest in the financing extended by the bank.
In general, SB 1235 requires a provider to disclose:
- The total amount of funds provided;
- The total dollar cost of financing;
- The term or estimated term;
- The method, frequency, and amount of payments;
- A description of prepayment policies; and,
- Until January 1, 2024, the total cost of the financing expressed as an annualized rate.
The proposed regulations also clarify a number of different content and formatting issues for various types of commercial financing transactions, including closed-end loans, open-end credit plants, sales financing, asset-based lending, and lease financing transactions. These include rules for calculating APR, disclosing payment options, and determining the amount of a commercial financing offer for purposes of the exemption for offers greater than $500,000. The proposed regulations describe the circumstances and requirements under which a provider of factoring or asset-based lending may provide disclosures using an example transaction.
In addition, the DBO's proposal includes sample disclosure forms for the following financing types:
- Asset-Based Lending
- Closed-End Transactions
- General Factoring
- Lease Financing
- Open-End Credit Plan
- Sales-Based Financing
A recipient's signature confirming receipt of the required disclosures must be obtained prior to consummating a commercial financing transaction. The DBO's proposed regulations clarify that if a transaction is consummated through the Internet, a provider may obtain the recipient's signature electronically after making the necessary disclosures.
Companies providing the types of financing covered by the law are not required to comply with the new disclosure requirements until the DBO's final regulations become effective.
For further information on SB 1235, please see our prior discussion here.