It appears likely that California Governor Jerry Brown will sign a bill passed on August 31 by the state’s Senate, Senate Bill 1235, which would create consumer-style disclosure requirements for certain commercial loans and other finance products, such as merchant cash advances and factoring transactions.
Notably, the new disclosure requirements would apply to sponsors of bank-model lending programs in addition to companies directly extending certain forms of commercial credit pursuant to California Finance Lender licenses. The requirements would apply whenever the company receiving financing is located in California, even if the company providing the financing is located outside the state. Although the bill contains several ambiguities and potential loopholes created by last-minute amendments, Governor Brown is expected to sign it over industry opposition.
The bill’s central feature is a requirement that “providers” make a series of disclosures before consummation of a covered transaction and must obtain the recipient’s signature on the disclosures which include the “total dollar cost of the financing” and the “total cost of the financing expressed as an annualized rate.” As used in the bill, the term “provider” includes both a “person who extends a specific offer of commercial financing to a recipient,” and certain bank-model program sponsors, i.e., “a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.”
“Commercial financing” is defined broadly to include “an accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing transaction intended by the recipient for use primarily for other than personal, family, or household purposes.” This would appear to include commercial credit cards but not commercial sales finance contracts. There are exemptions and carve-outs for, among other things, depository institutions, financings of more than $500,000, closed-end loans with a principal amount of less than $5,000, and transactions secured by real property.
For more information about the bill, see our legal alert.