The California Department of Financial Protection and Innovation (DFPI) has issued modifications to its proposed regulations to implement SB 1235, the bill signed into law on September 30, 2018 that requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances.
SB 1235, codified at CA Financial Code (Code) sections 22800-22805, requires a “provider,” meaning a person who extends a specific offer of “commercial financing” as defined in Code section 22800(d) to a recipient, to give the recipient certain disclosures at the time the provider extends the offer. SB 1235 requires the DFPI to issue regulations implementing the specific requirements of the disclosures that must be given to recipients. The law contains 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. Compliance with the new disclosure requirements is not required until the DFPI’s final regulation s become effective.
In September 2020, the DFPI (then the Department of Business Oversight) issued proposed regulations to implement SB 1235. The modifications issued last week are intended to address the public comments that the DFPI received on the September proposal. Comments on the modifications must be submitted to the DFPI by April 26, 2021.
The provisions of the proposal modified by the DFPI include provisions that address:
- The meaning of the term “at the time of extending a specific commercial financing offer” in section 22802 of the Code (which is the trigger event in Code section 22802(a) for providing the required disclosures)
- Closed-end transaction formatting and content requirements
- Commercial open-end credit plan disclosure formatting
- Factoring disclosure formatting
- Sales-based financing disclosure formatting
- Lease financing formatting and content requirements
- General asset-based lending transaction disclosure formatting
- Disclosure formatting for all other transactions
- Signature requirements
- Estimates for sales-based financing
- Example transactions for asset-based lending and factoring
The modifications also add new provisions to the proposed regulations. The new provisions include:
- Section 3024(b) which states that (1) a provider’s “mere use” of certain words required by the regulations such as interest, interest rate, APR, and prepayment “shall not constitute evidence that a financer’s contract with a recipient is or is not a loan under California law,” and (2) the new subsection “shall not preclude a trier of fact from considering a provider’s statements in the disclosures required by [these regulations] when assessing whether a transaction, based upon the totality of the circumstances, is a loan under California law.” (Previously proposed Section 2057(a)(11) defines a “financer” as “the person who provides or will provide the commercial financing to the recipient or any 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.” As defined in Code section 28000(m), a “provider” includes a “financer.”)
- Section 3025(b) which states that for purposes of determining whether a recipient’s business is “principally directed or managed from California,” a provider “may rely upon the business address provided by the recipient to the provider in the application for financing.” (Previously proposed Section 3025(a) provides that the requirement to provide disclosures for commercial financing “applies to recipients whose business is principally directed or managed from California.”)
- Section 3026 creates a tolerance for the disclosed APR and safe harbors from liability for overdisclosures and for inadvertent disclosure errors that are addressed within 60 days of discovery through the provider’s or financer’s own procedures.
- Section 3027 requires additional disclosures when the amount financed is greater than the amount of funds received by the recipient.
Like California, New York has also enacted a law (S 5470–B) that requires consumer-like disclosures for “commercial financing” transactions. Signed into law by New York Governor Cuomo on December 23, 2020, S 5470–B requires disclosures for transactions of $500,000 or less. The new law states that it takes effect on the 180th day after becoming law, which is June 21, 2021.