The California Department of Financial Protection and Innovation (DFPI) has issued final 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.  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.  However, while depository institutions are exempt, SB 1235 treats certain nonbank partners as “providers” subject to the law’s disclosure requirements.  Specifically, SB 1235 defines a “provider” to include “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.”

Pursuant to SB 1235, the DFPI was tasked with issuing regulations implementing the law’s disclosure requirements.  Providers will be required to comply with the new disclosure requirements beginning December 9, 2022, the date the final regulations become effective.

The regulations provide that the disclosure requirements apply “only to recipients whose business is principally directed or managed from California.”  For purposes of determining  whether a recipient’s business “is principally directed or managed from California,” a provider can rely on any written representation by the recipient as to whether it is principally directed or managed from California or the business address provided by the recipient in its application for financing.  If a business qualifies as a “recipient,” the new disclosure requirements would appear to apply regardless of where the provider is located.

The regulations are detailed as to both the format and content of the disclosures that must be provided and the specific requirements vary depending on the type of commercial financing offered. In addition to extensive definitions and general requirements, the regulations contain separate requirements for:

  • Closed-end transactions
  • Commercial open-end credit plans
  • Factoring transactions
  • Sales-based financing
  • Lease financing
  • Asset-based lending transactions
  • Commercial financing that does not fall into any of the above categories

New York regulators have yet to issue final regulations implementing the state’s Commercial Finance Disclosure Law, which went into effect on January 1, 2022.  In March 2022 and April 2022, Utah and Virginia, respectively, became the first two states to require the registration of providers of merchant cash advances.  The new laws also include disclosure requirements.