The California Office of Administrative Law (OAL) has approved the California Department of Financial Protection and Innovation's (DFPI) final regulations, which require providers of commercial financing, including nonbank lenders, to provide commercial borrowers with cost-of-credit disclosures similar to those provided to consumer customers. These regulations become effective on December 9, 2022.
How We Got Here
The statute that governs commercial financing is the California Financial Code (see Cal. Fin. Code §§ 22800 to 22895). On September 30, 2018, California enacted SB No. 1235, which is now codified at Division 9.5 of the California Financial Code. That law required providers of commercial financing to give consumer-style "cost-of-credit" disclosures to recipients and directed the DFPI to promulgate regulations governing those disclosures. In our article about SB No. 1235, dated September 4, 2019, we discussed the proposed law and, in particular, how a provider was defined and what was required to be disclosed. In October 2020, the DFPI proposed regulations, which were subsequently modified several times in response to comments from various stakeholders. The final regulations were sent to the OAL for review in December 2021 and approved by the OAL on June 9, 2022.
The DFPI's final regulations address seven categories of commercial financing transactions:
- Closed-End Transactions
- Open-End Credit Plans
- General Factoring
- Sales-Based Financing (e.g., merchant cash advances)
- Lease Financing
- Asset-Based Lending Transactions
- All Other Transactions (a catchall for transactions that don't fit in the six specific categories above)
At the time of extending a financing offer, a commercial financing provider is required to provide cost-of-credit disclosures to recipients whose business is directed or managed principally from California. Moreover, the final regulations mandate the formatting and content requirements, row by row and column by column, for each category of commercial financing. We note that the final regulations also impose other requirements, for example, signature requirements (including electronic signatures) and rules for determining statutory exemptions. We further note that the final regulations require disclosures of annual percentage rates (APRs) and disclosures for estimating or calculating APRs, finance charges, and other items. The final regulations state that a non-depository institution that is providing technology or support services to a depository institution's commercial financing program is exempt if the non-depository institution has no interest in or agreement to acquire an interest in the commercial financing, and the program is not branded with the non-depository institution's trademark.
An important takeaway is that given the limited scope of the exemption for non-depository institutions, typical arrangements between fintech companies and banks may result in fintech companies fitting the definition of a provider and, as such, being subject to these regulations.
The final regulations will be effective on December 9, 2022, so it is important to get started with building the processes and systems needed to comply. Notably, other states, including New York, Utah, and Virginia, are currently considering similar rules. And some states, including Connecticut, Maryland, Missouri, and New Jersey, are considering or have considered a version of these rules that would apply to small businesses.