Newly-effective California law requires a non-bank provider of commercial financing to present its financing recipient with certain consumer lending-style cost disclosures at the time when making an offer of commercial financing, and to obtain the recipient’s signature on the required disclosure before consummating the financing. While effective now, parties need not comply with the new law for an undetermined period of time.
California Senate Bill 1235 was approved and filed on September 30, 2018, creating a new Division 9.5 of the California Financial Code effective on January 1, 2019. However, financing providers need not comply with new Division 9.5 (the “Commercial Disclosure Requirement”) until the effectiveness of final regulations to be adopted by the Commissioner of Business Oversight, for which no deadline has been established.1 The Department of Business Oversight (“DBO”) invited comments on the content of such regulations, which comment period closed on January 22, 2019.2 No such regulations (either in draft or final form) have been adopted to date; no guidance has been provided by the DBO as to when such regulations will be issued.
Transaction Types. The Commercial Disclosure Requirement does not apply to transactions in an amount greater than $500,000, or to transactions that are secured by real property, or to financings to a motor vehicle dealer (or affiliate thereof) or vehicle rental company.
Provider Types. The Commercial Disclosure Requirement also does not apply to banks or other depositary institutions, or to financing providers who, in a 12-month period, (x) make no more than one commercial financing transaction in California or (y) make five or fewer commercial financing transactions in California that are incidental to the financier’s business. Note that if the ultimate originating financier is a depositary institution, but the offer of financing is made or arranged by a nondepository institution that 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, the Commercial Disclosure Requirement does apply to the nondepository institution/platform, which is not shielded from compliance by the ultimate originating financier’s exemption.3
The Commercial Disclosure Requirement’s exemptions are not coterminous with the exemptions from the California Financing Law4 (the “CFL”), which the Commercial Disclosure Requirement joins; a transaction’s or provider’s exemption from the CFL does not ensure exemption from the Commercial Disclosure Requirement (and vice versa).
Furthermore, unlike with California’s usury law, registration under the CFL as a licensed Finance Lender does not exempt a financing provider from compliance with the Commercial Disclosure Requirement5 if the licensed Finance Lender or transaction is within the Commercial Disclosure Requirement’s stated scope. Furthermore, compliance with the Commercial Disclosure Requirement will become part of the DBO’s examination of licensed Finance Lenders.
The Commercial Disclosure Requirement applies to commercial financings of $500,000 or less. It applies to (and requires disclosure at the time of) an offer of such a financing, regardless of whether a financing is actually consummated. A financing provider must obtain the recipient’s signature on the required disclosure before consummating the financing.
A “commercial financing” is defined to include an accounts receivable purchase transaction, including a 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.
Content of required disclosure
The required disclosure must include the following: (1) the total amount of funds provided; (2) the total dollar cost of the financing; (3) the term or estimated term of the financing; (4) the method, frequency, and amount of payments; (5) a description of prepayment policies; and (6) until January 1, 2024, the total cost of the financing expressed as an annualized rate. In the case of a commercial financing that is a factoring or asset-based lending transaction, the financing provider may instead opt to provide the following disclosures as a hypothetical example of a specific transaction under the factoring or asset-based lending transaction: (1) an amount financed; (2) the total dollar cost; (3) the term or estimated term; (4) the method, frequency, and amount of payments; (5) a description of prepayment policies; and (6) until January 1, 2024, the total cost of the financing expressed as an annualized rate.
As the data required to be disclosed can be defined or calculated in many different ways, the Commercial Disclosure Requirement requires the DBO to adopt regulations, including definitions, contents, or calculation methods, and the time, manner, and format of the required disclosure. Given the variability of possible interpretation of these items, as discussed above, compliance with the Commercial Disclosure Requirement is deferred until final regulations have been adopted by the DBO.
As noted above, there is no guidance regarding when to expect draft or final regulations; therefore, finance companies should monitor developments on this front.