Non-bank lenders to small businesses need to be on alert after Governor Brown signed California Senate Bill 1235 into law on September 30, 2018. The new law, Commercial Financing: Disclosures," requires specific disclosures be made when commercial financing offers of $500,000 or less are presented to commercial borrowers. The new requirements will become effective when the California Commissioner of Business Oversight adopts final regulations to aid in the law's implementation; the earliest date that this new law may be enforced is January 1, 2019. California's law is important as it requires consumer-lending style disclosures in the commercial lending context.
Under the new law, non-bank lenders that facilitate commercial financing transactions equal to or less than $500,000 must make new disclosures to commercial borrowers at the time of presenting a commercial offer of financing and must obtain the borrower's signature on the disclosure prior to consummating the transaction. The law also applies to a "nondepository institution that enters into written agreements with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient through an online lending platform that is administered by the nondepository institution."
The law exempts from its coverage traditional depository institutions, such as banks and credit unions; lenders regulated by the Farm Credit Act; commercial transactions secured by real property; and floor plan financing transactions in which the borrower is a motor vehicle dealer or an affiliate. In addition, the law exempts entities that make no more than one commercial financing transaction within the state in a 12-month period or that make five or fewer commercial transactions in the state that are incidental to the entity's business.
"Commercial financing" as regulated by the new law includes not only traditional loans, but also "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."
A lender regulated under the new law that offers commercial financing of $500,000 or less to a borrower will be required at the time of extending the financing offer to disclose the following:
- The total amount of funds provided;
- The total dollar cost of the financing;
- The term or estimated term;
- The method, frequency, and amount of payments;
- A description of prepayment policies; and
- The total cost of the financing expressed as an annualized rate.
The law provides for similar disclosures to be made in asset-based lending and factoring commercial financing offers. Finally, providers of commercial financing must obtain the recipient's signature on the disclosure statement before consummating the commercial transaction.
Non-bank lenders offering commercial financing in California should monitor the status of the final regulations to be promulgated by the California Commissioner of Business Oversight and should put procedures in place to implement these new disclosure requirements when the implementing regulations are promulgated. Commercial financing providers should seek advice from legal counsel to ensure compliance with this new law.
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