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California Enacts a First-of-Its-Kind Commercial Financing Disclosure Law

Posted on October 9, 2018 at 1:55 PM

California Governor Jerry Brown signed into law SB 1235 (the Act), which requires disclosures of key terms in connection with certain commercial financing by non-banks and could impact bank/non-bank arrangements as well. California now becomes the first state to require consumer-style disclosures for commercial financing. The Act helps comparisons of financing options by recipients of covered financing offers by establishing a general framework for the disclosure requirements. The Act becomes effective after the California Department of Business Oversight (DBO) 

The Act's disclosure requirements are triggered by the size of the financing offer, rather than the size of the business seeking financing. Specifically, the Act applies to commercial financing offers of $500,000 or less to entities in California by any entity that extends a specific offer of commercial financing, including non-depository institutions that arrange commercial financing as part of a bank partnership arrangement. Thus, the Act applies more broadly than the existing California Financing Law (CFL) in imposing disclosure obligations on non-bank partners, such as online lending platforms, that currently are not covered by the CFL. The Act applies to “commercial financing,” which includes commercial loans of $5,000 or more, commercial openend credit plans, lease financing transactions, account receivable purchase transactions, asset-based lending transactions, and factoring.

Who is subject? The following entities and transactions are exempted from the Act’s requirements:
• Banks;
• Lenders regulated under the federal Farm Credit Act;
• Commercial financing transactions secured by real property;
• Certain commercial financing transactions where the recipient is a dealer, vehicle rental company, or their affiliates; and
• Persons either engaged in no more than one commercial financing transaction a year, or who make no more than five commercial financing transactions a year and the transactions are incidental to that person’s business.

What are the disclosure requirements? Entities covered by the Act will be required to provide commercial financing applicants with the specified disclosure at the time of extending a specific commercial financing offer. In addition, the disclosure must be signed by the recipient before the commercial financing transaction is consummated. The disclosure itself must contain:
• 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 financing expressed as an annualized rate.

The requirement to express financing as an annualized rate is in effect only until January 1, 2024. The Act specifies that for factoring or asset-based lending, the disclosure can be provided as an example of a transaction that could occur under a general agreement for a given amount of accounts receivables.

Specifically, the Act directs the DBO to adopt regulations to implement the disclosure requirements, including:
• Definitions, contents, or methods of calculations for each of the disclosure items;
• Requirements concerning the time, manner, and format of the disclosures; and
• A determination of the appropriate method of expressing the annualized rate disclosure and the types of fees and charges to be included.

Read More:
https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235" target="_blank">https/leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235

Categories: Corporate Governance