On June 9, 2022, California approved new commercial financing disclosure regulations proposed by the California Department of Financial Protection and Innovation (DFPI). Those regulations go into effect on December 9, 2022. The commercial financing disclosure regulations extend consumer style disclosure protections to California small businesses seeking commercial financing. The result is that providers of certain commercial financing products in California may need to provide borrowers with certain disclosures that comply with the new regulations at the time of making the offer on and after December 9, 2022.
The DFPI regulations implement the financing disclosure requirements under California SB 1235, which California enacted on September 30, 2018, and is codified in the California Financial Code sections 228000–22805. The final regulations are posted to the DFPI website here. The purpose of the disclosure requirements is to ensure that small business owners have a complete understanding of the financing terms that are offered to them and to enable them to find the best terms for their business needs.
Parties and Transactions to Which the Regulations Apply
The disclosure regulations apply to “providers” making specific offers of commercial financing that is equal to or less than $500,000 to a recipient or a recipient’s agent or broker. Types of transactions that may be covered include (among others):
Accounts receivable financing transactions;
Commercial open-end credit plans;
Lease financing transactions;
Asset-based lending transactions;
Merchant cash advances; and
The entry by a non-depository provider of 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 provider.
The requirements of the new law do not apply to any of the following:
(i) providers that are depository institutions;
(ii) providers that are lenders regulated under the federal Farm Credit Act;
(iii) a commercial financing transaction in which the recipient is a dealer (as defined by Section 285 of the Vehicle Code), or an affiliate of such a dealer, or a vehicle rental company, or an affiliate of such a company, pursuant to a specific commercial financing offer or commercial open-end credit plan of at least fifty thousand dollars ($50,000), including any commercial loan made pursuant to such a commercial financing transaction; and
(iv) any person who makes no more than one commercial financing transaction in California in a 12-month period or any person who makes five or fewer commercial financing transactions in California in a 12-month period that are incidental to the business of the person relying upon the exemption.
What Types of Disclosures Are Required?
The regulations are very detailed, covering everything from font size to economic content, and should be carefully reviewed if you think they may apply to you.
In general commercial financing providers can expect to have to disclose, among other things, 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 (until January 1, 2024) the total cost of financing expressed as an annualized rate.
It bears noting that different types transactions may have different disclosure and formatting requirements under the new law, and the specific provisions that are applicable should be consulted. In general, however, commercial financing providers should evaluate whether they undertake the following as party of their current processes:
Provide a copy of compliant disclosures to a recipient or a broker, whenever a financer provides a recipient or broker with a specific commercial financing offer.
Maintain a copy of the evidence of transmission of the disclosures provided for at least four years following the date that the disclosure is presented.
Obtain a copy of the disclosures signed by the recipient prior to consummating the commercial financing.
Ensure that any broker timely provides the disclosure transmissions to the financing recipient
Financiers subject to the DFPI regulations need to ensure that the disclosures that accompany their financing offers on and after December 9, 2022 are in compliance with the new regulations.
O’Melveny & Myers LLP – Jennifer Taylor, Danielle Oakley Morris and Kevin Loquaci