On June 9, California’s Office of Administrative Law approved commercial financing disclosure regulations (Regulations) which require consumer-like disclosures for certain commercial financing products such as small business loans and merchant cash advances. With this final step completed, the Regulations from the Department of Financial Protection and Innovation (DFPI) will become effective on December 9, 2022, completing a process that began with the passage of SB 1235 in 2018.
Until this year, only New York had also passed a similar law requiring commercial financing disclosures, which is currently at the proposed regulations stage (see our blog post on New York’s proposed regulations here). However, already this year, Utah and Virginia have each passed statutes requiring the registration of certain commercial finance companies in addition to imposing disclosure requirements (see our blog posts on Utah’s law here and Virginia’s law here).
The Regulations require providers of commercial financing to give the recipient of the financing-specific disclosures in the precise language and format detailed by the Regulations at the time the provider extends the commercial financing offer. The format requirements detail specific rows and columns that must be used for a disclosure table and the terms that must appear in each section of the table.
Despite significant pushback from industry groups during the rulemaking process, the regulations require an APR disclosure for all product types, including sales-based financing transactions such as merchant cash advances. The Regulations provide information about how the APR disclosure must be calculated.
Additionally, although there is an exemption for depository institutions, the Regulations expressly apply to certain partners of depository institutions. As a result, despite the exemption, banks will need to determine applicability of the Regulations to appropriately assess their partners’ compliance practices.
We routinely assist clients in developing and maintaining commercial finance programs and will continue to monitor the developments of state regulation of commercial finance.