California DBO Proposes Commercial Finance Disclosure Regulations

Financial Services Law

On September 11, 2020, the California Department of Business Oversight (DBO) commenced a formal rulemaking to adopt regulations to implement SB 1235, a law passed in September 2018 to impose first-in-the-nation disclosure requirements on commercial financing.  Comments are due by October 28, 2020, and the regulations will take effect on July 1, 2021 or six months after the final regulations are adopted, whichever is later.

What Happened

SB 1235 requires that “providers” of commercial financing make disclosures similar to those required by consumer finance laws such as the federal Truth in Lending Act.  The term “providers” excludes depository institutions like banks, but includes commercial lenders operating under the California Financing Law (CFL) or bank sponsorship arrangements, including many fintech companies.  “Commercial financing” is not limited to CFL loans, but also covers non-loan financing such as factoring and merchant cash advances (MCAs).  Although SB 1235 broadly outlines what must be disclosed, it delegated to the DBO the task of specifying the form and timing of the disclosures in the statute’s implementing regulations.  The formal rulemaking provides a fourth opportunity for interested parties to comment, and includes a detailed Initial Statement of Reasons explaining DBO’s thinking behind the individual provisions. 

Generally speaking, the current draft reflects DBO’s thoughtful consideration of prior comments.  For example, the new draft includes improvements such as APR calculation tolerances and simplifications, clarification of which “recipients” the requirements apply to, opportunities to explain assumptions underlying certain disclosures, and a statement that the regulations are not intended to “[c]larify or interpret existing California law with respect to the definitions of loan, sale, and lease, as those terms may apply to the commercial financing transactions regulated by” the new rules.  It also provides at least six months to comply with the new requirements once they are adopted.

Problems remain, however, so it will be critically important for commercial finance companies to comment by the deadline and perhaps request a hearing.  For example, the latest draft continues to require some calculations and disclosures based on artificial and unrealistic assumptions that can cause significant confusion if not explained.  While helpful explanatory disclosures have now been provided for some products, disclosures for others (such as MCAs) remain inadequate and appear likely to lead to private litigation against companies based solely on their compliance with the new rules.  Requests for safe harbors to address these concerns should be renewed. 

Why It Matters

SB 1235 was enacted to ensure that companies can easily compare the costs and features of various forms of commercial financing, and it already has been imitated in New York.  While the implementing regulations have come a long way from the first draft, they still will impose significant compliance burdens on commercial financing companies and, particularly for specialty finance products such as MCAs, engender confusion rather than clarity.  By submitting further comments before the October 28 deadline, companies can help DBO make the final regulations better for all parties.  If you need assistance submitting comments or complying with the new law, please contact any of the authors or the Manatt professional with whom you work.

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