FinTech Flash October 04, 2018

New California Law Requires Consumer Credit-Like Disclosures By Factors And Merchant Cash Advance Providers

Summary

Is this the beginning of the end for the substantial compliance freedoms enjoyed by factors and merchant cash advance (MCA) providers? A new California law, SB 1235, foists consumer cost of credit-like disclosures onto a largely unregulated sector of the financial industry. In this FinTech Flash, we’ll tell you everything you need to know about it.

The California Senate and Assembly passed SB 1235 on August 31, 2018, and Governor Brown signed it into law on September 30, 2018. We’ve been watching this bill make its way through the state legislature, and we last reported on it in our March 2018 Flash. The bill adds a new Division (Division 9.5) to the California Financing Law (CFL). The CFL generally covers both consumer and commercial lenders, imposing licensing and disclosure requirements and interest and fee limitations on certain loans. Although Division 9.5 does not go so far as to require factors or MCA providers to be licensed, it is noteworthy because it brings providers of commercial, non-loan financing options, including factoring and MCAs, into the CFL.

Under Division 9.5, a person (provider) that extends a specific offer of “commercial financing,” as defined, of $500,000 or less to a person (recipient) must provide the recipient with and obtain the recipient’s signature on a cost disclosure statement before consummating the commercial financing transaction.

A covered commercial financing transaction is 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. When determining whether a transaction constitutes commercial financing, a provider may rely on any written statement of intended purposes signed by the recipient without being required to confirm that proceeds were used in accordance with the recipient’s statement.

The provider’s cost disclosure must specify the amount financed, the total dollar cost, 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 also authorizes a provider that offers factoring or asset-based lending and provides an agreement describing the general terms and conditions of the commercial financing transaction to provide an alternative disclosure that may be based on an example of a transaction that could occur under the agreement for a given amount of accounts receivable.

Division 9.5 offers no guidance on the definitions, contents, or methods of calculations for each of the disclosure items, nor any specific requirements concerning the time, manner, and format of the disclosures. Instead, it directs the California Commissioner of Business Oversight (DBO) to adopt regulations governing these requirements and provides that a provider is not subject to those provisions until those regulations become effective. So, Division 9.5 does not have an effective date. The DBO will set a compliance date when it issues regulations.

The new law doesn’t apply to everyone. Division 9.5 provides limited exceptions for a provider that is a depository institution; a provider that is a lender regulated under the federal Farm Credit Act; a commercial financing transaction secured by real property; a commercial financing transaction in which the recipient is a dealer, vehicle rental company, or one of their affiliates and meets specified requirements; a provider who makes no more than one commercial financing transaction in California in a 12-month period; and a provider that makes five or fewer commercial financing transactions in California in a 12-month period that are incidental to the provider’s business.

Check out SB 1235 here. Our experienced team can help you evaluate your compliance with the California Finance Law and get ready for the disclosures required by Division 9.5. We’ll continue tracking developments in this space closely. Call or email us to discuss your next move.