On June 9, 2022, the California Office of Administrative Law (OAL) approved the California Department of Financial Protection and Innovation’s (DFPI) final regulations requiring providers of commercial financing, including non-loan commercial financing, such as merchant cash advances and factoring transactions, to provide recipients with consumer-style “cost of credit” disclosures. The regulations will go into effect December 9, 2022.
In 2018, California enacted SB 1235, now codified at Division 9.5 of the California Financial Code (Cal. Fin. Code §§ 22800 to 22805), requiring providers of commercial financing to provide consumer-style “cost of credit” disclosures to recipients and directing the DFPI to issue regulations governing such disclosures. The DFPI initially proposed regulations in October 2020 and subsequently modified them four times in response to public comments from a variety of stakeholders, including commercial finance companies, trade associations, law firms, and others. The DFPI sent its final regulations to the OAL for review in December 2021, and the OAL approved them on June 9, 2022.
The DFPI’s final regulations, spanning 48 pages, address seven categories of commercial financing transactions: closed-end transactions, commercial open-end credit plans, factoring transactions, sales-based financing, lease financing transactions, asset-based lending transactions, and a seventh catchall for commercial financing transactions that do not fit within one of the other six categories.
The final regulations require a provider of commercial financing, at the time of extending a specific commercial financing offer, to deliver cost of credit disclosures to a recipient (or the recipient’s agent or broker with the expectation that the information will be shared with the recipient) whose business is principally directed or managed from California. Special rules apply to brokers conveying specific offers from financers.
The final regulations impose column-by-column and row-by-row disclosure formatting and content requirements for each category of commercial financing, signature requirements (including electronic signatures), and rules for determining the availability of a statutory exemption for transactions of more than $500,000. Our prior alert includes information about SB 1235’s applicability and its exemptions, including an exemption for depository institutions. The final regulations clarify that a nondepository institution providing technology or support services to a depository institution’s commercial financing program is not required to provide these disclosures, as long as the nondepository institution has no interest in or agreement to acquire an interest in the commercial financing, and the program is not branded with the nondepository institution’s trademark. The limited scope of this exemption, however, means that many financial technology companies (i.e., Fintechs) in typical bank partnership arrangements may be considered providers under the final regulations.
Notably, the final regulations require disclosures of annual percentage rates (APRs) and include category-specific rules for calculating or estimating APRs, finance charges, itemizations of the amount financed, and other items that must be disclosed. These disclosure requirements apply even to non-loan transactions, such as sales-based financing transactions (e.g., merchant cash advances) and factoring transactions.
The final regulations are effective December 9, 2022, so it is time to begin building out your systems and implementing appropriate compliance strategies. Similar disclosure requirements are also underway in other states, including New York, Utah, and Virginia. For assistance navigating these regulations and developing your own commercial financing disclosures, please contact Alexander J. Callen or Josh Burlingham.