On April 9, 2018, significant changes were made to SB 1235 (Steve Glazer, D-Sacramento), which was introduced in the California State Senate on February 15th. If passed in its original form, the language of the Bill would have required disclosure of interest rates and imposed other regulations for commercial loans.
Presently, California law has never required interest rate disclosures for commercial loans and many industry experts believe that the bill, as proposed, would have significantly affected California’s commercial lending industry. As a result, many spoke out, lobbied against the bill in its original form, and, in response, the California Senate revised important language of the bill on April 9, 2018.
Both the February and April versions contain the following regarding to whom the Bill may apply:
The bill would provide that the provisions of this bill apply to a provider who consummates or arranges more than 5 commercial financing transactions during a calendar year to a recipient. The bill would specifically provide that the provisions of this bill do not apply to a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions.
Thus, the bill applies to providers who make five or more loans a year but does not apply to depositary institutions.
Both versions of the Bill contain the following prohibition against finance lending without a license while defining a finance lender. However, the newly-amended version of SB 1235 deleted the following important provision related to liability: “A willful violation of the CFL is a crime except as specified.”
Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan.
SB 1235 as originally proposed read as follows:
“This bill would require any person who engages in the business of commercial financing to, at the time of offering the commercial financing provide to the prospective borrower a written statement showing in clear and distinct terms specified information regarding that transaction, including the total amount of fees, the amount provided, the APR related to that transaction, and policies regarding repayment or prepayment that apply to that transaction. The bill would require that disclosure to be signed by all parties to the transaction, and to meet certain requirements, such as that it must be in writing using a specified font size, made in the same language used in discussions, or negotiations related to that transaction, and not be vague or misleading.
The bill would define the term “commercial financing” for these purposes to mean a commercial loan, accounts receivable financing or factoring, a cash advance to a business, or a line of credit. By expanding the scope of an existing crime with respect to willful violations of the CFL, this bill would impose a state mandated local program.”
The new version of SB 1235 omits the provision related to the loan’s average percentage rate of interest (APR). The bill also eliminates the last paragraph defining the term “commercial financing.” Instead, it defines it as “… an accounts receivable purchase transaction, commercial loan, or commercial open-end credit plan intended by the recipient for use primarily for other than personal, family, or household purposes.”
After the April changes, the Bill now reads:
This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing.
SB 1235 defines a “provider” as “… a person who facilitates commercial financing to a recipient. “Provider” includes a person who is facilitating an offer of commercial financing in partnership with a depository institution.” Most importantly, the new April amendments delete the provisions related to disclosure of total fees and a commercial loan’s rate of interest. Instead, it requires disclosure of “specified” information, the total amount of funds provided, and the total dollar cost of the financing.
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