SB 1235 is one of two bills in California aimed at commercial transactions that will change California’s Finance Laws. The bill is an act that would be added to Division 9.5 (commencing with Section 22800) to the Financial Code, relating to commercial financing. SB 1235, introduced by Senator Steve Glazer (D), was referred to the Senate Banking and Finance Committee, passing through committee on June 25, 2018.
SB 1235 would require some commercial lenders to disclose interest rates in some commercial loans. Specifically, SB 1235 would require commercial finance companies to disclose an Estimated Annualized Cost of Capital. Senator Glazer stated that he intended that it also apply to merchant cash advances. The disclosure will be consistent with Regulation Z in consumer transactions.
A provider would be required to provide all of the following disclosures:
*The principal loan amount or the purchase price, less any fees paid to or retained by the provider (or affiliate thereof) for originating or processing the commercial financing transaction.
For a commercial open-end credit plan the principal loan amount is the maximum amount of credit available for draw by the borrower under the commercial open-end credit plan and is labeled as the “Total Amount of Funds Provided.”
*The total amount of funds to be paid by the recipient of the commercial financing pursuant to the financing agreement, assuming all payments are made as agreed.
For a commercial open-end credit plan the Total of Payments shall include the total dollar costs to be charged to a borrower, based on the maximum draw amount of credit available under the open-end credit plan, assuming the borrower repays the commercial loan according to its original payment schedule, plus all required periodic and nonperiodic fees and charges that cannot be avoided by a borrower. This shall be labeled “Total of Payments.” This disclosure shall clarify that “Total of Payments” does not include fees the recipient may avoid, such as late fees or returned payment fees.
*The total dollar cost of the commercial financing transaction, which shall be calculated by subtracting the amount of funds provided from the total of payments labeled as “Total Dollar Cost of Financing.”
*For commercial financing with fixed periodic payments, the term of the financing in total calendar days, and for commercial financing with variable payments and no fixed term, the estimated term of the financing in total calendar days as assumed by the provider in the underwriting process, labeled as “Term” or “Estimated Term.”
*For commercial financing that has fixed, nonvariable period payment amounts: the frequency and amount of each payment. For commercial financing that has variable periodic payment amounts: a description of the method by which payments are calculated and the frequency of those payments. This disclosure is labeled as “Payments.”
*A statement of whether there are any costs or discounts associated with prepayment of the commercial financing including a reference to the paragraph in the financing agreement that creates the contractual rights of the parties related to prepayment. This disclosure is labeled as “Prepayment.”
The Bill in its present form requires disclosure for all commercial loans over $5,000 (increased from $2,500) but transactions over $500,000 are exempt. Lenders which makes five (5) loans or less per year would be exempt. Loans secured by real estate and commercial leasing transactions are exempt. Under the Uniform Commercial Code, this means a true lease. Thus, any lenders that deal in 10% purchase option transactions must still disclose. Banks and open-ended credit programs are also exempt. The bill must now pass through the California Assembly and be signed by Governor Brown to become law.
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