Next year, commercial financial lenders, including merchant cash advance lenders, will feel the pinch as California lawmakers tighten disclosure requirements aimed at protecting potential borrowers from unfair and misleading practices.
Effective Jan. 1, 2019, anyone engaging in commercial financing in California is required to provide potential borrowers with clear written statements, including total fee amounts, monthly payment amounts, length of agreement, and APR information.
The new requirements, which are based on SB 1235 that was introduced by California Sen. Steve Glazer, define “commercial financings” and require disclosures from these classified entities. “Commercial financings” are defined as commercial loans and lines of credit, cash advances to businesses, and accounts receivable financing or factoring of amounts of $5,000 or more.
These requirements not only strengthen the existing California Financing Law (CFL), but also widens the net as to who must obtain licenses to legally operate in the sector.
Finance lenders or brokers cannot engage in any business without obtaining a license, according to the CFL. Prior to the changes to the law, the CFL defined a finance lender as a person who engages in making consumer or commercial loans. With these additions to the CFL, disclosure requirements are now imposed on banks, real estate brokers, insurance companies, unlicensed lenders, and purchasers of accounts receivable.
What are the Changes
Under the law, written disclosures require the following:
- A complete disclosure of the total amount of fees charged due to the commercial financing must be titled, “Total Amount of Fees”
- The total amount of funds provided by the commercial financing must be labeled “Total Amount of Funds Provided”
- The annual percentage rate (APR) must be calculated according to the provisions of federal Truth In Lending Act and Regulation Z
- For cash advances, the APR must be calculated based on the daily, weekly, or monthly delivery of receivables from the business to the lender that was projected as part of the financing offer, and this must be labeled “APR”
- Commercial financing terms must be displayed in months or years and labeled “Term Length of Financing”
- The total monthly payment amount owed by the prospective borrower must be labeled “Total Monthly Payment”
- The total dollar cost of the commercial financing to the prospective borrower must be labeled “Total Dollar Cost of Financing”
- If an annualized interest rate is applicable, it must be labeled “Annualized Interest Rate”
- Any collateral required must be labeled “Collateral”
- A description of the funding and repayment process, including the frequency and the amounts of payments, must be labeled “Funding and Repayment Process”
Also, disclosures must include descriptions of prepayment policies and whether there are penalties if repayment is made early. The description must include how penalties are applied by using examples relevant to the transaction that was offered, as well as any financing charges or fees that are required to be paid at the time the loan is retired or paid in full. These descriptions must be labeled “Prepayment Policies.”
Other New Requirements
The written disclosures must be signed by all parties, not contain any vague or misleading language, and be created using “a specified font size, made in the same language used in discussions or negotiations related to that transaction,” according to the bill. The disclosure must be in at least 10-point font.
The enhanced measures aim to simplify, clarify, and modernize the law governing loans made by finance lenders, to foster competition among them, and to protect borrowers illegitimate and unscrupulous commercial financings. Any “willful” violation of the CFL is a crime and violators will be prosecuted accordingly.