The California Legislature is considering amendments to the California Financing Law (the “CFL”), which requires most non-bank commercial lenders active in California to be licensed by the State’s Department of Business Oversight. Senator Steve Glazer proposed new measures earlier this year that would require CFL lenders to provide standardized price disclosures to small-business borrowers (currently defined as loans of $500,000 or less). The bill would apply to both closed-end and open-end commercial loans, as well as purchases of accounts receivable. Although regulated banks are exempt, companies that have agreements with banks to fund such loans would not be exempt unless they qualify for their own exemption. The Senate already adopted the bill, and it is pending a floor vote by the Assembly following clearance by its Banking and Finance Committee on June 26, 2018.
CFL lenders are currently prohibited from making materially false or misleading statements to a borrower about the terms or conditions of a loan, and the amendments would impose new, substantive disclosure requirements. Lenders would be required to calculate and disclose in writing the total dollar cost of the loan, the frequency and amount of each payment (or for variable rate loans, the method of calculation), and prepayment-related fees. Interestingly, if a transaction involves the purchase of accounts receivable, the licensee would be required to disclose the “Estimated Annualized Cost of Capital,” which is the Legislature’s rough cut at a uniform APR-like calculation.
These disclosures are intended to facilitate comparison of the costs of various financing offers. A chief motivation for the bill was to attempt to mitigate perceived abuses in on-line lending practices. If adopted, California would be the first state in the nation to prescribe the format of these disclosures in the context of non-bank, private commercial lending. See a copy of the bill as currently proposed.