As many of our members are aware, legislation is popping up around the country requiring providers of commercial financings to make certain disclosures to their clients with respect to the costs associated with a commercial financing product being provided to a borrower.  The first such legislation was introduced in California in 2018 by Senator Steve Glazer, which impacted commercial financing products for $500,000 or less.  The bill was eventually approved by the legislature at the 11^th hour of the final day of the legislative session in 2018 and signed into law by Governor Jerry Brown.  Recognizing the challenges involved with the task to impose such requirements on the commercial finance industry and the tens (if not hundreds) of different financial products, the text of the new law left it to the regulators to draft regulation to determine how commercial finance providers would comply with the new requirements.  The newly formed California Department of Financial Protection and Innovation took on this obligation.  Whether due to COVID-19 or the challenges of drafting such regulations, or both, the process took four years!  After multiple rounds of modifications to the proposed regulations and comment periods, the regulations are now final and will become effective on December 9, 2022. 

SFNet is working hard to provide information to its members through online and in-person education on the issues raised by these new disclosure requirements as well as the compliance challenges they pose.  The next event will be on July 7 at 1:00 p.m. EDST.

As our members work to better understand the California disclosure requirements and compliance with the new regulations, there are a number of basic characteristics related to the new rules and regulations to keep in mind:

• The disclosure requirements only impact commercial financings which are equal to or less than $500,000 (California Financial Code §22800(n)).
• A commercial financing is defined to include factoring and asset-based lending transactions (California Financial Code §22800(d)(1)).
• Due to the efforts made to educate Senator Glazer’s office by the SFNet, the drafters recognized the compliance challenges facing factors and ABL lenders, factors and ABL lenders were provided the ability to comply with the requirements by providing an example of the applicable commercial financing (California Financial Code §22803).
• Depository institutions are exempt from the requirement to comply with the disclosure rules (California Financial Code §22801).
• Non-depository subsidiaries of depository institutions are not exempt from compliance (California Financial Code §22801).
• The disclosures have to be a separate document (California Code of Regulations, Title 10, Chapter 3, §901(a)(6)).
• The provider has to re-disclose at any time the underlying financing is changed if the change results in a higher annual percentage rate (California Code of Regulations, Title 10, Chapter 3,  §900(a)(5)(b))

Overall, this is a very convoluted set of rules and regulations and the lay person is going to have difficulty determining how to comply.  We suggest that each impacted SFNet member reach out to its own legal resources to help it determine the bast path towards compliance. 

To read the past few comment letters submitted by SFNet, please see below:

August 2021 Comment Letter

https://www.sfnet.com/docs/default-source/tsl-tslexpress/sfnet-comments-to-ca-finance-disclosure-proposed-regulations-8_24_21_.pdf?sfvrsn=1d7e38d8_2

October 2021 Comment Letter

https://www.sfnet.com/home/industry-data-publications/the-secured-lender/tsl-express-daily-articles-news/tsl-express-daily-articles-news/2020/10/30/sfnet-comment-letter-to-california-dbo-on-proposed-regulations-for-implementation-of-commercial-financing-disclosures

September 2019 Comment Letter

https://www.sfnet.com/docs/default-source/data-files-and-research-documents/comments-on-proposed-regulations-for-implementation-of-commercial-financing-disclosures.pdf?sfvrsn=5418dc09_2