(Editor’s Note: SFNet held a webinar on the California Financial Disclosure regulations on July 7. SFNet members can watch this webinar here. SFNet’s Advocacy Committee, under the guidance of Hamid Namazie of McGuireWoods, has engaged Hudson Cook, LLP to create a compliance guide for SFNet members. If you have questions, please contact Michele Ocejo at mocejo@sfnet.com.)

Commercial financing providers in California will soon need to comply with detailed disclosure requirements when making an offer of commercial financing to potential borrowers. The California Department of Financial Protection and Innovation’s final implementing regulations for the state’s commercial finance disclosure law (CFDL) become effective on December 9, 2022. Other states that have been considering or already passed a CFDL—including New York—have been awaiting release of California’s regulations and are anticipated to soon release similar regulations.

Impacted commercial finance providers should begin working now to conform their practices, including to review the detailed regulations and work with their legal provider for assistance.

Who must comply?

Impacted providers generally include those offering closed-end transactions, commercial open-end credit plans, factoring transactions, sales-based financing, lease financing, general asset-based lending, and other types of commercial financing. Federal- and state-chartered banks, trust companies, savings and loan associations, credit unions, and vehicle rental companies are exempt. The CFDL laws are generally aimed at commercial finance providers not otherwise regulated by the U.S. Government or state banking authorities. These include specialty finance companies like commercial factors and merchant cash advance companies.

The California disclosure requirements apply to all transactions offering $5,000 to $500,000 in financing intended for commercial purposes.

What is required?

The disclosure requirements for California are detailed and specific, comprising 48 pages and addressing different requirements dependent upon the nature of the financing being offered. In general, specific disclosure must be made as to:

• The total amount of funds provided or available;
• The total dollar cost of the financing;
• The term or estimated term;
• The method, frequency, and amount of payments;
• A description of prepayment policies; and
• The total cost of the financing expressed as an annualized percentage rate (APR).

The specific content of such disclosures is dependent upon the type of financing being offered. The regulations provide detailed instructions including on how certain items such as APR shall be calculated for disclosure purposes, the estimated average monthly cost that borrowers will pay over the course of the transaction, itemizations for the amounts financed, and other specifically delineated disclosures.

The disclosures also must conform with formatting requirements, including as to the size and formatting of rows and columns in required tables, font style, and font size. Additionally, the disclosures must be made as a stand-alone document, and cannot be part of any other document such as a credit agreement.

To demonstrate the detailed and strict requirements of the regulations, the see below for a sample form of disclosure that captures several of the requirements applicable to various types of financing (for example only, the sample is an amalgamation of various requirements applicable to different types of financing, and includes the bolded and capitalized “offer summary” and title in 16-point Times New Roman font, a table of 3 specified columns in a 3:3:7 ratio and 6 specified rows, 12-point Times New Roman font in the first column, 10-point Times New Roman font in the other columns, a required legal disclosure, and labeled spaces for a signature and date).

What action should commercial finance providers take now?

Commercial finance providers are encouraged to immediately review the regulations and consult with their legal provider as appropriate. Even for those not active in California, many other states have or are expected to pass CFDL laws. Implementing regulations in those states will likely follow the California regulations in many respects. Providers are well-advised to be proactive in working to conform with anticipated disclosures requirements. Substantial penalties can be imposed against providers who do not comply after the regulations become effective.

The California regulations are available HERE.