July 25, 2018
Dominic J. Bartolone
C-Suite Wednesday — California Close to Adopting Small Business Lending APR Disclosures for Non-Bank Lenders
Making its way through the California legislature is a new bill that will have a negative effect on small business lenders.
The legislation, initially introduced in February, would be the first-of-its-kind to mandate commercial disclosure requirements similar to those required for consumer loans under the federal Truth in Lending Act and Regulation Z.
If Senate Bill 1235 is enacted, it would have a significant impact on how commercial lenders approach making loans to small businesses . The law would require lenders to issue a written statement to prospective borrowers detailing the fees and terms of the loan, among other details.
According to language in the bill, the lender must provide prospective clients with the following for all commercial financing:
- The annual percentage rate (APR) calculated based on the provisions of the Truth in Lending Act and Regulation Z.
- Full disclosure of the total amount of any fees charged in connection with commercial financing.
- Total amount of funds provided.
- The “Term Length of Financing.”
- The total monthly payment amount.
- The total cost of commercial financing to the prospective client.
- A description of the funding and repayment process.
- Any collateral required as a condition of financing.
The legislation appears to target non-bank lenders, as it explicitly exempts depository institution lenders, such as state and federally licensed commercial banks. The law would most significantly impact cash advance and online and fintech lenders.
It would also apply to some individuals who are not even lenders, such as firms that purchase accounts receivables, and some insurance brokers and others that arrange loans for business clients.
The bill defines “commercial financing” to include any commercial-purpose loans, including:
- A commercial loan, defined in the California Financial Code.
- Accounts receivable financing or factoring (i.e. where a business agrees to pay the financier a portion of accounts receivable collected on a recurring basis).
- A cash advance of more than $5,000 made to a business under agreement that the business will repay the lender with a portion of future receipts.
- A line of credit to a business of $5,000 or more.
California is currently one of the only states that flatly licenses and regulates all business lenders without regard to loan size or interest rate. As you can imagine, when legislators target these businesses, the industry takes notice.
Small business and lender advocacy groups lobbied legislators in May, concerned over language in the bill that treats small businesses like consumers.
Providing testimony on behalf of the Small Business Finance Association (SBFA), attorney Joseph Looney stated that state and federal government has historically treated SMBs differently than consumers, and for good reason.
Looney claims that federal agencies are concerned that by treating SMBs as consumers, it would restrict the flow of capital to main street businesses and harm economic growth within America’s communities.
He also argued that small business owners are sophisticated individuals that do not need the same government protections provided to consumers.
Although the bill has passed the Senate, along with being approved by multiple committees in the Assembly, legislators have promised to “fine tune” the legislation before a final bill is presented.