C-Suite Wednesday — Small Business Loan Truth-in-Lending Disclosures Mandated by California

October 24, 2018

By Dominic J Bartolone
Contributing Editor, C-Suite Wednesday

C-Suite Wednesday — Small Business Loan Truth-in-Lending Disclosures Mandated by California

Consumer-style Truth in Lending disclosure is coming to California’s small business lenders for loans less than $500,000.

The new law signed by Governor Jerry Brown affects non-bank lenders. Regulated financial institutions, e.g. banks and credit unions, will be exempt.

But, the new regulation will apply to lenders who fund or underwrite loans from third-party lending platforms.

Small business loan disclosures are to include the total amount of funds provided; 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 rate.”

The law allows alternative disclosure methods for merchant cash advance lenders and AR factors where APR calculation is problematic, but the specifics have yet to be written.

Tis first-in-the-nation state small business loan disclosure law does not take effect on a specific date. The California Department of Business Oversight is empowered to adopt regulations that clarify the law’s requirements and provide an implementation plan for the new disclosure process.

When implemented, the law will put pressure on small business lending operating under bank sponsorship arrangements to more closely monitor DBO to ensure compliance. While it is yet to be determined how these regulations will be enforced at the state level for the majority of lenders, it does provide a mechanism to investigate and enforce violations if the lender is licensed under CFL law.

A new DBO Commissioner will not take office until next year, so it is unlikely the law will go into effect earlier than late 2019 or early 2020. The bill also includes a sunset clause that terminates the law in 2024, unless it is extended or made permanent before that date.

Why this matters to you? Other states are closely following this legislation and will probably adopt similar measures — specifically New York.