Coleman’s California DFPI Update

Coleman’s California DFPI Update

By Bob Coleman

New DFPI Regulations Take Effect Before Year-End — Are you Ready?

Starting December 9, the California regulated lenders must follow new disclosure regulations when offering commercial loans to California-based small businesses.

These new regulations apply to state regulated bank and credit union companies lending to California’s  Main Street. Also affected are  merchant cash advance lenders and open-end credit commercial factors.

California legislators believe adopting consumer credit standards and applying disclosure of key loan metrics, small business owners can make more informed small business loan decisions.

Lenders disagree. They say this is an unneeded costly regulation with a faulty assumption that standardized consumer lending oversight can not translate to easily-informed decisions by the small business owner.  The difference in the small business loan products’ uses and pricing make it an apples to  oranges comparison.

Legislators also envision that this California Commercial Financing Disclosure Law will provide a template for other states to follow.

So, in December commercial lenders must clearly disclose several new metrics to all commercial loan products, including:

  • APR calculated for the transaction and finance charges
  • Amount of funding the small business will receive
  • Payment amount or average monthly cost (depending on loan product)
  • Term
  • Prepayment policy details

The specific methods for how each of these metrics must be calculated and disclosed are all included in the DFPI’s Final Regulations.

Specific financing disclosure requirements by type

The DFPI created specific disclosure requirements for each of the following six categories of commercial financial products, as well as general disclosure requirements for those not included in these categories:

  1. Closed-end transactions
  2. Open-end credit plans
  3. Factoring
  4. Sales-based financing
  5. Leases
  6. General asset-based lending

Execution of disclosure information

As is typically the case, how these regulations are to be executed remains unclear, even as the deadline for adoption approaches 90 days.

This new DFPI law requires that loan product providers must give the disclosure information to recipients whenever a specific commercial financing offer is presented, or when a specific offer is chosen. 

According to the DFPI, this timing is purposely earlier than the Truth in Lending Act. And, unlike TILA, these regulations require re-disclosures anytime the contract terms are changed.

APR Divergence and Errors

While this commercial lending disclosure law doesn’t allow for safe harbor errors like TILA, the DFPI regulations allow an acceptable amount of APR divergence without penalty. Errors corrected within 60 days of discovery are a safe harbor so long as the loan recipient receives notice, and the account is adjusted accordingly.

We will discuss compliance of regulation in-depth in the coming months prior to enactment 

For more details, subscribe to Coleman’s California DFPI Report.