California Finalizes Commercial Finance Disclosure Regulations – Financial Services


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California’s Office of Administrative Law (OAL) has approved the California Department of Financial Protection and Innovation’s (DFPI) final rule, which requires commercial finance providers, including non-bank lenders, to provide commercial borrowers with information on the cost of credit similar to those provided to consumer customers. This regulation comes into force on December 9, 2022.

How we got here

The law that governs commercial financing is the California Financial Code (see Cal. Fin. Code §§ 22800 to 22895). On September 30, 2018, California enacted SB No. 1235, which is now codified in Division 9.5 of the California Financial Code. This law required commercial finance providers to disclose consumer “cost of credit” information to recipients and directed the DFPI to promulgate regulations governing such information. In our article on SB #1235, dated September 4, 2019, we discussed the proposed legislation and, in particular, the definition of a supplier and what should be disclosed. In October 2020, the DFPI proposed regulations, which were subsequently amended several times in response to feedback from various stakeholders. The final regulations were sent to the OAL for review in December 2021 and approved by the OAL on June 9, 2022.

Final settlement

The DFPI Final Rule addresses seven categories of trade finance transactions:

  • Closed deals

  • Open-ended credit plans

  • General factoring

  • Sales-based financing (e.g. cash advances to merchants)

  • Leasing

  • Asset-Based Lending Transactions

  • All other transactions (a catch-all for transactions that do not fit into the six specific categories above)

When extending a financing offer, a commercial finance provider is required to provide cost of credit information to recipients whose business is conducted or primarily managed from California. In addition, the final rule imposes formatting and content requirements, line by line and column by column, for each category of trade finance. We note that the final rule also imposes other requirements, for example, signature requirements (including electronic signatures) and rules for determining legal exemptions. We further note that the final regulations require the disclosure of annual percentage rates (APRs) and disclosures for estimating or calculating APRs, finance charges and other items. The final rule provides that a non-custodial institution that provides technology or services in support of a custodial institution’s trade finance program is exempt if the non-custodial institution has no interest or agreement to acquire an interest in the commercial financing, and whether the program is not branded by the non-custodial institution.

An important takeaway is that given the limited scope of the exemption for non-custodial institutions, typical agreements between fintech companies and banks may result in fintech companies meeting the definition of a provider and , as such, are subject to these regulations.

Next steps

The final rule will come into effect on December 9, 2022, so it’s important to start putting in place the processes and systems needed to comply. Notably, other states, including New York, Utah and Virginia, are currently considering similar rules. And some states, including Connecticut, Maryland, Missouri and New Jersey, are considering or have considered a version of these rules that would apply to small businesses.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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