(1)Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan. The CFL authorizes the commissioner to bring an action to enjoin, as specified, against a person who, in the commissioners estimation, has violated or is about to violate the CFL, and authorizes the imposition of civil penalties to that effect. A willful violation of the CFL is a crime, except as specified.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipients signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. The bill would, until January 1, 2024, additionally require a provider to disclose the total cost of financing expressed as an annualized rate. The bill would authorize a provider who offers financing that is factoring or asset-based lending to, in lieu of those disclosure requirements, provide an alternative disclosure that meets specified requirements, including that the disclosure may be based on an example of a transaction that could occur under the general agreement for a given amount of accounts receivables. The bill would require the commissioner to adopt regulations governing these disclosure requirements, and would require those regulations to include specified information and determinations. The bill would provide that a provider is not subject to these provisions until those regulations become effective. The bill would provide that the provisions of this bill do not apply to specified entities or financing arrangements, including a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions, a commercial financing transaction secured by real property, and a commercial financing transaction in which the recipient is a dealer or vehicle rental company and meets specified requirements, or a provider who makes a specified number of commercial financing transactions in California during a 12-month period and meets other requirements.

This bill would require a provider who is licensed under the CFL to be subject to the examination and enforcement authority of the commissioner granted under the CFL with respect to any violations of these provisions, and would make a conforming change to that effect. By expanding the scope of an existing crime with regard to willful violations of the CFL, this bill would impose a state-mandated local program.

(2)The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(1)Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan. The CFL authorizes the commissioner to bring an action to enjoin, as specified, against a person who, in the commissioners estimation, has violated or is about to violate the CFL, and authorizes the imposition of civil penalties to that effect. A willful violation of the CFL is a crime, except as specified.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipients signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. The bill would, until January 1, 2024, additionally require a provider to disclose the total cost of financing expressed as an annualized rate. The bill would authorize a provider who offers financing that is factoring or asset-based lending to, in lieu of those disclosure requirements, provide an alternative disclosure that meets specified requirements, including that the disclosure may be based on an example of a transaction that could occur under the general agreement for a given amount of accounts receivables. The bill would require the commissioner to adopt regulations governing these disclosure requirements, and would require those regulations to include specified information and determinations. The bill would provide that a provider is not subject to these provisions until those regulations become effective. The bill would provide that the provisions of this bill do not apply to specified entities or financing arrangements, including a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions, a commercial financing transaction secured by real property, and a commercial financing transaction in which the recipient is a dealer or vehicle rental company and meets specified requirements, or a provider who makes a specified number of commercial financing transactions in California during a 12-month period and meets other requirements.

This bill would require a provider who is licensed under the CFL to be subject to the examination and enforcement authority of the commissioner granted under the CFL with respect to any violations of these provisions, and would make a conforming change to that effect. By expanding the scope of an existing crime with regard to willful violations of the CFL, this bill would impose a state-mandated local program.

(2)The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(1)Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan. The CFL authorizes the commissioner to bring an action to enjoin, as specified, against a person who, in the commissioners estimation, has violated or is about to violate the CFL, and authorizes the imposition of civil penalties to that effect. A willful violation of the CFL is a crime, except as specified.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipients signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. The bill would, until January 1, 2024, additionally require a provider to disclose the total cost of financing expressed as an annualized rate. The bill would authorize a provider who offers financing that is factoring or asset-based lending to, in lieu of those disclosure requirements, provide an alternative disclosure that meets specified requirements, including that the disclosure may be based on an example of a transaction that could occur under the general agreement for a given amount of accounts receivables. The bill would require the commissioner to adopt regulations governing these disclosure requirements, and would require those regulations to include specified information and determinations. The bill would provide that a provider is not subject to these provisions until those regulations become effective. The bill would provide that the provisions of this bill do not apply to specified entities or financing arrangements, including a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions, a commercial financing transaction secured by real property, and a commercial financing transaction in which the recipient is a dealer or vehicle rental company and meets specified requirements, or a provider who makes a specified number of commercial financing transactions in California during a 12-month period and meets other requirements.

This bill would require a provider who is licensed under the CFL to be subject to the examination and enforcement authority of the commissioner granted under the CFL with respect to any violations of these provisions, and would make a conforming change to that effect. By expanding the scope of an existing crime with regard to willful violations of the CFL, this bill would impose a state-mandated local program.

(2)The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(1)Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan. The CFL authorizes the commissioner to bring an action to enjoin, as specified, against a person who, in the commissioners estimation, has violated or is about to violate the CFL, and authorizes the imposition of civil penalties to that effect. A willful violation of the CFL is a crime, except as specified.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipients signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. The bill would, until January 1, 2024, additionally require a provider to disclose the total cost of financing expressed as an annualized rate. The bill would authorize a provider who offers financing that is factoring or asset-based lending to, in lieu of those disclosure requirements, provide an alternative disclosure that meets specified requirements, including that the disclosure may be based on an example of a transaction that could occur under the general agreement for a given amount of accounts receivables. The bill would require the commissioner to adopt regulations governing these disclosure requirements, and would require those regulations to include specified information and determinations. The bill would provide that a provider is not subject to these provisions until those regulations become effective. The bill would provide that the provisions of this bill do not apply to specified entities or financing arrangements, including a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions, a commercial financing transaction secured by real property, and a commercial financing transaction in which the recipient is a dealer or vehicle rental company and meets specified requirements, or a provider who makes a specified number of commercial financing transactions in California during a 12-month period and meets other requirements.

This bill would require a provider who is licensed under the CFL to be subject to the examination and enforcement authority of the commissioner granted under the CFL with respect to any violations of these provisions, and would make a conforming change to that effect. By expanding the scope of an existing crime with regard to willful violations of the CFL, this bill would impose a state-mandated local program.

(2)The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(1)Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL requires a finance lender, broker, and, beginning on January 1, 2019, program administrator licensee to file an annual report with the commissioner, on or before March 15, containing relevant information that the commissioner may specify. The CFL requires the annual report to be made under oath.

This bill would require a licensee to include in the report information on all loans made through a 3rd-party financial institution in connection with pursuant to a contractual agreement with the licensee. By expanding the existing crime of perjury, this bill would impose a state-mandated local program.

(2)The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan. The CFL authorizes the commissioner to bring an action to enjoin, as specified, against a person who, in the commissioners estimation, has violated or is about to violate the CFL, and authorizes the imposition of civil penalties to that effect. A willful violation of the CFL is a crime, except as specified.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipients signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. The bill would, until January 1, 2024, additionally require a provider to disclose the total cost of financing expressed as an annualized rate. The bill would authorize a provider who offers financing that is factoring or asset-based lending to, in lieu of those disclosure requirements, provide an alternative disclosure that meets specified requirements, including that the disclosure may be based on an example of a transaction that could occur under the general agreement for a given amount of accounts receivables. The bill would require the commissioner to adopt regulations governing these disclosure requirements, and would require those regulations to include specified information and determinations. The bill would provide that a provider is not subject to these provisions until those regulations become effective. The bill would provide that the provisions of this bill do not apply to specified entities or financing arrangements, including a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions, a commercial financing transaction secured by real property, and a commercial financing transaction in which the recipient is a dealer or vehicle rental company and meets specified requirements, or a provider who makes 5 or fewer a specified number of commercial financing transactions in California during a 12-month period and meets other requirements.

This bill would require a provider who is required to be licensed under the CFL to be subject to the examination and enforcement authority of the commissioner granted under the CFL with respect to any violations of these provisions, and would make a conforming change to that effect. By expanding the scope of an existing crime with regard to willful violations of the CFL, this bill would impose a state-mandated local program.

This bill would provide that no reimbursement is required by this act for a specified reason.

(1)Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan. The CFL requires a finance lender, broker, and, beginning on January 1, 2019, program administrator licensee to file an annual report with the commissioner, on or before March 15, containing relevant information that the commissioner may specify. The CFL requires the annual report to be made under oath.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipients signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. The bill would, until January 1, 2023, 2024, additionally require a provider of a commercial loan, commercial open-end credit plan, or accounts receivable purchase transaction that requires a recipient to forward or otherwise sell to the provider a portion of receipts that are collected by the recipient to disclose the estimated annual cost of capital and the estimated annualized cost of capital. The bill would provide that the provisions of this bill apply to a provider who consummates or arranges more than 5 commercial financing transactions during a calendar year to a recipient. to disclose the total cost of financing expressed as an annualized rate. The bill would authorize a provider who offers financing that is factoring or asset-based lending to, in lieu of those disclosure requirements, provide an alternative disclosure that meets specified requirements, including that the disclosure may be based on an example of a transaction that could occur under the general agreement for a given amount of accounts receivables. The bill would require the commissioner to adopt regulations governing these disclosure requirements, and would require those regulations to include specified information and determinations. The bill would provide that a provider is not subject to these provisions until those regulations become effective. The bill would specifically provide that the provisions of this bill do not apply to specified entities or financing arrangements, including a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions. institutions, a commercial financing transaction secured by real property, and a commercial financing transaction in which the recipient is a dealer or vehicle rental company and meets specified requirements, or a provider who makes 5 or fewer commercial financing transactions in California during a 12-month period and meets other requirements.

Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipients signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. The bill would, until January 1, 2023, additionally require a provider of a commercial loan, commercial open-end credit plan, or accounts receivable purchase transaction that requires a recipient to forward or otherwise sell to the provider a portion of receipts that are collected by the recipient to disclose the estimated annual cost of capital and the estimated annualized cost of capital. The bill would provide that the provisions of this bill apply to a provider who consummates or arranges more than 5 commercial financing transactions during a calendar year to a recipient. The bill would specifically provide that the provisions of this bill do not apply to a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions.

Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipients signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. The bill would, until January 1, 2023, additionally require a provider of a commercial loan, commercial open-end credit plan, or accounts receivable purchase transaction that requires a recipient to forward or otherwise sell to the provider a portion of receipts that are collected by the recipient to disclose the estimated annual cost of capital and the estimated annualized cost of capital. The bill would provide that the provisions of this bill apply to a provider who consummates or arranges more than 5 commercial financing transactions during a calendar year to a recipient. The bill would specifically provide that the provisions of this bill do not apply to a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions.

Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipients signature on that disclosure before consummating the commercial financing transaction. The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. The bill would provide that the provisions of this bill apply to a provider who consummates or arranges more than 5 commercial financing transactions during a calendar year to a recipient. The bill would specifically provide that the provisions of this bill do not apply to a provider who is a depository institution, which this bill would define to include specified state and federal financial institutions.

Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. The CFL prohibits a licensee from making a materially false or misleading statement to a borrower about the terms or conditions of a loan. A willful violation of the CFL is a crime, except as specified.

This bill would require any person who engages in the business of commercial financing to, at the time of offering the commercial financing, provide to the prospective borrower a written statement showing in clear and distinct terms specified information regarding that transaction, including the total amount of fees, the amount provided, the APR related to that transaction, and policies regarding repayment or prepayment that apply to that transaction. The bill would require that disclosure to be signed by all parties to the transaction and to meet certain requirements, such as that it must be in writing using a specified font size, made in the same language used in discussions or negotiations related to that transaction, and not be vague or misleading. The bill would define the term commercial financing for these purposes to mean a commercial loan, accounts receivable financing or factoring, a cash advance to a business, or a line of credit. By expanding the scope of an existing crime with respect to willful violations of the CFL, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2017 - 2018 Regular

Bill No: Hearing Date: August 31, 2018

Subject:

SENATE RULE 29.10 HEARING: An earlier version of this bill was heard and passed by this Committee in April, 2018. This analysis focuses on amendments made to the bill in the Assembly.

SUMMARY

This bill requires providers of commercial financing, as defined, to provide disclosures about the cost of that financing to the recipients of the financing, as specified.

EXISTING LAW

1. Provides for the California Financing Law (CFL; Financial Code Section 22000 et seq.), administered by the Department of Business Oversight (DBO), which regulates secured and unsecured, consumer-purpose and commercial-purpose loans made by nondepository institutions, as specified, and requires persons engaged in the business of making consumer and commercial loans, as defined, to obtain finance lender licenses.
   
2. Provides that every loan with a principal amount under $5,000, which is regulated under the CFL, is considered a consumer loan (Financial Code Sections 22203 and 22204).
   
3. Defines a commercial loan, for purposes of the CFL, as a loan of a principal amount of $5,000 or more, or any loan under an open-end credit program, whether secured by real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes. Provides that, for purposes of determining whether a loan is a commercial loan, the lender may rely on any written statement of intended purpose signed by the borrower (Financial Code Section 22502).
   
4. Defines an open-end credit program, for purposes of the CFL, as a CFL licensee’s plan for making open-end loans pursuant to a loan agreement that sets forth the terms and conditions governing the use of the open-end credit program, expressly states that the loan is made pursuant to the CFL, and provides for all of the following (Financial Code Section 22650):
   
   1. The borrower may use the open-end credit program to obtain money, goods, labor, or services or credit, and the licensee makes open-end loans to the borrower for the purpose of paying money to, or at the direction of, the borrower or paying obligations that the borrower creates through use of the open-end credit program.
      
   2. The amount of each advance and the charges and other permitted costs are debited to an account.
      
   3. The charges are computed from time to time on the unpaid balances of the borrower’s account, excluding from the computation any unpaid charges other than permitted fees, costs, and expenses.
      
   4. The borrower may pay the account in full at any time.
      
5. Provides two de minimis commercial lending licensing exemptions under the CFL. The CFL does not apply to any person who makes no more than one commercial loan in a 12-month period (Financial Code Section 22050.5) or to any person who makes five or fewer commercial loans in a 12-month period, as long as the loans are incidental to the business of the person relying on the exemption (Financial Code Section 22050).
   
6. Provides that the CFL does not apply to depository institutions, as specified (Financial Code Section 22050).

THIS BILL (provisions added and changes made in the Assembly are italicized)

1. Creates a new division within the Financial Code, titled “Commercial Financing Disclosures” (Division 9.5, Financial Code Section 22800 et seq.)
   
2. Defines the terms commercial loan, commercial open-end credit plan, accounts receivable purchase transaction, account, payment intangible, factoring, lease financing, asset-based lending transaction, commercial financing, provider, and recipient for purposes of Division 9.5, as follows:
   
   1. Commercial loan means a loan of a principal amount of $5,000 or more, or any loan under an open-end credit program, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes.
      
   2. Commercial open-end credit plan means a provider’s plan for making open-end loans pursuant to a loan agreement that sets forth the terms and conditions governing the use of the open-end credit program, as specified.
      
   3. Accounts receivable purchase transaction means a transaction as part of an agreement requiring a recipient to forward or otherwise sell to the provider all or a portion of accounts, payment intangibles, or cash receipts that are owed to the recipient or are collected by the recipient during a specified period or in a specified amount.
      
   4. Account means a right to payment of a monetary obligation.
      
   5. Payment intangible means a general intangible under which the account debtor’s principal obligation is a monetary obligation.
      
   6. Factoring means an accounts receivable purchase transaction that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods the recipient has supplied or services the recipient has rendered that have been ordered, but for which payment has not yet been made.
      
   7. Lease financing means providing a lease for goods, if the lease includes a purchase option that creates a security interest in the goods leased, as specified.
      
   8. Asset-based lending transaction means a transaction in which advances are made from time to time contingent on a recipient forwarding payments received from one or more third parties for goods the recipient has supplied or services the recipient has rendered to that party or parties.
      
   9. Commercial financing means a commercial loan, commercial open-end credit plan, accounts receivable purchase transaction, factoring, lease financing transaction, or asset-based lending transaction intended by the recipient for use primarily for other than personal, family, or household purposes. For purposes of determining whether financing is commercial financing, the provider may rely on any written statement of intended purpose signed by the recipient and is not required to ascertain whether the proceeds of the commercial financing are used in accordance with the recipient’s statement of intended purposes.
      
   10. Provider means a person who extends a specific offer of commercial financing to a recipient and includes a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution via an online lending platform administered by the nondepository institution.
       
   11. Recipient means a person who is presented a specific commercial financing offer by a provider that is equal to or less than $500,000.
       
3. Exempts all of the following from the provisions of the bill: depository institutions; lenders regulated under the federal Farm Credit Act; commercial financing transactions secured by real property; commercial financing transactions in which the recipient is a motor vehicle dealer or its affiliate or a vehicle rental company or its affiliate, as specified; any person who makes no more than one commercial financing transaction in California in a 12-month period; and any person who makes five or fewer commercial financing transactions in California in a 12-month period, where the commercial financing transactions are incidental to the business of the person relying on the exemption.
   
4. Requires providers subject to the provisions of the bill to disclose all of the following information to a recipient at the time of extending a specific commercial financing offer to that recipient, and to obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction:
   
   1. Total amount of funds provided.
      
   2. Total dollar cost of financing.
      
   3. Term or estimated term.
      
   4. Method, frequency, and amount of payments.
      
   5. Description of prepayment policies.
      
   6. Total cost of the financing expressed as an annualized rate (this requirement sunsets on January 1, 2024).
      
5. Allows providers who offer factoring or asset-based lending types of commercial financing to provide the disclosures above in a different format, in which the recipient is provided disclosures in connection with sample transactions that could occur under the general agreement.
   
6. Requires DBO to adopt regulations governing the required disclosures and requires those regulations to include all of the following: definitions, contents, or methods of calculating each of the disclosures; requirements concerning the time, manner, and format of the disclosures; a determination of which method should be used to disclose an annualized rate; when providers may be permitted to disclose an estimated annualized rate; the accuracy requirements and tolerance allowances for annualized rate calculations; and the types of fees and charges to be included in the annualized rate calculations.
   
7. Requires providers to comply with the disclosure requirements of the bill once DBO’s regulations are final and become effective pursuant to Section 11343.4 of the Government Code. That code section generally provides for regulations to become operative on the first day of the calendar quarter following the filing of the regulation with the Office of Administrative Law, but allows the agency filing the regulation to specify an earlier or later date in its rulemaking.
   
8. Provides that a violation of the aforementioned provisions by a CFL licensee is grounds for discipline under the CFL and states that any provider who is subject to licensure under the CFL is subject to examination and enforcement by the commissioner for any violation of the provisions, as specified.

COMMENTS

1. Purpose: This bill is sponsored by the author help small businesses better understand the terms and costs of the financing available to them in the commercial financing market.
   
2. Assembly Amendments: The following represent the most significant changes to this bill since it was passed by the Senate in May, 2018.
   
   1. Deletes one of the required metrics that must be disclosed (total of payments), deletes a requirement that the estimated annualized cost of capital be disclosed and instead requires DBO to determine which annualized metric(s) should be disclosed, develop the formula(s) to be used to calculate the metric(s), and specify accuracy requirements and tolerance allowances associated with the metric(s). The bill does not prescribe a timeframe within which DBO must promulgate those regulations.
      
      Requires providers to comply with DBO’s regulations on “the applicable date described in Section 11343.4 of the Government Code.” Under that code section, a regulation becomes operative on the first day of the calendar quarter following the filing of that regulation with the Office of Administrative Law, but the agency filing the regulation may specify an earlier or later date in its rulemaking.
      
      The table below summarizes differences between the disclosures required by current version of the bill and the version that passed the Senate.
      

• 1. Delays the sunset date of the annualized rate disclosure by one year (from January 1, 2023 to January 1, 2024).
     
     According to the author’s office, this change is intended to reflect time for DBO to promulgate regulations implementing the bill.
     
  2. Revises the definition of accounts receivable purchase transaction to remove the “$5,000 or more” minimum. When SB 1235 passed the Senate, the definitions of commercial loan and accounts receivable purchase transaction covered financing in amounts of $5,000 or more; financing that otherwise met these definitions but was for less than $5,000 was not covered by the bill. Assembly amendments removed the $5,000 minimum from the definition of accounts receivable purchase transaction but left the definition of commercial loan unchanged.
     
     According to the author’s office, the change to the definition of accounts receivable purchase transaction is intended to discourage providers of commercial financing from evading the intent of the bill by extending multiple, small-dollar advances to recipients to avoid the bill’s disclosure requirement.
     
  3. Adds definitions for asset-based lending transactions, factoring, and lease financing and requires disclosures in connection with these types of commercial financing transactions. Adds exemptions for “floor financing” involving motor vehicles and for de minimis commercial lending activities.
     
     These changes are consistent with the intent of the bill that passed the Senate, to cover as many different types of small business financing as is reasonably possible to cover and to provide exemptions for commercial financing whose recipients are unlikely to benefit from the disclosures envisioned by the bill.
     
  4. Clarifies the enforcement authority of DBO. Assembly amendments provide that a violation of the bill by a CFL licensee represents a violation of the CFL and clarify that any provider licensed under the CFL as of the date the commissioner’s final regulations implementing this bill become operative is subject to examination and enforcement by the DBO commissioner for any violation of the bill.
     
     Notably, the author intends for DBO to have jurisdiction over any disclosures provided by a CFL licensee, even when those disclosures are provided in connection with commercial financing that is not subject to DBO’s jurisdiction. Thus, when a CFL licensee with a bank partner provides a disclosure in connection with an offer of commercial financing extended by its bank partner, the author intends for DBO to have examination and enforcement authority over the CFL licensee in connection with that disclosure.
     

1. Broad Application: SB 1235 is drafted outside of the CFL, to cover more types of commercial financing and more types of lenders than are regulated under the CFL. As described in more detail in the Senate Banking and Financial Institutions Committee analysis of the April 9, 2018 version of this bill, there are not only myriad different types of small business financing available to small businesses today, but also myriad different entities providing that financing. Relatively little commercial financing is regulated under the CFL, both because the CFL does not regulate merchant cash advances or other types of accounts receivable financing, and because several of the entities that extend offers of commercial financing are exempt from the CFL due to their partnerships with banks.^[1]
   
   The variety of business models and regulatory structures among those who offer commercial financing presents one of the key challenges facing anyone wishing to see all providers of small business financing provide common disclosures. This bill’s author attempts to tackle that challenge without requiring any new entities to become licensed. Instead, he proposes to create a new article within the Financial Code focused only on disclosure and to apply that article to some entities which are currently subject to state licensure (CFL licensees making commercial loans) and to many more entities which are not currently subject to state licensure under the CFL. This bill attempts to skirt the pre-emption issues that typically plague attempts to regulate bank partnership lending models by placing its disclosure requirements on the nondepository partner rather than the bank lender.
   
2. Fiscal Impact: According to the Assembly Appropriations Committee, DBO believes that its costs to promulgate the regulations envisioned by this bill will be minor and absorbable. However, as noted above, this bill places substantial regulatory obligations on DBO. If the regulations prove more challenging to develop than DBO envisions, this bill will pose an interesting dilemma – namely, which entities will be responsible for covering DBO’s costs?
   
   As a special fund department, DBO is supported by the fees paid by its licensees. However, the regulations this bill requires DBO to promulgate will apply to both non-licensees and licensees. If DBO’s costs to promulgate the regulations required by this bill are not minor and absorbable within existing resources, will DBO ask its CFL licensees to fully fund the cost to promulgate those regulations? Or will DBO attempt to bill non-licensees subject to this bill’s provisions to help offset its costs?
   
3. Support:
   
   1. A coalition of over five dozen organizations submitted a joint letter of support stating, “we are a diverse coalition, spanning California’s leading community advocacy organizations, for-profit fintech innovators, and nonprofit community development financial institutions and service organizations, as well as national research and policy nonprofits....We agree that small businesses deserve the common sense disclosures in Senator Glazer’s SB 1235. In response to widespread calls to action, this bill would become the first small business truth in lending law in the country. It would protect California’s small businesses and economy, support responsible industry innovation, and set the standard for the rest of the country to follow.”
      
   2. The California Small Business Association writes, “We support SB 1235 because it would bring important Truth in Lending protections to small business owners for the first time...Your recent amendments wisely require the Department of Business Oversight to consult with lenders and borrowers to ensure the disclosure works for everyone. The department will also be an important resource for lenders who have questions about how to properly disclose their unique loan offerings....SB 1235 gives California a chance to lead the nation in commercial finance disclosure at a crucial time. The recent expansion of online financing, while bringing much needed capital to small business, has also made it difficult for entrepreneurs with limited financial background to compare and contrast the many different products on the market.”
      
4. Opposition:
   
   1. The Commercial Finance Coalition (CFC) and Online Lenders Alliance write that “the Legislature, and not DBO, should determine the appropriate method to express an annualized rate disclosure.” CFC observes that since SB 1235 was introduced, the bill has sparked a robust debate regarding the appropriate method for expressing an annualized rate disclosure for commercial finance transactions. The usefulness of annual percentage rate (APR) has been questioned by federal regulators. This metric is also misleading for an accounts receivable purchase transaction. The annualized cost of capital (ACC) metric that was amended into SB 1235 before being removed with the most recent set of amendments “is an untested metric that poses many of the same issues as APR. The ACC calculation also fails to recognize the difference between a loan, which is absolutely repayable, and an accounts receivable purchase transaction. And because this disclosure is not consistently used in any other type of transactions, it is likely to further confuse small business owners and increase the risk of litigation.”
      
   2. The Small Business Finance Association (SBFA) supported a previous version of SB 1235 but opposes the current version. SBFA believes that DBO “lacks the experience to implement the bill. Although DBO does an effective job of regulating and examining its existing licensees, it lacks the expertise in developing an annualized metric for small business extensions of credit. No state or federal regulatory body regulates commercial or small business credit in the manner proposed in this bill. The DBO will have to hire consultants to instruct them on how to develop a workable metric that takes into consideration the significant differences between commercial and consumer credit. This process is very expensive and cannot be paid for from DBO’s existing budget.”
      

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

3 Core

Access Plus Capital

American GI Forum

ANewAmerica

Arcata Economic Development Corporation

Asian Business Association

Asian Pacific Islander Small Business Program

Azul

Business for Good San Diego

California Asian Chamber of Commerce

California Association for Micro Enterprise Development

California Black Chamber of Commerce

California Capital Financial Development Corporation

California Coalition for Rural Housing

California Hispanic Chambers of Commerce

California Reinvestment Coalition

California Resources and Training

California Small Business Association

CDC Small Business Finance

Central Valley Urban Institute

Centro Legal de la Raza

Common Capital

Community Housing Opportunities Corporation

Consumer Action

Consumer Advocates Against Reverse Mortgage Abuse

East LA Community Corporation

Economic Development & Financing Corporation

El Parajo

Fair Housing Advocates of Northern California

Faith and Community Empowerment

Fresno Metro Black Chamber of Commerce

Funding Circle

The Greenlining Institute

Hispanas Organized for Political Equality

Human Scale Business

Inland Fair Housing and Mediation Board

Invest in Women Entrepreneurs Initiative

Lending Club

Lighter Capital

Main Street Launch

The Marketplace Lending Association

Mission Economic Development Agency

Multifunding

National Federation of Filipino American Associations

Nav

Northern California Small Business Development Corporation

Oakland African American Chamber of Commerce

Oakland Citizens Committee for Urban Renewal

Opening Doors

Opportunity Fund

Pacific Asian Consortium in Employment

Pacific Community Ventures

Public Law Center

The Responsible Business Lending Coalition

Sac Black Biz

Scratch

Small Business California

Small Business Finance Fund

Small Business Finance Institute

Small Business Majority

StreetShares

Venturize

Vermont Slauson Economic Development Corporation

Women’s Economic Ventures                                                                               

The Woodstock Institute

Working Solutions

Opposition

Commercial Finance Association

Commercial Finance Coalition

Electronic Transactions Association

Online Lenders Alliance

Small Business Finance Association

-- END --

1. Although the specifics of the bank partnership model have evolved over time, the general model involves a nondepository lender as the “face” a borrower sees via an online lending platform (e.g., LendingClub, OnDeck, Kabbage, and others). The prospective borrower submits information in support of their request for financing via the lending platform but, if approved for financing, receives that financing from a bank (the bank partner). Although the borrower is informed that the money he or she is borrowing is coming from the nondepository’s bank partner, the bank’s involvement occurs behind the scenes. A few days to a few weeks after the financing transaction is consummated, the nondepository buys the loan back from the bank, placing it back on its books or bundling it with other loans and securitizing it. Because the source of the financing is a bank, the transaction is subject to banking laws rather than nondepository lending laws like the CFL. Some examples of banks that partner with nondepositories using bank partnership models include Celtic Bank, WebBank, MetaBank, and Cross River Bank. ↑

 UNFINISHED BUSINESS  

Bill No: SB 1235

Author:

:

Vote:

SENATE BANKING & F.I. COMMITTEE: 4-1, 4/18/18

AYES: Bradford, Hueso, Lara, Portantino

NOES: Vidak

NO VOTE RECORDED: Gaines, Galgiani

SENATE JUDICIARY COMMITTEE: 4-1, 5/8/18

AYES: Jackson, Hertzberg, Monning, Wieckowski

NOES: Anderson

NO VOTE RECORDED: Moorlach, Stern

SENATE FLOOR: 21-11, 5/31/18

AYES: Allen, Atkins, Beall, Berryhill, Bradford, Cannella, Dodd, Fuller, Glazer, Hernandez, Jackson, Leyva, McGuire, Monning, Nguyen, Pan, Portantino, Roth, Skinner, Wieckowski, Wilk

NOES: Anderson, Bates, Gaines, Galgiani, Hill, Lara, Morrell, Nielsen, Stone, Vidak, Wiener

NO VOTE RECORDED: De León, Hertzberg, Hueso, Mitchell, Moorlach, Newman, Stern

ASSEMBLY FLOOR: Not available

SUBJECT:

SOURCE: Author

DIGEST:

This bill requires providers of commercial financing, as defined, to provide disclosures about the cost of that financing to the recipients of the financing, as specified.

Assembly Amendments

add definitions for factoring, lease financing, and asset based lending transaction; delete one of the required metrics that must be disclosed (total of payments); delete a requirement that the estimated annualized cost of capital be disclosed, and instead require the Department of Business Oversight (DBO) to determine which annualized metric(s) should be disclosed, develop the formula(s) to be used to calculate the metric(s), and specify accuracy requirements and tolerance allowances associated with the metric(s). This bill does not prescribe a timeframe within which DBO must promulgate those regulations.

ANALYSIS:

Existing law:

1. Provides for the California Financing Law (CFL; Financial Code Section 22000 et seq.), administered by DBO, which regulates secured and unsecured, consumer-purpose and commercial-purpose loans made by nondepository institutions, as specified, and requires persons engaged in the business of making consumer and commercial loans, as defined, to obtain finance lender licenses.
   
2. Provides that every loan with a principal amount under $5,000, which is regulated under the CFL, is considered a consumer loan (Financial Code Sections 22203 and 22204).
   
3. Defines a commercial loan, for purposes of the CFL, as a loan of a principal amount of $5,000 or more, or any loan under an open-end credit program, whether secured by real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes. Provides that, for purposes of determining whether a loan is a commercial loan, the lender may rely on any written statement of intended purpose signed by the borrower (Financial Code Section 22502).
   
4. Defines an open-end credit program, for purposes of the CFL, as a CFL licensee’s plan for making open-end loans pursuant to a loan agreement that sets forth the terms and conditions governing the use of the open-end credit program, expressly states that the loan is made pursuant to the CFL, and provides for all of the following (Financial Code Section 22650):
   1. The borrower may use the open-end credit program to obtain money, goods, labor, or services or credit, and the licensee makes open-end loans to the borrower for the purpose of paying money to, or at the direction of, the borrower or paying obligations that the borrower creates through use of the open-end credit program.
   2. The amount of each advance and the charges and other permitted costs are debited to an account.
   3. The charges are computed from time to time on the unpaid balances of the borrower’s account, excluding from the computation any unpaid charges other than permitted fees, costs, and expenses.
   4. The borrower may pay the account in full at any time.
      
5. Provides two de minimis commercial lending licensing exemptions under the CFL. The CFL does not apply to any person who makes no more than one commercial loan in a 12-month period (Financial Code Section 22050.5) or to any person who makes five or fewer commercial loans in a 12-month period, as long as the loans are incidental to the business of the person relying on the exemption (Financial Code Section 22050).
   
6. Provides that the CFL does not apply to depository institutions, as specified (Financial Code Section 22050).

This bill:

1. Creates a new division within the Financial Code, titled “Commercial Financing Disclosures” (Division 9.5, Financial Code Section 22800 et seq.)
   
2. Defines the terms commercial loan, commercial open-end credit plan, accounts receivable purchase transaction, account, payment intangible, factoring, lease financing, asset-based lending transaction, commercial financing, provider, and recipient for purposes of Division 9.5, as follows:
   
   1. Commercial loan means a loan of a principal amount of $5,000 or more, or any loan under an open-end credit program, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes.
   2. Commercial open-end credit plan means a provider’s plan for making open-end loans pursuant to a loan agreement that sets forth the terms and conditions governing the use of the open-end credit program, as specified.
   3. Accounts receivable purchase transaction means a transaction as part of an agreement requiring a recipient to forward or otherwise sell to the provider all or a portion of accounts, payment intangibles, or cash receipts that are owed to the recipient or are collected by the recipient during a specified period or in a specified amount.
   4. Account means a right to payment of a monetary obligation.
   5. Payment intangible means a general intangible under which the account debtor’s principal obligation is a monetary obligation.
   6. Factoring means an accounts receivable purchase transaction that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods the recipient has supplied or services the recipient has rendered that have been ordered, but for which payment has not yet been made.
   7. Lease financing means providing a lease for goods, if the lease includes a purchase option that creates a security interest in the goods leased, as specified.
   8. Asset-based lending transaction means a transaction in which advances are made from time to time contingent on a recipient forwarding payments received from one or more third parties for goods the recipient has supplied or services the recipient has rendered to that party or parties.
   9. Commercial financing means a commercial loan, commercial open-end credit plan, accounts receivable purchase transaction, factoring, lease financing transaction, or asset-based lending transaction intended by the recipient for use primarily for other than personal, family, or household purposes. For purposes of determining whether financing is commercial financing, the provider may rely on any written statement of intended purpose signed by the recipient and is not required to ascertain whether the proceeds of the commercial financing are used in accordance with the recipient’s statement of intended purposes.
   10. Provider means a person who extends a specific offer of commercial financing to a recipient and includes a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution via an online lending platform administered by the nondepository institution.
   11. Recipient means a person who is presented a specific commercial financing offer by a provider that is equal to or less than $500,000.
       
3. Exempts all of the following from the provisions of the bill: depository institutions; lenders regulated under the federal Farm Credit Act; commercial financing transactions secured by real property; commercial financing transactions in which the recipient is a motor vehicle dealer or its affiliate or a vehicle rental company or its affiliate, as specified; any person who makes no more than one commercial financing transaction in California in a 12-month period; and any person who makes five or fewer commercial financing transactions in California in a 12-month period, where the commercial financing transactions are incidental to the business of the person relying on the exemption.
   
4. Requires providers subject to the provisions of the bill to disclose all of the following information to a recipient at the time of extending a specific commercial financing offer to that recipient, and to obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction:
   1. Total amount of funds provided.
   2. Total dollar cost of financing.
   3. Term or estimated term.
   4. Method, frequency, and amount of payments.
   5. Description of prepayment policies.
   6. Total cost of the financing expressed as an annualized rate (this requirement sunsets on January 1, 2024).
      
5. Allows providers who offer factoring or asset-based lending types of commercial financing to provide the disclosures above in a different format, in which the recipient is provided disclosures in connection with sample transactions that could occur under the general agreement.
   
6. Requires DBO to adopt regulations governing the required disclosures and requires those regulations to include all of the following: definitions, contents, or methods of calculating each of the disclosures; requirements concerning the time, manner, and format of the disclosures; a determination of which method should be used to disclose an annualized rate; when providers may be permitted to disclose an estimated annualized rate; the accuracy requirements and tolerance allowances for annualized rate calculations; and the types of fees and charges to be included in the annualized rate calculations.
   
7. Requires providers to comply with the disclosure requirements of the bill once DBO’s regulations are final and become effective pursuant to Section 11343.4 of the Government Code. That code section generally provides for regulations to become operative on the first day of the calendar quarter following the filing of the regulation with the Office of Administrative Law, but allows the agency filing the regulation to specify an earlier or later date in its rulemaking.
   
8. Provides that a violation of the aforementioned provisions by a CFL licensee is grounds for discipline under the CFL and states that any provider who is subject to licensure under the CFL is subject to examination and enforcement by the commissioner for any violation of the provisions, as specified.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Assembly Appropriations Committee, this bill will likely result in minor and absorbable costs for DBO to promulgate rules and regulations around disclosure requirements.

SUPPORT: (Verified 8/28/18)

3 Core

Access Plus Capital

American GI Forum

ANewAmerica

Arcata Economic Development Corporation

Asian Business Association

Asian Pacific Islander Small Business Program

Azul

Business for Good San Diego

California Asian Chamber of Commerce

California Association for Micro Enterprise Development

California Black Chamber of Commerce

California Capital Financial Development Corporation

California Coalition for Rural Housing

California Hispanic Chambers of Commerce

California Reinvestment Coalition

California Resources and Training

California Small Business Association

CDC Small Business Finance

Central Valley Urban Institute

Centro Legal de la Raza

Common Capital

Community Housing Opportunities Corporation

Consumer Action

Consumer Advocates Against Reverse Mortgage Abuse

East LA Community Corporation

Economic Development & Financing Corporation

El Parajo

Fair Housing Advocates of Northern California

Faith and Community Empowerment

Fresno Metro Black Chamber of Commerce

Funding Circle

The Greenlining Institute

Hispanas Organized for Political Equality

Human Scale Business

Inland Fair Housing and Mediation Board

Invest in Women Entrepreneurs Initiative

Lending Club

Lighter Capital

Main Street Launch

The Marketplace Lending Association

Mission Economic Development Agency

Multifunding

National Federation of Filipino American Associations

Nav

Northern California Small Business Development Corporation

Oakland African American Chamber of Commerce

Oakland Citizens Committee for Urban Renewal

Opening Doors

Opportunity Fund

Pacific Asian Consortium in Employment

Pacific Community Ventures

Public Law Center

The Responsible Business Lending Coalition

Sac Black Biz

Scratch

Small Business California

Small Business Finance Fund

Small Business Finance Institute

Small Business Majority

StreetShares

Venturize

Vermont Slauson Economic Development Corporation

Women’s Economic Ventures                                                                               

The Woodstock Institute

Working Solutions

OPPOSITION: (Verified 8/28/18)

Commercial Finance Association

Commercial Finance Coalition

Electronic Transactions Association

Online Lenders Alliance

Small Business Finance Association

ARGUMENTS IN SUPPORT: A coalition of over five dozen organizations submitted a joint letter of support stating, “we are a diverse coalition, spanning California’s leading community advocacy organizations, for-profit fintech innovators, and nonprofit community development financial institutions and service organizations, as well as national research and policy nonprofits....We agree that small businesses deserve the common sense disclosures in Senator Glazer’s SB 1235. In response to widespread calls to action, this bill would become the first small business truth in lending law in the country. It would protect California’s small businesses and economy, support responsible industry innovation, and set the standard for the rest of the country to follow.”

ARGUMENTS IN OPPOSITION: The Commercial Finance Coalition and Online Lenders Alliance write that “the Legislature, and not DBO, should determine the appropriate method to express an annualized rate disclosure.” The Small Business Finance Association (SBFA) supported a previous version of SB 1235 but opposes the current version. SBFA believes that DBO “lacks the experience to implement the bill. Although DBO does an effective job of regulating and examining its existing licensees, it lacks the expertise in developing an annualized metric for small business extensions of credit. No state or federal regulatory body regulates commercial or small business credit in the manner proposed in this bill. The DBO will have to hire consultants to instruct them on how to develop a workable metric that takes into consideration the significant differences between commercial and consumer credit. This process is very expensive and cannot be paid for from DBO’s existing budget.”

Prepared by:

8/31/18 22:28:05

**** END ****

SENATE THIRD READING

STR Bill Id:SB 1235

Author:(Glazer)

As Amended Ver:August 24, 2018

Majority vote

SENATE VOTE: 21-11

SUMMARY: Requires a commercial lender who facilitates commercial financing to a borrower to disclose specified information relating to that transaction to the recipient, as specified. Specifically, this bill:

Requires the Commissioner of the Department of Business Oversight (DBO) to adopt regulations governing the required disclosures commercial lenders must make to commercial borrowers.

1. Requires the Commissioner adopt regulations concerning the annualized rate disclosure, as specified, including:
   1. The determination of the appropriate method to express the annualized rate disclosure.
   2. When providers shall be permitted to disclose an estimated annualized rate, and how such an estimate shall be calculated.
   3. Requirements concerning the time, manner, and format of the disclosure.
2. Requires the Commissioner adopt regulations describing the following:
   1. The total amount of funds provided
   2. The total dollar cost of the financing.
   3. The term or estimated term.
   4. The method, frequency, and amount of payment.
   5. A description of prepayment policies.
3. Requires the Commissioner adopt alternative regulations for providers who offer financing that is factoring or asset-based lending, as specified.
4. Requires the Commissioner adopt regulations concerning the time, manner, and format of the applicable disclosures.
5. Provides that the following are not covered by this division:
   1. A provider that is a depository institution.
   2. A provider that is a lender regulated under the federal Farm Credit Act.
   3. A commercial financing transaction secured by real property.
   4. A commercial financing transaction in which the recipient is a dealer, as defined by Vehicle Code Section, as specified.
   5. Any person who makes five or fewer commercial financing transactions in California in a 12-month period, as specified.
6. States that a provider shall not be required to comply with the disclosure requirements of the bill until the final regulations are adopted by the Commissioner, as specified.
7. Provides that lenders that are subject to the California Finance Law (CFL) be subject to examination and enforcement by the Commission under the CFL, as specified.
8. Adds to existing annual reporting requirements that CFL licensees report all loans made through third-party financial institutions in connection with a contractual agreement with the licensee.
9. Adds definitions and clarifications where required.
10. Provides a sunset date of January 1, 2024.

EXISTING LAW:

1. Provides for the California Financing Law (CFL; Financial Code Section 22000 et seq.), administered by the Department of Business Oversight, which regulates secured and unsecured, consumer-purpose and commercial-purpose loans made by nondepository institutions, as specified, and requires persons engaged in the business of making consumer and commercial loans, as defined, to obtain finance lender licenses.
2. Defines commercial loan and commercial open-end credit program under the CFL (Financial Code Sections 22502 and 22650).
3. Provides that every loan with a principal amount under $5,000, which is regulated under the CFL, is considered a consumer loan (Financial Code Sections 22203 and 22204).

FISCAL EFFECT: According to the Assembly Appropriations Committee, likely minor and absorbable costs for DBO to promulgate rules and regulations around disclosure requirements. While DBO could incur significant costs if the development of these disclosures requires additional staff or expertise, this is unlikely to be the case.

COMMENTS: Recent amendments to the bill delete definitions and requirements associated with the Estimated Annualized Cost of Capital and insert language requiring DBO to adopt regulations governing the required disclosures commercial lenders must make to commercial borrowers.

This bill requires disclosures to be provided to small businesses engaged in borrowing across multiple types of commercial financing:

1. Closed-end loans are the most familiar of the four types of financing. These loans are offered in a fixed amount, for a fixed term, at a fixed (or variable) interest rate, and require money to be paid back on a fixed schedule.
2. Open-end lines of credit are similar to a home equity line of credit. The borrower is provided with a credit line, which can be drawn down in whole or in part, at the borrower's discretion and on the borrower's desired schedule. Fees may be charged in connection with each draw. Open-end lines of credit typically lack fixed terms; they are often available, until closed by either the borrower or the creditor. Interest on open-end lines of credit is owed on the amount drawn, not on the total amount of the credit line. Payments are due on a fixed schedule.
3. Merchant cash advances generally involve a lender extending a fixed cash advance to the small business in exchange for a percentage of the small business's future receipts. The amount owed by the small business (a set percentage of its receipts) is calculated and payable on a daily, weekly, or monthly schedule or on another schedule mutually agreed to by the provider and the small business.

Although the percentage the small business owes the provider remains constant, the amount paid to the provider varies, based on the business' daily, weekly, or monthly cash flows. Because the payments owed by the small business closely track receipts received by the business from its customers, merchant cash advances are popular among businesses with seasonal or other types of irregular cash flow. Rather than taking out a loan and having to make a fixed payment every month, regardless of its cash receipts, a business knows it will owe no more than a set percentage of its receipts. Because of the way in which they are structured, merchant cash advances do not have fixed terms; they last as long as it takes the small business to pay back the advance.

1. Asset-based lending means a transaction in which advances are made from time to time contingent on a recipient providing as collateral a legally enforceable claim for payment held by a recipient for goods the recipient has supplied or services the recipient has rendered that have been ordered but for which payment has not yet been made.
2. Accounts receivable financing, also known as factoring, generally involves the loan provider purchasing a set amount of accounts receivable, in advance, at a discount, from a business. The discount price builds in a profit margin for the Factor that has purchased the accounts receivable that is intended to reflect the cost of capital. The advantage for the small business is it receives money immediately. The Factor, however, must wait to collect the receivables, along with the risk that some portion of the receivables may not be collectable. Because of the way in which factoring arrangements are structured, there is no set term or repayment amount; the purchase price of the accounts is paid to the small business up front, and the factor collects receipts over time as customers of the business make payments on the underlying accounts. Generally, small businesses using factoring would not be provided with an EACC.

Because the vast majority of small business financing available in California is offered by companies that are not subject to the CFL, this bill is drafted outside of that law. Entities providing commercial financing include, but are not limited to:

1. Traditional banks.
2. Banks acting in partnership with nondepository institutions
3. Nondepository institutions making direct loans under the CFL.
4. Nondepository institutions making cash advances or offering factoring. These activities are not, generally speaking, regulated under the CFL.

According to the author:

Small business owners, especially those entrepreneurs just starting to get their businesses off the ground, often have limited access to traditional bank loans. Instead, they turn to non-traditional forms of financing, many of which are now offered over the Internet. These innovative lending products can be life-savers for a business, but they can also be difficult to understand and compare to each other and to traditional loans. Surveys show that many business owners do not understand the interest rates, prepayment rules and other terms of the financing that is available today and support more disclosure.

This bill requires additional disclosures be provided to businesses when engaging in commercial financing. The DBO will develop the regulations necessary to implement consistent and effective disclosures.

Support. A coalition representing community advocacy organizations, nonprofit community development financial institutions, and research and nonprofit organizations argues that this bill is a common sense bill that will "clearly communicate to small businesses what their financing would cost." The coalition notes that this bill will become the first small business "truth in lending" law in the country.

Opposition. A number of lending groups and business groups oppose this bill. The Small Business Finance Association writes that DBO "lacks the expertise to implement the bill" and that this bill generates significant uncertainty for small businesses. The Electronic Transactions Association argues this bill "will create confusion and uncertainty for…customers trying to make informed decisions about the cost of financing products."

DBO's role. Opponents to this bill contend that that DBO currently lacks the expertise or in-house knowledge to develop these disclosures without seeking outside help, thereby leading to additional staffing costs for DBO. However, this concern is likely overstated because DBO can solicit input from technical experts as part of the normal rulemaking process.

Other amendments. In addition to change described above, a series of recent author amendments made other assorted changes to the bill. The August 21st amendments modified the definition of "lease financing" and clarified the use of fees and charges as part of the disclosures developed by DBO, among other provisions. The August 23rd amendments removed a standalone reporting requirement that was previously a provision in AB 2984 (Limon), of the 2017-18 Legislative Session, which was held on this committee's Suspense File. Finally, August 24th amendments made nonsubstantive and technical changes.

Analysis Prepared by: William Herms / B. & F. / (916) 319-3081 FN: 0005060

Date of Hearing: August 27, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 1235

Author:(Glazer) – As Amended Ver:August 24, 2018

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill requires providers of commercial financing to disclose specified information to borrowers. Specifically, this bill:

1. Requires commercial financing providers, as defined, to disclose the following information to a recipient of commercial financing: a) the total amount of funds provided; the total dollar cost of the financing, b) the term or estimated term, c) the method, frequency, and amount of payments, d) a description of prepayment policies, and e) the total cost of the financing expressed as an annualized rate. Beginning on January 1, 2024, providers do not need to provide information on the total cost of the financing expressed as an annualized rate.
2. Authorizes a provider who offers factoring or asset-based lending to provide the disclosures described in 1) as an example of a transaction that could occur under the general agreement for a given amount of accounts receivable.
3. Requires the Department of Business Oversight (DBO) to adopt regulations governing the disclosures described above.
4. Exempts depository institutions, commercial financing transactions secured by real property, a lender regulated under the federal farm Credit Act, and commercial leasing transactions, as defined, from the provisions of this bill.

FISCAL EFFECT:

Likely minor and absorbable costs for DBO to promulgate rules and regulations around disclosure requirements. While DBO could incur significant costs if the development of these disclosures requires additional staff or expertise, this is unlikely to be the case. (See staff comment #6.)

COMMENTS:

1. Purpose. According to the author, the growth in the number of companies offering small business lending and the spread of innovative finance products makes it difficult for small business borrowers to compare and contrast options and determine which works best for their business. The author argues that SB 1235 requires small business borrowers to be given a standard set of disclosures and therefore give these owners the information they need to make good decisions.
2. The journey so far. Prior versions of SB 1235 contained detailed disclosure requirements that were subject to significant debate and modification as the bill went through the legislative process. Initial versions of the bill required lenders to disclose the annual percentage rate (APR) of the commercial financing transaction, a metric many consumers already use when comparing household or personal loans. However, some argue that APR is an inappropriate metric because of its differing applicability to financing products in the commercial lending market. Subsequent versions of SB 1235 instead included an “estimated annualized cost of capital” metric, which reflects the total cost of capital expressed as a percentage of the amount financed. However, opponents to this metric, including the Commercial Finance Coalition, argue such a metric is untested and confusing for small businesses.

Rather than picking an annualized rate metric and defining it in statute, the current version of SB 1235 instead requires DBO to adopt regulations around an annualized rate disclosure. These regulations must include a determination of the appropriate method to express such a rate.

1. Other amendments. In addition to change described above, a series of recent author amendments made other assorted changes to the bill. The August 21^st amendments modified the definition of “lease financing” and clarified the use of fees and charges as part of the disclosures developed by DBO, among other provisions. The August 23^rd amendments removed a standalone reporting requirement that was previously a provision in AB 2984 (Limon), of the 2017-18 Legislative Session, which was held on this committee’s Suspense File. Finally, August 24^th amendments made nonsubstantive and technical changes.
2. Support. A coalition representing community advocacy organizations, nonprofit community development financial institutions, and research and nonprofit organizations argues that SB 1235 is a common sense bill that will “clearly communicate to small businesses what their financing would cost.” The coalition notes that SB 1235 will become the first small business “truth in lending” law in the country.
3. Opposition. A number of lending groups and business groups oppose SB 1235. The Small Business Finance Association writes that DBO “lacks the expertise to implement the bill” and that this bill generates significant uncertainty for small businesses. The Electronic Transactions Association argues SB 1235 “will create confusion and uncertainty for…customers trying to make informed decisions about the cost of financing products.”
4. DBO’s role. Opponents to SB 1235 contend that that DBO currently lacks the expertise or in-house knowledge to develop these disclosures without seeking outside help, thereby leading to additional staffing costs for DBO. However, this concern is likely overstated because DBO can solicit input from technical experts as part of the normal rulemaking process.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

SENATE THIRD READING

STR Bill Id:SB 1235

Author:(Glazer)

As Amended Ver:June 13, 2018

Majority vote

SENATE VOTE: 21-11

SUMMARY: Creates a new division within the Financial Code, titled "Commercial Financing Disclosures" (Division 9.5, Financial Code Section 22800 et seq) requiring providers of commercial financing, as defined, to provide disclosures about the cost of that financing to the recipients of the financing, as specified. Specifically, this bill:

1. Defines the terms commercial loan and commercial open-end credit program as they are defined in California Financing Law (CFL.)
2. Defines an accounts receivable purchase transaction as a transaction of $5,000 or more as part of an agreement requiring a recipient sell to the provider all or a portion of accounts, as specified, that are owed to the recipient per the agreement.
3. Defines commercial financing as intended by the recipient for use primarily for other than personal, family, or household purposes.
4. Defines a provider as a person who extends a specific offer of commercial financing to a recipient, as specified.
5. Applies the provisions of this bill to each provider that consummates or arranges more than five commercial financing transactions during a calendar year.
6. Expressly exempts depository institutions, commercial financing transactions secured by real property, and commercial leasing transactions, as defined, from the provisions of this bill.
7. Requires each provider to disclose all of the following information to a recipient at the time the provider extends a specific commercial financing offer to that recipient, and to obtain the recipient's signature on the disclosure before consummating the commercial financing transaction:
   1. The principal loan amount or the purchase price labeled "Total Amount of Funds Provided," less any specified fees.
   2. The total amount of funds to be paid by the recipient, labeled "Total of Payments" including all fees, as specified.
   3. The total dollar cost of the commercial financing transaction, which must be labeled "Total Dollar Cost of Financing," and must be calculated by subtracting the total amount of funds provided from the total of payments.
8. Provides that in addition, until January 1, 2023, providers of commercial loans, commercial open-end credit programs, and certain types of accounts receivable purchase transactions (i.e., merchant cash advances) must include an Estimated Annualized Cost of Capital (EACC) in the disclosures they are required to provide recipients, at the time they extend specific commercial financing offers to those recipients. Providers of other types of accounts receivable purchase transactions (i.e., factoring) are not required to calculate or disclose an EACC.
   1. The Estimated Annualized Cost of Capital is defined as the total cost of capital, expressed as a percentage of the amount financed and presented as an annual equivalent.
   2. For open-end lines of credit, the EACC must be calculated by multiplying the monthly periodic rate applied by the provider to the outstanding balance by 12.
   3. For other types of commercial financing (i.e., for closed-end loans and merchant cash advances), the EACC must be calculated by: (i) dividing the total dollar cost of financing by the total amount of funds provided; (ii) multiplying the result of (i), above, by 365; (iii) dividing the result of (ii) by the term or estimated term of the financing in days; and (iv) multiplying the result of (iii) by 100.
   4. Providers are required to round the EACC to the nearest whole number and to include the following disclosure in connection with the EACC: "This estimate includes all charges and fees incurred for the financing, assuming you make all payments when scheduled and adhere to the terms of the agreement. This number is based on the estimated term. If the actual term is shorter than estimated, the annualized cost of capital may be higher than shown, and if the actual term is longer than estimated, the annualized cost of capital may be lower. This is not an Annual Percentage Rate (APR)."
9. Provides that recipients may elect to receive the disclosures described in 6) and 7), above, either electronically or in writing. If the disclosures are provided in writing, they must be printed in at least 10-point font. If they are provided electronically, they must be provided in a format that allows the recipient to review them on an electronic device that the recipient can independently access, and in a format that allows the disclosures to be printed out by the recipient in a minimum of 10-point font.

EXISTING LAW:

1. Provides for the California Financing Law (CFL; Financial Code Section 22000 et seq.), administered by the Department of Business Oversight, which regulates secured and unsecured, consumer-purpose and commercial-purpose loans made by nondepository institutions, as specified, and requires persons engaged in the business of making consumer and commercial loans, as defined, to obtain finance lender licenses.
2. Defines commercial loan and commercial open-end credit program under the CFL (Financial Code Sections 22502 and 22650).
3. Provides that every loan with a principal amount under $5,000, which is regulated under the CFL, is considered a consumer loan (Financial Code Sections 22203 and 22204).

COMMENTS: This bill requires disclosures to be provided to small businesses engaged in borrowing across four different types of commercial financing:

1. Closed-end loans are the most familiar of the four types of financing. These loans are offered in a fixed amount, for a fixed term, at a fixed (or variable) interest rate, and require money to be paid back on a fixed schedule.
2. Open-end lines of credit are similar to a home equity line of credit. The borrower is provided with a credit line, which can be drawn down in whole or in part, at the borrower's discretion and on the borrower's desired schedule. Fees may be charged in connection with each draw. Open-end lines of credit typically lack fixed terms; they are often available, until closed by either the borrower or the creditor. Interest on open-end lines of credit is owed on the amount drawn, not on the total amount of the credit line. Payments are due on a fixed schedule.
3. Merchant cash advances generally involve a lender extending a fixed cash advance to the small business in exchange for a percentage of the small business's future receipts. The amount owed by the small business (a set percentage of its receipts) is calculated and payable on a daily, weekly, or monthly schedule or on another schedule mutually agreed to by the provider and the small business.

Although the percentage the small business owes the provider remains constant, the amount paid to the provider varies, based on the business' daily, weekly, or monthly cash flows. Because the payments owed by the small business closely track receipts received by the business from its customers, merchant cash advances are popular among businesses with seasonal or other types of irregular cash flow. Rather than taking out a loan and having to make a fixed payment every month, regardless of its cash receipts, a business knows it will owe no more than a set percentage of its receipts. Because of the way in which they are structured, merchant cash advances do not have fixed terms; they last as long as it takes the small business to pay back the advance.

1. Accounts receivable financing, also known as factoring, generally involves the loan provider purchasing a set amount of accounts receivable, in advance, at a discount, from a business. The discount price builds in a profit margin for the Factor that has purchased the accounts receivable that is intended to reflect the cost of capital. The advantage for the small business is it receives money immediately. The Factor, however, must wait to collect the receivables, along with the risk that some portion of the receivables may not be collectable. Because of the way in which factoring arrangements are structured, there is no set term or repayment amount; the purchase price of the accounts is paid to the small business up front, and the factor collects receipts over time as customers of the business make payments on the underlying accounts. Generally, small businesses using factoring would not be provided with an EACC.

Because the vast majority of small business financing available in California is offered by companies that are not subject to the CFL, this bill is drafted outside of that law. Entities providing commercial financing include, but are not limited to:

1. Traditional banks.
2. Banks acting in partnership with nondepository institutions
3. Nondepository institutions making direct loans under the CFL.
4. Nondepository institutions making cash advances or offering factoring. These activities are not, generally speaking, regulated under the CFL.

This bill requires these entities, other than banks acting on their own behalf, to provide disclosures. The bill also requires the disclosure provisions to apply to merchant cash advances and factoring arrangements, not currently regulated by the CFL.

Commercial financing entities that use the "bank partnership" model are also included. The bank partnership model places the nondepository lender as the "face" the borrower sees via an online lending platform. The business entity receives financing from the nondepository lender, however, it is the bank partner that acturally provides the loan proceeds. Some examples of banks that partner with nondepositories using bank partnership models include Celtic Bank, WebBank, and MetaBank.

This bill requires some entities currently subject to licensure in California and many more entities not currently subject to licensure in California to provide small business borrowers with a standardized set of disclosures those borrowers can use to compare financing options. By requiring small business borrowers to be given a standard set of disclosures, this bill's author hopes to provide small business owners with information they need to make good financing decisions, without creating unnecessary licensing burdens on the entities extending that financing.

However, the bill lacks oversight and enforcement to ensure that the disclosure requirements are consistently followed and adhered to across multiple commercial loan providers using multiple lending mechanisms. Without a licensing, registration, or enrollment requirement, there is no regulator, and without a regulator, there are no regular examinations, nor any administrative enforcement mechanisms with which to sanction entities for failing to provide disclosures in accordance with the bill.

When a bill such as this is silent on both its oversight and enforcement mechanisms, the default mechanism is the courts. Courts, however, are used as an after-the-fact remedy and do little to provide structure and consistency in a diverse lending environment.

Using the EACC approach is unique but untested. The requirements placed on various types of commercial finance providers are complicated and run the risk of providing confusing and inconsistent results for borrowers to use as a method to compare lenders.

Analysis Prepared by: William Herms / B. & F. / (916) 319-3081 FN: 0003623

Date of Hearing: June 25, 2018

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Monique Limón, Chair

SBPCA Bill Id:SB 1235

Author:(Glazer) – As Amended Ver:June 13, 2018

SENATE VOTE: 21-11

SUBJECT: Commercial financing: disclosures

SUMMARY: Creates a new division within the Financial Code, titled “Commercial Financing Disclosures” (Division 9.5, Financial Code Section 22800 et seq). requiring providers of commercial financing, as defined, to provide disclosures about the cost of that financing to the recipients of the financing, as specified. Specifically, this bill:

1. Defines the terms commercial loan and commercial open-end credit program as they are defined in the CFL.
2. Defines an accounts receivable purchase transaction as a transaction of $5,000 or more as part of an agreement requiring a recipient sell to the provider all or a portion of accounts, as specified, that are owed to the recipient per the agreement.
3. Defines commercial financing as intended by the recipient for use primarily for other than personal, family, or household purposes.
4. Defines a provider as a person who extends a specific offer of commercial financing to a recipient, as specified.
5. Applies the provisions of this bill to each provider that consummates or arranges more than five commercial financing transactions during a calendar year.
6. Expressly exempts depository institutions, commercial financing transactions secured by real property, and commercial leasing transactions, as defined, from the provisions of this bill.
7. Requires each provider to disclose all of the following information to a recipient at the time the provider extends a specific commercial financing offer to that recipient, and to obtain the recipient’s signature on the disclosure before consummating the commercial financing transaction:
   1. The principal loan amount or the purchase price labeled “Total Amount of Funds Provided,” less any specified fees.
   2. The total amount of funds to be paid by the recipient, labeled “Total of Payments” including all fees, as specified.
   3. The total dollar cost of the commercial financing transaction, which must be labeled “Total Dollar Cost of Financing,” and must be calculated by subtracting the total amount of funds provided from the total of payments.
8. Provides that in addition, until January 1, 2023, providers of commercial loans, commercial open-end credit programs, and certain types of accounts receivable purchase transactions (i.e., merchant cash advances) must include an Estimated Annualized Cost of Capital (EACC) in the disclosures they are required to provide recipients, at the time they extend specific commercial financing offers to those recipients. Providers of other types of accounts receivable purchase transactions (i.e., factoring) are not required to calculate or disclose an EACC.
   1. The Estimated Annualized Cost of Capital is defined as the total cost of capital, expressed as a percentage of the amount financed and presented as an annual equivalent.
   2. For open-end lines of credit, the EACC must be calculated by multiplying the monthly periodic rate applied by the provider to the outstanding balance by 12.
   3. For other types of commercial financing (i.e., for closed-end loans and merchant cash advances), the EACC must be calculated by: (i) dividing the total dollar cost of financing by the total amount of funds provided; (ii) multiplying the result of (i), above, by 365; (iii) dividing the result of (ii) by the term or estimated term of the financing in days; and (iv) multiplying the result of (iii) by 100.
   4. Providers are required to round the EACC to the nearest whole number and to include the following disclosure in connection with the EACC: “This estimate includes all charges and fees incurred for the financing, assuming you make all payments when scheduled and adhere to the terms of the agreement. This number is based on the estimated term. If the actual term is shorter than estimated, the annualized cost of capital may be higher than shown, and if the actual term is longer than estimated, the annualized cost of capital may be lower. This is not an Annual Percentage Rate (APR).”
9. Provides that recipients may elect to receive the disclosures described in 6) and 7), above, either electronically or in writing. If the disclosures are provided in writing, they must be printed in at least 10-point font. If they are provided electronically, they must be provided in a format that allows the recipient to review them on an electronic device that the recipient can independently access, and in a format that allows the disclosures to be printed out by the recipient in a minimum of 10-point font.

EXISTING LAW:

1. Provides for the California Financing Law (CFL; Financial Code Section 22000 et seq.), administered by the Department of Business Oversight, which regulates secured and unsecured, consumer-purpose and commercial-purpose loans made by nondepository institutions, as specified, and requires persons engaged in the business of making consumer and commercial loans, as defined, to obtain finance lender licenses.
   
2. Defines commercial loan and commercial open-end credit program under the CFL (Financial Code Sections 22502 and 22650).
   
3. Provides that every loan with a principal amount under $5,000, which is regulated under the CFL, is considered a consumer loan (Financial Code Sections 22203 and 22204).

COMMENTS: This bill requires disclosures to be provided to small businesses engaged in borrowing across four different types of commercial financing:

1. Closed-end loans are the most familiar of the four types of financing. These loans are offered in a fixed amount, for a fixed term, at a fixed (or variable) interest rate, and require money to be paid back on a fixed schedule.
   
2. Open-end lines of credit are similar to a home equity line of credit. The borrower is provided with a credit line, which can be drawn down in whole or in part, at the borrower’s discretion and on the borrower’s desired schedule. Fees may be charged in connection with each draw. Open-end lines of credit typically lack fixed terms; they are often available, until closed by either the borrower or the creditor. Interest on open-end lines of credit is owed on the amount drawn, not on the total amount of the credit line. Payments are due on a fixed schedule.
   
3. Merchant cash advances generally involve a lender extending a fixed cash advance to the small business in exchange for a percentage of the small business’s future receipts. The amount owed by the small business (a set percentage of its receipts) is calculated and payable on a daily, weekly, or monthly schedule or on another schedule mutually agreed to by the provider and the small business.
   
   Although the percentage the small business owes the provider remains constant, the amount paid to the provider varies, based on the business’ daily, weekly, or monthly cash flows. Because the payments owed by the small business closely track receipts received by the business from its customers, merchant cash advances are popular among businesses with seasonal or other types of irregular cash flow. Rather than taking out a loan and having to make a fixed payment every month, regardless of its cash receipts, a business knows it will owe no more than a set percentage of its receipts. Because of the way in which they are structured, merchant cash advances do not have fixed terms; they last as long as it takes the small business to pay back the advance.
   
4. Accounts receivable financing, also known as factoring, generally involves the loan provider purchasing a set amount of accounts receivable, in advance, at a discount, from a business. The discount price builds in a profit margin for the Factor that has purchased the accounts receivable that is intended to reflect the cost of capital. The advantage for the small business is it receives money immediately. The Factor, however, must wait to collect the receivables, along with the risk that some portion of the receivables may not be collectable. Because of the way in which factoring arrangements are structured, there is no set term or repayment amount; the purchase price of the accounts is paid to the small business up front, and the factor collects receipts over time as customers of the business make payments on the underlying accounts. Generally, small businesses using factoring would not be provided with an EACC.

Because the vast majority of small business financing available in California is offered by companies that are not subject to the CFL, SB 1235 is drafted outside of that law. Entities providing commercial financing include, but are not limited to:

1. Traditional banks.
   
2. Banks acting in partnership with nondepository institutions
   
3. Nondepository institutions making direct loans under the CFL.
   
4. Nondepository institutions making cash advances or offering factoring. These activities are not, generally speaking, regulated under the CFL.

This bill requires these entities, other than banks acting on their own behalf, to provide disclosures. The bill also requires the disclosure provisions to apply to merchant cash advances and factoring arrangements, not currently regulated by the CFL.

Commercial financing entities that use the “bank partnership” model are also included. The bank partnership model places the nondepository lender as the “face” the borrower sees via an online lending platform. The business entity receives financing from the nondepository lender, however, it is the bank partner that acturally provides the loan proceeds. Some examples of banks that partner with nondepositories using bank partnership models include Celtic Bank, WebBank, and MetaBank.

This bill requires some entities currently subject to licensure in California and many more entities not currently subject to licensure in California to provide small business borrowers with a standardized set of disclosures those borrowers can use to compare financing options. By requiring small business borrowers to be given a standard set of disclosures, this bill’s author hopes to provide small business owners with information they need to make good financing decisions, without creating unnecessary licensing burdens on the entities extending that financing.

However, the bill lacks oversight and enforcement to ensure that the disclosure requirements are consistently followed and adhered to across multiple commercial loan providers using multiple lending mechanisms. Without a licensing, registration, or enrollment requirement, there is no regulator, and without a regulator, there are no regular examinations, nor any administrative enforcement mechanisms with which to sanction entities for failing to provide disclosures in accordance with the bill.

When a bill such as this is silent on both its oversight and enforcement mechanisms, the default mechanism is the courts. Courts, however, are used as an after-the-fact remedy and do little to provide structure and consistency in a diverse lending environment.

Using the EACC approach is unique but untested. The requirements placed on various types of commercial finance providers are complicated and run the risk of providing confusing and inconsistent results for borrowers to use as a method to compare lenders.

REGISTERED SUPPORT / OPPOSITION:

Support

California Black Chamber Of Commerce

California Small Business Association

Opposition

3core
Accion

Anewamerica
Azul Management Systems Institute

California Association for Micro Enterprise Opportunity
California Reinvestment Coalition

Commercial Finance Coalition

Economic Development and Financing Corporation

Electronic Transactions Association

Equipment Leasing Finance Association
Innovative Lending Platform Association

Mission Economic Development Agency

Main Street Launch

Marketplace Lending Association
Northern California Community Loan Fund

Opening Doors
Small Business Finance Fund

Women’s Economic Ventures

Working Solutions

Analysis Prepared by: William Herms / B. & F. / (916) 319-3081

 THIRD READING  

Bill No: SB 1235

Author:

:

Vote:

SENATE BANKING & F.I. COMMITTEE: 4-1, 4/18/18

AYES: Bradford, Hueso, Lara, Portantino

NOES: Vidak

NO VOTE RECORDED: Gaines, Galgiani

SENATE JUDICIARY COMMITTEE: 4-1, 5/8/18

AYES: Jackson, Hertzberg, Monning, Wieckowski

NOES: Anderson

NO VOTE RECORDED: Moorlach, Stern

SUBJECT:

SOURCE: Author

DIGEST:

This bill requires providers of commercial financing, as defined, to provide disclosures about the cost of that financing to the recipients of the financing, as specified.

ANALYSIS:

Existing law:

1. Provides for the California Financing Law (CFL; Financial Code Section 22000 et seq.), administered by the Department of Business Oversight, which regulates secured and unsecured, consumer-purpose and commercial-purpose loans made by nondepository institutions, as specified, and requires persons engaged in the business of making consumer and commercial loans, as defined, to obtain finance lender licenses.
2. Defines commercial loan and commercial open-end credit program under the CFL (Financial Code Sections 22502 and 22650).
3. Provides that every loan with a principal amount under $5,000, which is regulated under the CFL, is considered a consumer loan (Financial Code Sections 22203 and 22204).

This bill:

1. Creates a new division within the Financial Code, titled “Commercial Financing Disclosures” (Division 9.5, Financial Code Section 22800 et seq).
2. Defines the terms commercial loan and commercial open-end credit program as they are defined in the CFL, and defines an accounts receivable purchase transaction as a transaction of $5,000 or more as part of an agreement requiring a recipient to forward or otherwise sell to the provider all or a portion of accounts, payment intangibles, or cash receipts that are owed to the recipient or are collected by the recipient during a specified period or in a specified amount.
3. Defines commercial financing as an accounts receivable purchase transaction, commercial loan, or commercial open-end credit program intended by the recipient for use primarily for other than personal, family, or household purposes. For purposes of determining whether financing is commercial financing, the provider may rely on any written statement of intended purpose signed by the recipient and is not required to ascertain whether the proceeds of the commercial financing are used in accordance with the recipient’s statement of intended purposes.
4. Defines a provider as a person who extends a specific offer of commercial financing to a recipient. Clarifies that the term provider also includes a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the depository institution (i.e., the nondepository institution that helps facilitate commercial financing through a bank partnership model).
5. Applies the provisions of this bill to each provider that consummates or arranges more than five commercial financing transactions during a calendar year. Expressly exempts depository institutions, commercial financing transactions secured by real property, and commercial leasing transactions, as defined, from the provisions of this bill.
6. Requires each provider to disclose all of the following information to a recipient at the time the provider extends a specific commercial financing offer to that recipient, and to obtain the recipient’s signature on the disclosure before consummating the commercial financing transaction:
   1. The principal loan amount or the purchase price, less any fees paid to or retained by the provider or an affiliate of the provider for originating or processing the commercial financing transaction. This must be labeled “Total Amount of Funds Provided.”
   2. The total amount of funds to be paid by the recipient pursuant to the financing agreement, assuming all payments are made when required. This amount, which must be labeled “Total of Payments,” must include all unavoidable fees and charges, and must clarify that it does not include fees the recipient may avoid, such as late fees or returned payment fees.
   3. The total dollar cost of the commercial financing transaction, which must be labeled “Total Dollar Cost of Financing,” and must be calculated by subtracting the total amount of funds provided from the total of payments.
   4. For products with fixed periodic payments, the term of the financing product in total days, and for products with variable payments and no fixed term, the estimated term of the financing product in total days, as assumed by the provider in the underwriting process. This must be labeled “Term” or “Estimated Term.”
   5. For commercial financing with fixed, non-variable payments, the frequency and amount of each payment, and for commercial financing with variable periodic payments, the frequency of payments and the method by which payments are calculated. This must be labeled “Payments.”
   6. A statement of whether there are any costs or discounts associated with prepayment of the commercial financing product, including a reference to the paragraph in the financing agreement that creates the contractual rights of the parties related to prepayment. This disclosure must be labeled “Prepayment.”
7. Provides that in addition, until January 1, 2023, providers of commercial loans, commercial open-end credit programs, and certain types of accounts receivable purchase transactions (i.e., merchant cash advances) must include an Estimated Annualized Cost of Capital (EACC) in the disclosures they are required to provide recipients, at the time they extend specific commercial financing offers to those recipients. Providers of other types of accounts receivable purchase transactions (i.e., factoring) are not required to calculate or disclose an EACC.
   1. The Estimated Annualized Cost of Capital is defined as the total cost of capital, expressed as a percentage of the amount financed and presented as an annual equivalent.
   2. For open-end lines of credit, the EACC must be calculated by multiplying the monthly periodic rate applied by the provider to the outstanding balance by 12.
   3. For other types of commercial financing (i.e., for closed-end loans and merchant cash advances), the EACC must be calculated by: (i) dividing the total dollar cost of financing by the total amount of funds provided; (ii) multiplying the result of (i), above, by 365; (iii) dividing the result of (ii) by the term or estimated term of the financing in days; and (iv) multiplying the result of (iii) by 100.
   4. Providers are required to round the EACC to the nearest whole number and to include the following disclosure in connection with the EACC: “This estimate includes all charges and fees incurred for the financing, assuming you make all payments when scheduled and adhere to the terms of the agreement. This number is based on the estimated term. If the actual term is shorter than estimated, the annualized cost of capital may be higher than shown, and if the actual term is longer than estimated, the annualized cost of capital may be lower. This is not an Annual Percentage Rate (APR).”
8. Provides that recipients may elect to receive the disclosures described in 6) and 7), above, either electronically or in writing. If the disclosures are provided in writing, they must be printed in at least 10-point font. If they are provided electronically, they must be provided in a format that allows the recipient to review them on an electronic device that the recipient can independently access, and in a format that allows the disclosures to be printed out by the recipient in a minimum of 10-point font.

Comments

This bill requires disclosures to be provided in connection with four different types of commercial financing: closed-end loans; open-end lines of credit; merchant cash advances; and factoring (though small businesses using factoring would not be provided with an EACC).

Understanding the different types of financing used by small businesses. Closed-end loans are the most familiar of the four types of financing. These loans are offered in a fixed amount, for a fixed term, at a fixed (or variable) interest rate, and require money to be paid back on a fixed schedule. Open-end lines of credit are familiar to anyone who has taken out a home equity line of credit. The borrower is provided with a credit line, which can be drawn down in whole or in part, at the borrower’s discretion and on the borrower’s desired schedule. Fees may be charged in connection with each draw. Open-end lines of credit typically lack fixed terms; they are often available, until closed by either the borrower or the creditor. Interest on open-end lines of credit is owed on the amount drawn, not on the total amount of the credit line. Payments are due on a fixed schedule.

Merchant cash advances take many different forms, but generally involve the provider extending a fixed amount of money (the advance) to the small business (i.e., the recipient), in exchange for a percentage of the small business’s future receipts. The amount owed by the small business (a set percentage of its receipts) is calculated and payable on a daily, weekly, or monthly schedule or on another schedule mutually agreed to by the provider and the small business. Although the percentage the small business owes the provider remains constant, the amount paid to the provider varies, based on the business’ daily, weekly, or monthly cash flows. Because the payments owed by the small business closely track receipts received by the business from its customers, merchant cash advances are popular among businesses with seasonal or other types of irregular cash flow. Rather than taking out a loan and having to make a fixed payment every month, regardless of its cash receipts, a business knows it will owe no more than a set percentage of its receipts. Because of the way in which they are structured, merchant cash advances do not have fixed terms; they last as long as it takes the small business to pay back the advance.

Factors, also known as factoring or accounts receivable financing, can also take many different forms, but generally involves the provider purchasing a set amount of accounts receivable, in advance, at a discount, from a business. The discount price builds in a profit margin for the factor and is also intended to reflect the cost of capital (the business is receiving the money immediately, while the factor must wait to collect the receivables) and to reflect the likelihood that some portion of the receivables will not be collectable by the factor. Because of the way in which factoring arrangements are structured, there is no set term or repayment amount; the purchase price of the accounts is paid to the small business up front, and the factor collects receipts over time as customers of the business make payments on the underlying accounts.

Understanding the different types of small business credit providers. Entities providing commercial financing run the gamut from traditional banks acting on their own behalf (e.g., Wells Fargo), to banks acting in partnership with nondepository institutions (e.g., Celtic Bank, acting in partnership with Kabbage), to nondepository institutions making direct loans under the CFL (e.g., Ally Financial), to nondepository institutions making cash advances or offering factoring, activities that are not, generally speaking, regulated under the CFL (e.g., Rapid Advance).

Because the vast majority of small business financing available in California is offered by companies that are not subject to the CFL, SB 1235 is drafted outside of that law. This bill requires all of the aforementioned entities, other than banks acting on their own behalf, to provide disclosures. This is significant, not only because this bill extends to two types of products not currently regulated under the CFL (merchant cash advances and factoring arrangements), but also because this bill attempts to do something not previously attempted in California: regulate the so-called “bank partnership” model (also called the “rent-a-charter” model, although the businesses that use these models prefer the term bank partnership). 

Although the specifics of the bank partnership model have evolved over time due to changing focus among federal and state regulators, the basic model places the nondepository lender as the “face” the borrower sees via an online lending platform (e.g., Kabbage, OnDeck, LendingClub, and many others).  In a typical bank partnership model, the nondepository identifies a small business seeking financing and works with that business to determine how much money it is seeking and much it can qualify for. Although the small business is informed that the money it is borrowing is coming from the nondepository’s bank partner, the bank’s involvement occurs behind the scenes; the bulk of the interactions occur between the small business and the nondepository via the nondepository’s branded online lending platform.  A few days to a few weeks after the financing is consummated by the bank, the nondepository buys the loan back from the bank, placing it back on its books or bundling it with other loans and securitizing it as a means to raise new capital.  Because the source of the financing provided to the small business is a bank rather than a nondepository, the transaction is subject to banking laws rather than state nondepository lending laws like the CFL.  Some examples of banks that partner with nondepositories using bank partnership models include Celtic Bank, WebBank, and MetaBank.

Disclosures and not licensing. This bill requires some entities currently subject to licensure in California and many more entities not currently subject to licensure in California to provide small business borrowers with a standardized set of disclosures those borrowers can use to compare financing options. By requiring small business borrowers to be given a standard set of disclosures, this bill’s author hopes to provide small business owners with information they need to make good financing decisions, without creating unnecessary licensing burdens on the entities extending that financing.

However, the unique approach taken in this bill carries with it two key challenges: oversight and enforcement. Without a licensing, registration, or enrollment requirement, there is no regulator, and without a regulator, there are no regular examinations, nor any administrative enforcement mechanisms with which to sanction entities for failing to provide disclosures in accordance with the bill. When a bill such as this is silent on both its oversight and enforcement mechanisms, the default mechanism is the courts.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 5/10/18)

Nav

Small Business Majority

One private individual

OPPOSITION: (Verified 5/10/18)

Commercial Finance Coalition

Electronic Transactions Association

Equipment Leasing Finance Association

Innovative Lending Platform Association

ARGUMENTS IN SUPPORT: Small Business Majority writes, “Alternative lending has the potential to spur growth and innovation in the small business community, but regulations are needed to ensure small business borrowers are protected from predatory lenders and that they have the information they need to make the best decision for their business. SB 1235 will extend important protections to small businesses by requiring financers to provide transparent lending terms before a loan is disbursed.”

ARGUMENTS IN OPPOSITION: The Commercial Finance Coalition states that the annualized cost of capital “is an untested metric that poses many of the same issues as APR. The annualized cost of capital calculation fails to recognize the difference between a loan, which is absolutely repayable, and an accounts receivable purchase transaction. And because this disclosure is not consistently used in any other type of transactions, it is likely to further confuse small business owners and increase the risk of litigation.”

Prepared by:

5/11/18 9:31:41

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2017-2018 Regular Session

Bill No: SB 1235 (Author:Glazer)

Version: April 25, 2018

Hearing Date: May 8, 2018

Fiscal: No

Urgency: No

Consultant: MS/JDT

SUBJECT

Commercial financing: disclosures

DESCRIPTION

This bill requires providers of commercial financing, as defined, to provide disclosures about the cost of that financing to recipients of the financing, as specified.

BACKGROUND

The California Finance Law (CFL), formerly the California Finance Lenders Law (CFLL), provides for the licensure and regulation of finance lenders and brokers by the Department of Business Oversight (DBO). The CFL authorizes licensed finance lenders to make secured and unsecured consumer and commercial loans according to certain terms set by statute. Generally, on loans less than $2,500, the CFL caps the interest rate lenders can charge to between 12 and 30 percent, based on the unpaid principal balance of the loan. (See Fin. Code Sec. 22303.) The CFL also restricts the amount lenders can collect in administrative (origination) and delinquency fees, and in some cases requires that the loan repayment occur “in substantially equal periodical installments.” (Fin. Code Sec. 22307.)

In response to concerns that the CFL’s restrictions constrained access to small-dollar lending, the Legislature has passed two different pilot projects related to small-dollar loans. The first, the Pilot Program for Affordable Credit-Building Opportunities, was passed by the Legislature in 2010 through the passage of SB 1146 (Florez, Ch. 640, Stats. 2010). This pilot program was intended to provide an alternative to payday loans that would, until January 1, 2015, allow participating CFLL licensees statewide to offer a new type of small-dollar consumer loan that met specified requirements. Additionally, in 2013, SB 318 (Hill, Ch. 467, Stats. 2013) was signed into law, establishing the Pilot Program for Increased Access to Responsible Small Dollar Loans. This pilot program was created in response to feedback received from participants in the 2010 Pilot Program for Affordable Credit-Building Opportunities. SB 318 was intended to expand the number of lenders offering loans between $300 and $2,500 by, among other things, authorizing an underwriting fee, increasing the origination fee, interest rates, late fees, and the frequency with which underwriting and origination fees could be assessed.

Consumers who utilize loans from CFL lenders, whether commercial or personal loans, are typically those who have limited credit options due to damaged credit history or minimal credit experience. These consumers often lack the option to obtain credit from banks and credit unions, so they rely on alternative financial service (AFS) providers (i.e. payday, title, and installment lenders) for their credit needs. Due to the increased potential for risk in these loans, the CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. The CFL additionally prohibits a licensee from making a materially false or misleading statement to a borrower regarding the terms or conditions of a loan. However, the CFL does not currently require specific disclosures be made to recipients of commercial financing.

This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction.

The bill was previously heard in the Senate Committee on Banking and Financial Institutions and passed out 4-1.

CHANGES TO EXISTING LAW

Existing law, the California Financing Law (CFL), provides for the regulation of secured and unsecured, consumer-purpose and commercial-purpose loans made by nondepository institutions, as specified, and requires persons engaged in the business of making consumer and commercial loans, as defined, to obtain finance lender licenses. (Fin. Code Sec. 22000 et seq.)

Existing law defines “consumer loan,” for the purposes of the CFL, as meaning a loan of a principal amount of less than $5,000, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower primarily for personal, family, or household purposes. When determining the intended purposes, the lender may rely on a written statement signed by the borrower, and the lender shall not be required to ascertain that the proceeds of the loan are used in accordance with the statement of intended purposes. (Fin. Code Secs. 22203, 22204.)

Existing law defines a “commercial loan,” for the purposes of the CFL, as a loan of a principal amount of $5,000 or more, or any loan under an open-end credit program, whether secured by real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes. Provides that, for purposes of determining whether a loan is a commercial loan, the lender may rely on any written statement of intended purpose signed by the borrower. (Fin. Code Sec. 222502.)

Existing law defines an open-end credit program, for the purposes of CFL, as a CFL licensee’s plan for making open-end loans pursuant to a loan agreement that sets forth the terms and conditions governing the use of the open-end credit program, expressly states that the loan is made pursuant to the CFL, and provides for all of the following:

• the borrower may use the open-end credit program to obtain money, goods, labor, or services or credit, and the licensee makes open-end loans to the borrower for the purpose of paying money to, or at the direction of, the borrower, or paying obligations that the borrower creates through use of the open-end credit program;
• the amount of each advance, the charges, and other permitted costs are debited to an account;
• the charges are computed from time to time on the unpaid balances of the borrower’s account excluding from the computation any unpaid charges other than permitted fees, costs, and expenses; and
• the borrower has the privilege of paying the account in full at any time. (Fin. Code Sec. 22650.)

Existing law provides that the CFL does not apply to any person who makes no more than one loan in a 12-month period if that loan is a commercial loan, as defined, or to any person who makes five or fewer commercial loans in a 12-month period if the loans are incidental to the business of the person relying upon the exemption. (Fin. Code Secs. 22050, 22050.5.)

Existing law provides that the CFL does not apply to any person doing business, under any law of any state or of the United States, relating to banks, trust companies, savings and loan associations, insurance premium finance agencies, credit unions, small business investment companies, community advantage lenders, California business and industrial development corporations when acting under federal law or other state authority, or licensed pawnbrokers when acting under the authority of that license. (Fin. Code Sec. 22050.)

This bill would provide the following definitions:

• “account” means a right to a payment of a monetary obligation;
• “accounts receivable purchase transaction” means a transaction in an amount of $2,500 or more, as part of an agreement requiring a recipient to forward or otherwise sell to the provider all or a portion of accounts, payment intangibles, or cash receipts that are owed to the recipient or are collected by the recipient during a specified period or in a specified amount;
• “commercial financing” means an accounts receivable purchase transaction, commercial loan, or commercial open-end credit plan intended by the recipient for use primarily for other than personal, family, or household purposes. For purposes of determining whether financing is commercial financing within the meaning of this subdivision, the provider may rely on any written statement of intended purposes signed by the recipient;
• “commercial loan” means a loan of a principal amount of $5,000 or more, or any loan under an open-credit plan, the proceeds of which are intended by the recipient for use primarily for other than personal, family, or household purposes;
• “commercial open-end credit program” means a provider’s plan for making open-end loans pursuant to a loan agreement that sets forth the terms and conditions governing the use of the open-end credit program, and provides that:
  • the recipient may use the open-end credit program to obtain money, goods, labor, or services or credit, and the provider makes open-end loans to the recipient for the purpose of paying money to, or at the direction of, the recipient or paying obligations that the recipient creates through use of the open-end credit program;
  • the amount of each advance and the charges and other permitted costs are debited to an account;
  • the charges are computed from time to time on the unpaid balances of the recipient’s account, excluding from the computation any unpaid charges other than permitted fees, costs, and expenses; and
  • the recipient has the privilege of paying the account in full at any time;
• “depository institution” means any of the following:
  • a bank, trust company, or industrial loan company doing business under the authority of, or in accordance with, a license, certificate, or charter issued by the United States, this state, or any other state, district, territory, or commonwealth of the United States that is authorized to transact business in this state.
  • a federally chartered savings and loan association, federal savings bank, or federal credit union that is authorized to transact business in this state.
  • a savings and loan association, savings bank, or credit union organized under the laws of this or any other state that is authorized to transact business in this state;
• “payment intangible” means a general intangible under which the account debtor’s principal obligation is a monetary obligation;
• “person” means an individual, a corporation, a partnership, a limited liability company, a joint venture, an association, a joint stock company, a trust, or an unincorporated organization;
• “provider” means a person who extends a specific offer of commercial financing to a recipient. “Provider” also includes a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.
• “recipient” means a person who is presented a specific commercial financing offer by a provider that is equal to or less than five hundred thousand dollars ($500,000).

This bill would provide that a provider is subject to this division if the provider consummates or arranges more than five commercial financing transactions during a calendar year to a recipient.

This bill would provide that these provisions do not apply to the following:

• a depository institution;
• a commercial financing transaction secured by real property; or
• a commercial leasing transaction.

This bill would provide that a provider subject to this division, shall disclose all of the following information to a recipient at the time of extending a specific commercial financing offer to that recipient, and shall obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction:

• the total amount of funds provided to the recipient of the commercial financing, labeled as “total amount of funds provided;”
• the total amount of funds to be paid by the recipient of the commercial financing pursuant to the financing agreement, including all unavoidable fees and charges, such as any fees or charges due at the time the financing is retired or paid in full, labeled as “total of payments;”
• the total dollar cost of the commercial financing transaction, which shall be calculated by subtracting the amount of funds provided from the total of payments, labeled as “total dollar cost of financing;”
• the annual percentage rate (APR) or estimated APR for the commercial financing calculated according to the requirements provided in the federal Truth in Lending Act, and in the case of accounts receivable financing transactions the estimated APR shall be calculated based on the daily, weekly, or monthly delivery of receivables from the business to the financer that is assumed as part of the financing offer;
• for commercial financing that has fixed, nonvariable period payment amounts, the frequency and amount of each payment shall be reported, and labeled as “payments;”
• for commercial financing that has variable periodic payment amounts, a description of the method by which payments are calculated and the frequency of those payments shall be reported, and labeled as “payments;” and
• a statement of whether there are any costs or discounts associated with prepayment of the commercial financing product, including a reference to the paragraph in the financing agreement that creates the contractual rights of the parties related to prepayment, labeled as “prepayment.”

This bill would provide that the provider may provide the required disclosures to the recipient in any format acceptable to the recipient. If the provider provides the disclosures in writing, the disclosures shall be printed in at least 10-point font, and if they are provided electronically, they must be provided in a format that allows the disclosures to be printed out by the recipient in a font size of at least 10 points.

COMMENT

1. Stated need for this bill

According to the Author:

SB 1235 would require standardized disclosure of the terms of commercial financing offered to businesses in order to help borrowers better understand the financial implications of their decisions.

Small business owners, especially those entrepreneurs just starting to get their businesses off the ground, often have limited access to traditional bank loans. Instead, they turn to non-traditional forms of financing, many of which are now offered over the Internet. These innovative lending products can be life-savers for a business, but they can also be difficult to understand and compare to each other and to traditional loans. Surveys show that many business owners do not understand the interest rates, prepayment rules and other terms of the financing that is available today.

This can lead them to borrow more than they can afford to repay, putting their business and possibly their life’s savings at risk. Requiring disclosure of these terms would give borrowers the information they need to make informed decisions without limiting the ability of financers to offer new and valuable products.

Existing law does not include disclosure requirements for commercial financing. Disclosure is required for real estate mortgages, credit cards, “Pay Day” loans and some other financial instruments. While there are at least three privately drafted disclosure models that some lenders use, including the Small Business Borrowers Bill of Rights, the Small Business Finance Assn. Best Practices and the “SmartBox” developed by the Innovative Lending Platform Assn., these models are not consistent and not required by any law.

The result is that while some lenders disclose some terms, it is very difficult for borrowers to compare one offer to another, and some lenders disclose little or nothing. SB 1235 seeks to address this problem while creating the least possible disruption to the responsible lenders in this sector.

1. Consumer protection

The Legislature has long considered consumer protection to be a matter of high importance. State law is replete with statutes aimed at protecting California consumers from unfair, dishonest, or harmful market practices. For example, the Consumer Legal Remedies Act was enacted “to protect the statute’s beneficiaries from deceptive and unfair business practices,” and to provide aggrieved consumers with “strong remedial provisions for violations of the statute.” (Am. Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1, 11.) Similarly, for over 70 years, California’s Unfair Practices Act (Bus. & Prof. Code Sec. 17000, et seq.) has protected California consumers from “unlawful, unfair or fraudulent business act[s] or practice[s].” (Bus. & Prof. Code Sec. 17200.)

Consumer protection in the banking and finance sector is no less important as a matter of fundamental public policy. The California Finance Lenders Law (Fin. Code Sec. 22000 et seq.) declares that it “shall be liberally construed and applied to promote its underlying purposes and policies,” which is, among other things, “[t]o protect borrowers against unfair practices by some lenders, having due regard for the interests of legitimate and scrupulous lenders.” (Fin. Code Sec. 22001.)

This bill would arguably seek to ensure the consumers of small business financing receive important disclosures, bettering their ability to make informed choices in terms of the financial obligation they are taking on. As discussed by the author, many small business owners, especially those who are just getting their business operational, have limited access to traditional bank loan financing. Thus these consumers turn to non-traditional forms of financing, many of which are offered over the internet. Some of these consumers may be repeat customers of a certain form of non-traditional financing, while others might be seeking their first form of commercial financing to get their business off the ground. As such, it is important that the disclosures provided for by this bill offers clear, informative disclosures in a manner that is easy for the consumer to understand.

As written, this bill would require the following disclosures:

• the total amount of funds provided to the recipient of the commercial financing;
• the total amount of funds to be paid by the recipient, including all unavoidable fees and charges;
• clarifying language that the total of payments does not include fees the recipient may avoid, such as late fees or returned payment fees;
• the total dollar cost of the commercial financing transaction;
• the annual percentage rate (APR) or estimated APR;
• the frequency and amount of each payment for commercial financing that has fixed, nonvariable period payments;
• for commercial financing that has variable periodic payment amounts, a description of the method by which payments are calculated and the frequency of those payments; and
• a statement of whether there are any costs or discounts associated with prepayment of the commercial financing product, including a reference to the paragraph in the financing agreement that creates the contractual rights of the parties related to prepayment.

1. The problem with APR

At first glance, it appears that all of these disclosures would provide information necessary for a consumer to make an educated decision in terms of what form of financing would be the best choice for their business needs. This information would enable the consumer to compare the total dollar cost of various financing options, while also considering the potential fees associated with late or early repayment, and the impact of variable versus nonvariable period payments. However, the continued inclusion of APR or estimate APR arguably brings with it the possibility of misleading both the consumer and the provider. That is because the calculation of the APR for different types of non-traditional financing options may vary greatly, while the actual overall total dollar cost does not. Moreover, other factors remain relatively comparable.

On the issue of including the APR, the Commercial Finance Coalition (CFC), in opposition, writes:

Requiring an “APR” disclosure is not helpful to small business owners. The annual percentage rate or APR is a measure of the cost of credit created by Congress as part of the adoption of the Truth in Lending Act (TILA) in 1968. It was created for the specific purpose of helping consumers compare the cost of credit for products of different terms. It is not intended to apply to commercial loans and the APR calculation is limited to only consumer transactions.

In addition, SB 1235 fails to address the complexity of calculating APR for different types of commercial finance transactions. This creates a regulatory minefield for entities making a good faith effort to disclose APR that may stifle small business financing in California.

This point is further illustrated by the Senate Committee on Banking and Financial Institution’s (April 9, 2018) analysis of this bill. That Committee’s analysis states:

APR can be helpful in certain circumstances. Because APR was designed to provide an annualized cost of credit, it can be helpful for comparing loans that are all greater than or equal to one year or when comparing loans of similar lengths. However, it can be confusing if one uses it to compare financing of different lengths, when one of those financing products has a term of less than one year. For example, compare the following three loans, all of which carry the same simple interest rate of 15% and are repaid via monthly payments of equal amounts. The total dollar cost of all three loans is the same ($15), but the APRs vary significantly. Because APR treats all loans as if they were one year in length (i.e., it annualizes them), a three-month loan appears more expensive than a one year loan looking only at APR.

Loan 1: $100 loan carrying a 15% simple interest rate, due in three months, repayable via three monthly payments of equal amounts. No fees. Total dollar cost of the loan = $15. APR = 87%

Loan 2: $100 loan carrying a 15% simple interest rate, due in six months, repayable via six monthly payments of equal amounts. No fees. Total dollar cost of the loan = $15. APR = 49%.

Loan 3: $100 loan carrying a 15% simple interest, due in one year, repayable via twelve monthly payments of equal amounts. No fees. Total dollar cost of the loan = $15. APR = 26%.

The term APR is also frequently confused with the term simple interest. In the examples above, the simple interest rate is 15% in all cases, but the APR varies, even though there are no fees imposed.

The challenge of using APR to help small businesses understand the types of financing they are being offered is further complicated if an open-end credit product is compared with a closed-end product using APR. Although all unavoidable charges owed under a closed-end loan are known up front, the same is not true under an open-end line of credit. Because each successive draw generates additional charges, the APR of an open-end credit product typically increases over time, as it is used. Yet, there is no way to predict ahead of time how frequently or by how much a small business will draw down its credit line, and thus no way to reasonably estimate an accurate APR prior to consummation. If this bill requires providers to disclose an estimated APR in connection with commercial financing, either open-end credit providers will be able to disclose a low APR at origination that does not reflect how the APR of their product may rise over time, or this bill will have to specify a range of assumptions for use by open-end credit providers to calculate an estimated APR, knowing full well that those assumptions may prove incorrect.

1. The author’s proposed alternative to APR

In recognition of the concerns surrounding the use of APR, the author has proposed an alternative metric: “Estimated Annualized Cost of Capital.” The author describes this proposal as follows:

These proposed amendments respond to the outstanding questions in the Banking and Financial Institutions Committee analysis, which I committed to answering moving forward. Those questions arose principally in regard to the bill’s proposal to require disclosure of an APR for innovative finance products that do not have a fixed term. Here is the relevant portion of that analysis:

If, instead, this bill’s author and this Committee wish to retain the requirement that APR or Estimated APR be included, amendments will be necessary to clarify accuracy requirements and tolerance allowances, specify what types of fees and charges must be included in the APR calculation in cases where TILA does not contemplate the type of financing covered by this bill, clarify what is meant by the term “estimated APR,” and specify when that metric must be disclosed.

To resolve these issues, I propose dropping the requirement that APR be disclosed for all types of financing. Instead these amendments require that a similar but simpler measure, the Estimated Annualized Cost of Capital, be disclosed.

The bill would specify a formula for calculating the annualized cost for Commercial Loans and Merchant Cash Advances. This formula is a widely accepted method for determining annualized cost, although it has never been required in a commercial financial disclosure.

For Open-ended lines of credit, this would require lenders to disclose an annual rate calculated by multiplying the monthly periodic rate x 12. This metric mimics a simplified APR for credit lines that can be found in federal regulations. Since this metric would not be an “estimated APR,” none of the issues raised in the analysis regarding an estimated APR pertain.

For factoring transactions, which involve the sale at a discount of multiple, pre-existing invoices with varying payment dates, the bill would not require the disclosure of an annualized cost of capital. These transactions are materially different from Merchant Cash Advances in that they involve existing, legally enforceable claims that are transferred to and collected by the finance provider. The inclusion of multiple due dates on these invoices with no guarantee of payment makes calculating even an estimated annual cost of capital problematic.

The result of these changes would be a bill that requires disclosure of terms in small business financing for the first time in the United States. I believe this would be a model for the nation in customer protection in this rapidly expanding financial sector.

The disclosure would include the following:

• Total Amount of Funds Provided
• Term or Estimated Term
• Total of Payments
• Total Dollar Cost of Financing (the difference between the total of payments and the amount provided).
• The frequency and amount of each payment.
• Pre-payment policies
• The Estimated Annualized Cost of Capital.

Under the author’s proposal, “Estimated Annualized Cost of Capital” would be defined as “the total cost of the capital expressed as a percentage of the amount financed and presented as an annual equivalent.” For open-end lines of credit, this number would be the product of the monthly periodic rate applied by the provider to the outstanding balance, multiplied by 12. For other types of commercial financing subject to the bill, the Estimated Annualized Cost of Capital would be derived using the following steps:

(1) Divide the total dollar cost of financing by the total amount of funds provided.

(2) Multiply the result by 365.

(3) Divide the result from steps (1) and (2) by the term or estimated term of the financing in days.

(4) Multiply the result from step (3) by 100.

The resulting figure from step (4) is the “The Estimated Annualized Cost of Capital.”

Small Business Majority and Nav, a small business lending platform, have indicated their support for the use of this metric. Additionally, Small Business Finance Association (SBFA), which opposes the bill in its current form, writes in support of the use of Estimated Annualized Cost of Capital as follows:

The SBFA was one of the trade groups opposed to SB 1235 when it was in front of the Senate Banking Committee. We testified at Senate Banking Committee hearing on the bill and explained that our objections to the bill centered largely around the inclusion of the Annual Percentage Rate (APR) as a required disclosure. After the hearing, Sen. Glazer’s office has made a good faith attempt to resolve the APR issues and plans to remove the APR requirement and replace it with a much more simplified calculation called the Annual Cost of Capital (ACC). The ACC is easier for customers to understand and much easier for providers of capital to calculate. We are thankful to Sen. Glazer’s efforts to work on these changes to the bill.

Provided the APR is replaced with the ACC as discussed with Sen. Glazer’s office, we remove our opposition.

In opposition to the author’s proposed alternative metric, the Commercial Finance Coalition writes that Estimated Annualized Cost of Capital “is an untested metric that poses many of the same issues as APR. The annualized cost of capital calculation fails to recognize the difference between a loan, which is absolutely repayable, and an accounts receivable purchase transaction.” Additional organizations, such as the Electronic Transactions Association, have expressed their opposition to this metric based on similar concerns. In their view, the metric may confuse recipients by potentially misrepresenting the costs of their products, especially Merchant Cash Advances, thereby distorting the market and deterring small business owners from using this financing product.

As noted, the author agreed with the Senate Committee on Banking and Financial Institutions that amendments “will be necessary to clarify accuracy requirements and tolerance allowances, specify what types of fees and charges must be included in the APR calculation in cases where TILA does not contemplate the type of financing covered by this bill, clarify what is meant by the term ‘estimated APR,’ and specify when that metric must be disclosed.” If the Committee determines that Estimated Annualized Cost of Capital has effectively accomplished these objectives, it may wish to accept the author’s proposal and amend the bill to include this metric in lieu of APR. To ensure that the metric is effective, the Committee may also wish to include a sunset provision that applies only to the metric. A period of four years would arguably provide sufficient opportunity for lenders and borrowers to adjust to the use of the metric, and for evidence relating to the metric’s effectiveness to be gathered.

Alternatively, the Committee may wish to consider removing the required APR disclosure for the sake of clarity and ensuring the disclosures required by this bill do not mislead consumers. The Committee may also wish to direct the author to continue working on a metric that is acceptable to all stakeholders.

1. Electronic Disclosure

As written, this bill would provide for the required disclosure to be provided to the recipient at the time a specific commercial financing offer is made, and would require that the recipient’s signature to be written on the provided disclosure before the commercial financing transaction may be consummated. The bill would additionally provide that the provider may provide the required disclosures in “any format” acceptable to the recipient. It is unclear what “any format” would mean. The proposed language also does not specify how the recipient makes the decision regarding what is “acceptable.” To bring these provisions in line with existing law and ensure consumers receive the disclosures in a format that they will continue to have access to, this Committee may wish to consider the following amendments:

Amendment

On page 6, strike lines 1 through 7 and insert:

(c) The recipient may elect to receive the disclosures required by Sections 22802 and 22803 in writing or electronically.

(1) If the provider provides the disclosures in writing, the disclosures shall be printed in at least a 10-point font.

(2) If the provider provides the disclosures electronically they shall be provided in a format that the recipient may review and have in their possession, on an electronic device that the recipient can independently access, and shall be provided in a format that allows the disclosures to be printed out by the recipient in at least 10-point font.

Support: Small Business Majority; Nav; an individual

Opposition: Commercial Finance Coalition; Electronic Transactions Association; Equipment Leasing & Finance Association; Small Business Finance Association; Innovative Lending Platform Association

HISTORY

Source: Author

Related Pending Legislation:

AB 2953 (Limón, 2018) would prohibit a licensee from receiving charges under a title loan agreement in an amount that is greater than 3% per month on the unpaid principal balance of the title loan. This bill is currently in the Assembly Appropriations Committee.

AB 2500 (Kalra, 2018) would prohibit California Finance Law licensees from receiving charges on a consumer loan at a rate exceeding 36% APR of the unpaid principal balance of a loan from $2,500 to $5,000 and 24% APR of the unpaid principal balance of a loan from $5,000 to $10,000. This bill would require the cost of optional credit insurance to fit within the proposed rate caps, as well as add consumer protections related to financing and minimum loan terms. This bill is currently in the Assembly Appropriations Committee.

Prior Legislation:

SB 1284 (Dababneh, Ch. 475, Stats. 2017) renamed the California Finance Lenders Law as the California Financing Law (CFL), as well as created new requirements for the licensure of program administrators, as defined, under CFL. Additionally, this bill established a regulatory scheme for the oversight of Property Assessed Clean Energy (PACE) solicitors and PACE solicitor agents, as defined, while adding a new rule that must be followed before PACE assessments may be recorded, as specified.

SB 984 (Hueso, Ch. 480, Stats. 2016) repealed the January 1, 2018, terminal date for the Pilot Program, and extended the Pilot Program until January 1, 2023.

SB 318 (Hill, Ch. 467, Stats. 2013) made changes to an existing installment loan pilot project authorized by SB 1146 (Florez, Ch. 640, Stats. 2010) intended to increase the availability of loans between $300 and $2500 to consumers and thereby provide a responsible market alternative to payday loans. The modified pilot project would, until January 1, 2018, permit lenders to charge higher interest rates, origination fees, and delinquency fees than are permitted under the CFLL in an effort to increase the availability of small-dollar loans and credit-building opportunities for unbanked or under-banked persons.

SB 526 (Calderon, 2013) would have required the Commissioner of the Department of Business Oversight to, among other things, report on the lending and collection practices of unlicensed persons offering deferred deposit transactions or installment loans, or both, in amounts under $2,500, over the Internet, to persons in California, and on the enforcement actions taken by the Commissioner against these persons. This bill died on suspense in the Senate Committee on Appropriations.

AB 1980 (Hernandez, 2011) would have required lenders offering loan products under the California Deferred Deposit Transaction Law and the California Finance Lenders Law to include a financial facts label with any deferred deposit transaction or unsecured consumer loan with a principal amount that is equal to or less than $2,500. This bill would also have required that these lenders place the financial facts label on specified advertisements. This bill died in the Assembly Committee on Banking and Finance.

SB 1146 (Florez, Ch. 640, Stats. 2010) created the Pilot Program for Affordable Credit-Building Opportunities, a four-year statewide pilot program under the California Finance Lenders Law (CFLL) that would allow participant lenders to offer a new type of small-dollar consumer loan subject to specified requirements. Under the program, lenders would be permitted to charge higher interest rates, origination fees, and delinquency fees than permitted under the CFLL in an effort to increase the availability of credit-building opportunities for unbanked or under-banked persons.

Prior Vote: Senate Committee on Banking and Financial Institutions (Ayes 4, Noes 1)

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SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2017 - 2018 Regular

Bill No: SB 1235 Hearing Date: April 18, 2018

Subject: California Financing Law: commercial financing: disclosures

SUMMARY

This bill requires providers of commercial financing, as defined, to provide disclosures about the cost of that financing to the recipients of the financing, as specified.

EXISTING LAW

1. Provides for the California Financing Law (CFL; Financial Code Section 22000 et seq.), administered by the Department of Business Oversight, which regulates secured and unsecured, consumer-purpose and commercial-purpose loans made by nondepository institutions, as specified, and requires persons engaged in the business of making consumer and commercial loans, as defined, to obtain finance lender licenses.
   
2. Provides that every loan with a principal amount under $5,000, which is regulated under the CFL, is considered a consumer loan (Financial Code Sections 22203 and 22204).
   
3. Defines a commercial loan, for purposes of the CFL, as a loan of a principal amount of $5,000 or more, or any loan under an open-end credit program, whether secured by real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes. Provides that, for purposes of determining whether a loan is a commercial loan, the lender may rely on any written statement of intended purpose signed by the borrower (Financial Code Section 22502).
   
4. Defines an open-end credit program, for purposes of the CFL, as a CFL licensee’s plan for making open-end loans pursuant to a loan agreement that sets forth the terms and conditions governing the use of the open-end credit program, expressly states that the loan is made pursuant to the CFL, and provides for all of the following (Financial Code Section 22650):
   
   1. The borrower may use the open-end credit program to obtain money, goods, labor, or services or credit, and the licensee makes open-end loans to the borrower for the purpose of paying money to, or at the direction of, the borrower or paying obligations that the borrower creates through use of the open-end credit program.
      
   2. The amount of each advance and the charges and other permitted costs are debited to an account.
      
   3. The charges are computed from time to time on the unpaid balances of the borrower’s account, excluding from the computation any unpaid charges other than permitted fees, costs, and expenses.
      
   4. The borrower may pay the account in full at any time.
      
5. Provides two de minimis commercial lending licensing exemptions under the CFL. The CFL does not apply to any person who makes no more than one commercial loan in a 12-month period (Financial Code Section 22050.5) or to any person who makes five or fewer commercial loans in a 12-month period, as long as the loans are incidental to the business of the person relying on the exemption (Financial Code Section 22050).
   
6. Provides that the CFL does not apply to depository institutions, as specified (Financial Code Section 22050).

THIS BILL

1. Creates a new division within the Financial Code, titled “Commercial Financing Disclosures” (Division 9.5, Financial Code Section 22800 et seq.)
   
2. Defines the terms commercial loan, commercial open-end credit plan, accounts receivable purchase transaction, account, payment intangible, commercial financing, provider, and recipient for purposes of Division 9.5, as follows:
   
   1. A commercial loan means a loan of a principal amount of $2,500 or more, or any loan under an open-end credit program, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes.
      
   2. A commercial open-end credit plan means as commercial financing extended by any provider under a plan in which the amount the borrower can receive from the provider is greater than $2,500, the provider reasonably contemplates repeat transactions, and the amount of financing that may be extended during the term of the plan is generally made available to the extent that any outstanding balance is repaid.
      
   3. Accounts receivable purchase transaction means a transaction of $2,500 or more as part of an agreement requiring a recipient to forward or otherwise sell to the provider all or a portion of accounts, payment intangibles, or cash receipts that are owed to the recipient or are collected by the recipient during a specified period or in a specified amount.
      
   4. Account means a right to payment of a monetary obligation.
      
   5. Payment intangible means a general intangible under which the account debtor’s principal obligation is a monetary obligation.
      
   6. Commercial financing means an accounts receivable purchase transaction, commercial loan, or commercial open-end credit plan intended by the recipient for use primarily for other than personal, family, or household purposes. For purposes of determining whether financing is commercial financing, the provider may rely on any written statement of intended purpose signed by the recipient and is not required to ascertain whether the proceeds of the commercial financing are used in accordance with the recipient’s statement of intended purposes.
      
   7. Provider means a person who facilitates commercial financing to a recipient and includes a person who facilitates an offer of commercial financing in partnership with a depository institution.
      
   8. Recipient means a person who is presented a specific commercial financing offer by a provider that is equal to or less than $500,000.
      
3. Applies the provisions of the bill to each provider that consummates or arranges more than five commercial financing transactions during a calendar year to a recipient. Expressly exempts depository institutions from the provisions of the bill.
   
4. Requires providers subject to the provisions of the bill to disclose all of the following information to a recipient at the time of extending a specific commercial financing offer to that recipient, and to obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction:
   
   1. The total amount of funds provided to the recipient, which must be labeled “Total Amount of Funds Provided.”
      
   2. The total amount of funds to be paid by the recipient, including any fees and charges to be paid, which must be labeled “Total of Payments.”
      
   3. The total dollar cost of the commercial financing transaction, which must be labeled “Total Dollar Cost of Financing,” and must be calculated by subtracting the total amount of funds provided from the total of payments.
      
   4. The annual percentage rate (APR) or estimated APR for the commercial financing transaction, calculated according to the provisions of the federal Truth in Lending Act (TILA; 15 USC Section 1601 et seq.) and Regulation Z (12 CFR Section 226.1 et seq), as specified. These must be labeled “APR” or “Estimated APR.”
      
   5. The manner, frequency, and amount of each payment in the case of commercial financing with fixed, non-variable payment amounts, or the frequency of payments and the method by which payments are calculated, in the case of commercial financing with variable periodic payment amounts. This disclosure must be labeled “Payments.”
      
   6. Any costs or discounts associated with prepayment of the commercial financing, including any costs or fees that must be paid when the financing is retired or paid in full. This disclosure must be labeled “Prepayment.”
      
5. Requires the disclosures summarized above to be provided in any format acceptable to the recipient. If the disclosures are provided in writing, they must be printed in at least 10-point font. If they are provided electronically, they must be provided in a format that allows the disclosures to be printed out by the recipient in a minimum of 10-point font.
   

COMMENTS

1. Purpose: This bill is sponsored by the author help small businesses better understand the terms and costs of the financing available to them in the commercial financing market.
   
2. Author’s Statement: According to the author, “With the explosion of the online lending sector and the spread of innovative finance products, potential customers and borrowers find it difficult to compare and contrast the many offers available and determine which would be best, and least costly, for their business. Research, surveys, and anecdotal accounts indicate that many commercial borrowers do not understand the terms of the financing into which they enter, especially financing that is offered online with a quick turnaround time. This sometimes results in borrowers taking on more debt than their business can support, forcing them to later seek to refinance the borrowing or close their doors because they cannot make the payments.” By requiring small business borrowers to be given a standard set of disclosures, this bill’s author believes that his bill will give small business owners the information they need to make good decisions without interfering with the creativity that is driving the expansion of this financing sector.
   
3. Small Business Borrowers Bill of Rights and the SMART Box: In recent years, as the number of companies offering online loans and other forms of credit to small businesses has exploded, there has been increasing attention paid to ensuring that small business borrowers are afforded fair treatment and provided with clear disclosures intended to help them understand the cost of the credit they are being offered.
   
   Small Business Borrowers Bill of Rights: The first organized effort of this type resulted in issuance of the Small Business Borrowers Bill of Rights (SBBOR) in August, 2015, later updated in August, 2017 (http://www.borrowersbillofrights.org/ and https://www.opportunityfund.org/media/blog/new-and-improved-the-small-business-borrower%E2%80%99s-bill-of-rights/) . According to the original signatories, the SBBOR was designed to foster greater transparency and accountability among the small business lending sector.

The SBBOR is a product of the Responsible Business Lending Coalition, a network of for-profit and non-profit lenders, brokers and small business advocates. A few examples of the many signatories to the SBBOR include Accion, the Aspen Institute, Fundera, Funding Circle, Lending Club, the Marketplace Lending Association, Nerdwallet, Opportunity Fund, and Small Business California. (http://www.borrowersbillofrights.org/uploads/1/0/0/4/100447618/bbor_2.0.pdf).

As currently drafted, the SBBOR lists six fundamental rights that the founders believe all small business owners seeking financing deserve, as well as specific practices that lenders and brokers should abide by in order to uphold and protect those rights. The BBOR rights include: transparent pricing and terms, non-abusive products, responsible underwriting, fair treatment from brokers, inclusive credit access, and fair collection practices. Of relevance to this bill, the signatories to the SBBOR believe that provision of APR to borrowers is one of the key components of the right to transparent pricing and terms.

SMART Box: In June, 2016, following closely behind issuance of the SBBOR, a trade association called the Innovative Lending Platform Association (ILPA) issued a model small business pricing disclosure called the SMART Box (short for Straightforward Metrics Around Rate and Total Cost Box; http://innovativelending.org/). Members of ILPA include OnDeck, Lendio, Breakout Capital, Kabbage, Paynet, Orion First, and The Business Backer.

According to ILPA, the SMART Box effort is a voluntary initiative to promote transparency through standardized pricing comparison tools and explanations, including both various total dollar cost and APR metrics. It is intended to empower small businesses to more fully understand and assess their small business finance options.  

The SMART Box is less a box and more a page that includes space for lenders to provide prospective borrowers with the loan amount; disbursement amount; repayment amount; loan term in months; frequency of repayment; total cost of capital broken down into interest expense, loan fee, origination fee, and other fees; APR; average monthly payment; the specific monthly payment schedule, if available; total amount of interest expense or loan fee paid per dollar borrowed; and information about prepayment.

1. How Does SB 1235 Compare to the SBBOR and the SMART Box? This bill borrows elements from both efforts referenced above, but does not adopt either in its entirety. For example, by requiring APR and estimated APR to be disclosed, this bill adopts one of the elements of SBBOR’s right to transparent pricing and terms. It does not, however, include provisions intended to add the other five rights to California law through statutory language.
   
   SB 1235 requires disclosure of six of the eleven elements of the SMART Box. This bill requires disclosure of disbursement amount, repayment amount, frequency of repayment, periodic payment amount; APR, and information about prepayment; it does not require disclosure of loan amount (which can be greater than disbursement amount if fees are withheld from the amount a borrower receives), loan term in months; total cost of capital broken down into interest expense, loan fee, origination fee, and other fees; average monthly payment; and total amount of interest expense or loan fee paid per dollar borrowed.
   
2. Deciphering the Maze: SB 1235 is drafted outside of the CFL, to cover more types of commercial financing than are regulated under the CFL and to cover more types of lenders than are regulated under the CFL. As described below, there are not only myriad different types of small business financing available to small businesses today, but also myriad different entities providing that financing. Relatively little commercial financing is regulated under the CFL, both because the CFL only regulates loans, and because several of the entities making loans are exempt from the CFL due to their partnerships with banks. This section attempts to decipher the confusing small business lending regulatory landscape in California.
   
   Understanding the Different Types of Small Business Financing: SB 1235 would require disclosures to be provided in connection with four different types of commercial financing: a) closed-end loans; b) open-end lines of credit; c) merchant cash advances; and d) factors.
   
   Closed-end loans are the most familiar of the four types. These loans are offered in a fixed amount, for a fixed term, at a fixed (or variable) interest rate, and require money to be paid back on a fixed schedule.
   
   Open-end lines of credit are familiar to anyone who has taken out a home equity line of credit. The borrower is provided with a credit line, which can be drawn down in whole or in part, at the borrower’s discretion and on the borrower’s desired schedule. Fees may be charged in connection with each draw. Open-end lines of credit typically lack fixed terms; they are often available, until closed by either the borrower or the creditor. Interest on open-end lines of credit is owed on the amount drawn, not on the total amount of the credit line. Payments are due on a fixed schedule.
   
   Merchant cash advances take many different forms, but generally involve the provider extending a fixed amount of money (the advance) to the small business (i.e., the recipient), in exchange for a percentage of the small business’s future receipts. The amount owed by the small business (a set percentage of its receipts) is calculated and payable on a daily, weekly, or monthly schedule or on another schedule mutually agreed to by the provider and the small business. Although the percentage the small business owes the provider remains constant, the amount paid to the provider varies, based on the business’ daily, weekly, or monthly cash flows. Because the payments owed by the small business closely track receipts received by the business from its customers, merchant cash advances are popular among businesses with seasonal or other types of irregular cash flow. Rather than taking out a loan and having to make a fixed payment every month, regardless of its cash receipts, a business knows it will owe no more than a set percentage of its receipts. Because of the way in which they are structured, merchant cash advances do not have fixed terms; they last as long as it takes the small business to pay back the advance.
   
   Factors, also known as factoring or accounts receivable financing, can also take many different forms, but generally involves the provider purchasing a set amount of accounts receivable, in advance, at a discount, from a business. The discount price builds in a profit margin for the factor and is also intended to reflect the cost of capital (the business is receiving the money immediately, while the factor must wait to collect the receivables) and to reflect the likelihood that some portion of the receivables will not be collectable by the factor. Because of the way in which factoring arrangements are structured, there is no set term or repayment amount; the purchase price of the accounts is paid to the small business up front, and the factor collects receipts over time as customers of the business make payments on the underlying accounts.
   
   Some of the products described above are available online only, others are available only through brick and mortar storefronts or bank branches, and still others can be obtained either online or in-person.
   

Understanding the Different Types of Small Business Credit Providers: Entities providing commercial financing run the gamut from traditional banks acting on their own behalf (e.g., Wells Fargo), to banks acting in partnership with nondepository institutions (e.g., Celtic Bank, acting in partnership with Kabbage), to nondepository institutions making direct loans under the CFL (e.g., Ally Financial), to nondepository institutions making cash advances or offering factoring, activities that are not, generally speaking, regulated under the CFL (e.g., Rapid Advance).

This bill would require all of the aforementioned entities, other than banks acting on their own behalf, to provide disclosures. This is significant, not only because this bill extends to two types of products not currently regulated under the CFL (merchant cash advances and factoring arrangements), but also because this bill attempts to do something not yet attempted in California: regulate the so-called “bank partnership” model (also called the “rent-a-charter” model, although the businesses that use these models prefer the term bank partnership). 

No exact figures are available, but it is widely believed that a significant amount of small business financing obtained by California small businesses is provided through bank partnerships. Although the specifics of the bank partnership model have evolved over time due to changing focus among federal and state regulators, the basic model places the nondepository lender as the “face” the borrower sees via an online lending platform (e.g., Kabbage, OnDeck, LendingClub, and many others).  In a typical bank partnership model, the nondepository identifies a small business seeking financing and works with that business to determine how much it is seeking and much it can qualify for. Although the small business is informed that the money it is borrowing is coming from the nondepository’s bank partner, the bank’s involvement occurs behind the scenes; the bulk of the interactions occur between the small business and the nondepository via the nondepository’s branded online lending platform.  A few days to a few weeks after the financing is consummated by the bank, the nondepository buys the loan back from the bank, placing it back on its books or bundling it with other loans and securitizing it as a means to raise new capital.  Because the source of the financing provided to the small business is a bank rather than a nondepository, the transaction is subject to banking laws rather than state nondepository lending laws like the CFL.  Some examples of banks that partner with nondepositories using bank partnership models include Celtic Bank, WebBank, and MetaBank.

1. Voluntary Versus Mandatory Disclosure: The variety of business models and regulatory structures among those who offer commercial financing presents one of the key challenges facing anyone wishing to see all providers of small business financing provide common disclosures. Absent a federal law requiring them, there is simply no legally enforceable way to require every single entity that provides commercial financing to use a common disclosure. This is why both the Small Business Borrowers Bill of Rights and the SMART Box are voluntary initiatives.
   
   This bill attempts to tackle the challenge using a unique approach. Rather than using a licensing law to require its disclosures, this bill creates a new article within the Financial Code and applies that article to some entities that are currently subject to state licensure (CFL licensees making commercial loans) and to many more entities that are not currently subject to state licensure under the CFL (nondepositories offering merchant cash advances and factoring directly to borrowers, and nondepositories offering commercial loans, merchant cash advances, and/or factoring through bank partnership models). This bill attempts to skirt the pre-emption issues that typically plague attempts to regulate bank partnership lending models by placing its disclosure requirements on the nondepository partner rather than the actual bank lender.
   
   Only two types of commercial financing are knowingly excluded from the disclosures required by this bill: traditional bank loans made outside of bank partnership models and commercial equipment leasing. The former is excluded, because of pre-emption concerns, while the latter is excluded because of the difficulty in identifying a workable definition for this type of activity.
   
2. What About Oversight and Enforcement? The unique approach taken in this bill carries with it two key challenges: oversight and enforcement. Without a licensing, registration, or enrollment requirement, there is no regulator, and without a regulator, there are no regular examinations, nor any administrative enforcement mechanisms with which to sanction entities for failing to provide disclosures in accordance with the bill. When a bill such as this is silent on both its oversight and enforcement mechanisms, the default mechanism is the courts.
   
   There are, however, are other models for the enforcement of financial rules, which do not involve a state or federal regulator or the courts. The National Automated Clearinghouse Association (NACHA) is one such model. The Financial Industry Regulatory Authority (FINRA) is another. Although they regulate very different activities (payments in the case of NACHA and securities broker-dealers in the case of FINRA), they share key traits. Both organizations are funded by the industries they regulate. Both write and enforce rules governing the activities of their members, examine their member organizations for compliance with those rules, and offer educational programs. Thus, one option available to the small business financing industry, if it wishes to minimize enforcement of this bill in the courts, is the creation of its own quasi-regulatory body to examine for compliance with this bill’s provisions and to sanction violators. The creation of a quasi-regulatory body will not deprive small businesses of the ability to pursue judicial actions against providers of commercial financing, but it will provide an alternate means of encouraging compliance and sanctioning violations.
   
3. Which Metrics Will Best Help Small Business Borrowers Understand the Financing They Are Offered? To date, there is no single, accepted set of disclosures considered “appropriate” and “helpful” in the context of small business financing. The SMART Box is one option, but some have criticized it as providing so much information that its value is lessened, relative to other disclosures that provide only a small amount of key information. The signatories to the SBBOR believe that APR and estimated APR are valuable metrics, but have not developed a model form for use by small business lenders wishing to subscribe to the SBBOR.
   
   The Consumer Finance Coalition (CFC) and Small Business Finance Association (SBFA) believe that only five key metrics are appropriate and helpful for small businesses seeking to understand financing they are offered: the total amount of funds provided; total of payments (including principal, interest, and unavoidable fees); total dollar cost of the financing (what results from subtracting the total of funds provided from the total of payment); information regarding the manner, frequency, and amount of each periodic payment (for fixed interest rate products) and regarding the method by which payments are calculated and the frequency of such payments (for variable interest rate products); and a statement of whether there are any costs or discounts associated with prepayment.
   
   CFC, SBFA, and the Electronic Transactions Association believe that APR and estimated APR are unhelpful to small businesses and should not be included in the list of disclosures this bill requires.
   
4. What is APR, Exactly, and How Will It Work In the Context of This Bill? APR is a measure of the cost of consumer credit, created by Congress in 1968 through enactment of the Truth in Lending Act (TILA). TILA does not specify a single APR calculation; instead, it provides different rules for calculating the APR on closed end loans (12 CFR Section 1026.22) and on open end plans (12 CFR Section 1026.14). Furthermore, within these sections, the rules governing the calculation of APR vary. For example, the APR of a payday loan is calculated differently than the APR of a pawn loan, which, in turn, is calculated differently than the APR of an installment loan, and so on. The actual formulas are so complex that it is impossible to replicate them in the format used for standard committee analyses. The description provided in Appendix J of TILA is illustrative, if incomprehensible:
   
   “The annual percentage rate for other than open-end transactions shall be determined in accordance with either the actuarial method or the United States Rule method…Under the actuarial method, at the end of each unit-period (or fractional unit-period) the unpaid balance of the amount financed is increased by the finance charge earned during that period and is decreased by the total payment (if any) made at the end of that period…In contrast, under the United States Rule method, at the end of each payment period, the unpaid balance of the amount financed is increased by the finance charge earned during that payment period and is decreased by the payment made at the end of that payment period. If the payment is less than the finance charge earned, the adjustment of the unpaid balance of the amount financed is postponed until the end of the next payment period. If at that time the sum of the two payments is still less than the total earned finance charge for the two payment periods, the adjustment of the unpaid balance of the amount financed is postponed still another payment period, and so forth.”
   
   APR can be helpful in certain circumstances. Because APR was designed to provide an annualized cost of credit, it can be helpful for comparing loans that are all greater than or equal to one year or when comparing loans of similar lengths. However, it can be confusing if one uses it to compare financing of different lengths, when one of those financing products has a term of less than one year. For example, compare the following three loans, all of which carry the same simple interest rate of 15% and are repaid via monthly payments of equal amounts. The total dollar cost of all three loans is the same ($15), but the APRs vary significantly. Because APR treats all loans as if they were one year in length (i.e., it annualizes them), a three-month loan appears more expensive than a one year loan looking only at APR.
   
   Loan 1: $100 loan carrying a 15% simple interest rate, due in three months, repayable via three monthly payments of equal amounts. No fees. Total dollar cost of the loan = $15. APR = 87%
   
   Loan 2: $100 loan carrying a 15% simple interest rate, due in six months, repayable via six monthly payments of equal amounts. No fees. Total dollar cost of the loan = $15. APR = 49%.
   
   Loan 3: $100 loan carrying a 15% simple interest, due in one year, repayable via twelve monthly payments of equal amounts. No fees. Total dollar cost of the loan = $15. APR = 26%.
   
   The term APR is also frequently confused with the term simple interest. In the examples above, the simple interest rate is 15% in all cases, but the APR varies, even though there are no fees imposed.
   
   The challenge of using APR to help small businesses understand the types of financing they are being offered is further complicated if an open-end credit product is compared with a closed-end product using APR. Although all unavoidable charges owed under a closed-end loan are known up front, the same is not true under an open-end line of credit. Because each successive draw generates additional charges, the APR of an open-end credit product typically increases over time, as it is used. Yet, there is no way to predict ahead of time how frequently or by how much a small business will draw down its credit line, and thus no way to reasonably estimate an accurate APR prior to consummation. If this bill requires providers to disclose an estimated APR in connection with commercial financing, either open-end credit providers will be able to disclose a low APR at origination that does not reflect how the APR of their product may rise over time, or this bill will have to specify a range of assumptions for use by open-end credit providers to calculate an estimated APR, knowing full well that those assumptions may prove incorrect.
   
   This bill will also need to address the way in which estimated APR should be calculated in connection with products not covered under TILA. For example, TILA fails to contemplate products with varying payment amounts, and with daily or weekly (rather than monthly) payments. It is impossible to calculate the APRs of these products in accordance with TILA, as this bill currently requires, because TILA’s APR calculations do not address them. Unless this bill contemplates requiring DBO to provide guidance for use by entities subject to this bill to calculate the APRs of types of credit not contemplated under TILA, requiring commercial financing providers to estimate the APRs of these products is likely to lead to different providers making different assumptions, and generating different APRs for the same products with the same pricing.
   
   
   It is not surprising that, when the Federal Reserve Board undertook a review of open-end (non-mortgage) disclosure rules in 2009, it eliminated effective APR as a measure of the cost of credit, due to consumer confusion. Rejecting arguments from consumer advocates that effective APR was a critical disclosure to help consumers understand the cost of credit, the Board concluded “The quantitative consumer research conducted by the Board validated the results of the qualitative testing conducted both before and after the June 2007 proposal; it indicates that most consumers do not understand the effective APR, and that for some consumers the effective APR is confusing and detracts from the effectiveness of other disclosures.” (Volume 74, No. 18, Federal Register, January 29, 2009, p. 5319).
   
   The federal Consumer Financial Protection Bureau (CFPB) reached a similar conclusion during 2013.in the context of work it did to improve mortgage disclosures. After extensive consumer testing, the CFPB concluded that “consumer testing and historical research indicate that consumers do not understand the APR and do not use it when shopping for a loan. Highlighting the APR on the disclosure form contributes to overall consumer confusion and information overload, complicates the mortgage lending process, and hinders consumers’ ability to understand important loan terms.” (Volume 78, No. 251, Federal Register, December 31, 2013, p. 79880).
   
   The Amendments section of this analysis offers a few different options to address some of the points raised above.
   
5. Support: Nav, a small business credit and financing platform, supports the bill because it will help business owners make better financial decisions. Nav believes that APR or estimated APR should be a part of the disclosure requirements at the time financing is offered. “APR is the only calculation we have that allows for a true apples-to-apples cost comparison. If that forces a lender to explain why their APR is so high, then so be it. It’s better than the current system that puts all the burden on the business owner.”
   
6. Opposition: The Small Business Finance Association (SBFA) is opposed, and the Electronic Transactions Association (ETA) is opposed to the bill, unless it is amended. Both organizations are concerned about the bill’s requirement that APR and Estimated APR be disclosed and are asking that those metrics be deleted from the bill. Among the arguments against the use of APR and estimated APR: “Mandating the calculation of APR under TILA in a commercial setting would result in different calculations, depending on the product, even if the overall repayment amount is the same...There is no benefit to a small business by imposing an APR disclosure on a product that was never contemplated to be covered by TILA and that would result in misleading APRs.”
   
   ETA also notes that the bill does not specify the accuracy with which APR must be calculated, nor address allowable tolerance limits for APR calculation errors. Further, in order to calculate an APR, there must be clear guidance on what is and is not a finance charge. SB 1235 does not specify which fees must be considered finance charges in connection with APR calculations. Finally, neither the federal government nor any state have ever mandated or applied an APR disclosure to the purchasing of account receivables (as this bill proposes to do), because there is no fixed repayment term, most models do not include fixed daily payments, and there is no absolute right to repay.
   
   ETA and SBFA also raise concerns about the language used to describe some of the other disclosures. For example, SBFA observes that “prepayment penalties vary widely between providers and products. To require an explanation of the prepayment penalty along with the other disclosures will create confusion and significantly detract from the other disclosures. Most prepayment calculations are difficult to calculate and result in extremely long descriptions. This same issue exists in the consumer finance industry and is why the federally mandated consumer disclosures require only a statement of whether there is a prepayment penalty or rebate (in fact it is a violation of the applicable federal rules to disclose too much detail about prepayment penalties and rebates).”
   
   ETA takes issue with the way in which payments must be disclosed. It notes that the “manner” of a payment amount is ambiguous and should be deleted.
   
   Finally, both organizations raise concerns about the timing with which this bill requires disclosures to be provided. As drafted, this bill requires disclosures to be provided “at the time of extending a specific commercial financing offer to that recipient” and requires the provider to obtain the borrower’s signature on that disclosure before consummating the commercial financing transaction. ETA observes that disclosures provided too early might not have the most accurate data and could be misleading. The organization also encourages an amendment to specify that a borrower’s signature on a financing agreement that includes the required disclosure is sufficient.
   
7. Amendments:
   1. Several of this bill’s definitions would benefit from amendment.
      
8. For example, this bill defines the term “commercial loan” differently than it is defined under the CFL (this bill applies a $2,500 threshold, while the CFL applies a $5,000 threshold). Staff recommends conforming the definition in this bill with the definition in the CFL. Failure to do so could result in the same loan being called a commercial loan under this bill and a consumer loan under the CFL.
   
   • 1. This bill also defines the term open-end credit plan differently than the term open-end credit program is defined under the CFL (see Existing Law and This Bill sections of this analysis). Unless there is a compelling need for the two definitions to be different, it would be clearer if they were aligned. However, regardless of which definition this bill’s author wishes to use, staff suggests applying a “$5,000 or more threshold.” At present, this bill uses different thresholds for different types of financing.
        
     2. This bill defines a provider as one who facilitates commercial financing to a recipient. The term “facilitate” is extremely broad and can include advertising and marketing, lead generation and other referral activities, and brokering, as well as the lending activities the author is intending to cover. Both for clarity and for consistency with wording used elsewhere in the bill, staff suggests replacing the word “facilitates” with “extends a specific offer of.”
        
     3. This bill also states that a provider includes a person who facilitates commercial financing in partnership with a depository institution. Just as the word facilitate is vague and can be read very broadly, so can the term “in partnership with”? If this bill’s author wants to cover the bank partnership model, the language below would do so more clearly. The language suggested by Committee staff may require further refinement over time, but it more clearly reflects the intent of the author than the language that currently appears in the bill.
        
        Page 4, line 23, strike “’Provider’ includes a person who is,” strike lines 24 and 25, and insert: “Provider” also includes a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.
        
   1. As drafted, the “Total of Payments” disclosure requires the disclosure of “fees,” which could include late fees and other avoidable fees. Staff suggests amending this disclosure to clarify that it is intended to cover fees and charges that are contracted for or scheduled, such as origination fees, and is not intended to include avoidable fees such as late fees or returned payment fees.
      
      Amend Page 5, lines 8 through 11, as follows: (2) The total amount of funds to be paid by the recipient of the commercial financing pursuant to the financing agreement. This amount shall include all unavoidable fees and charges, including, if applicable, any fees or charges due at the time the financing is retired or paid in full. This shall be labeled “Total of Payments.” This disclosure shall clarify that “Total of Payments” does not include fees the recipient may avoid, such as late fees or returned payment fees.
      
   2. The “Payments” disclosure requires disclosure of the manner, frequency, and amount of each payment in the case of commercial financing with fixed, nonvariable period payment amounts. ETA correctly observes that the term “manner” is ambiguous in this context. Unless the author wishes to clarify what is meant by this term, staff suggests deleting it.
      
   3. This bill also requires providers to explain any prepayment penalties they may impose. As noted above, most prepayment calculations are difficult to calculate and result in extremely long descriptions. This same issue exists in the consumer finance industry and is why federally mandated consumer disclosures only require a statement of whether there is a prepayment penalty or rebate
      
      Staff suggests the following amendments, based on input from SBFA: Strike page 5, lines 31 through 34, and insert: A statement of whether there are any costs or discounts associated with prepayment of the commercial financing product, including a reference to the paragraph in the financing agreement that creates the contractual rights of the parties related to prepayment. This disclosure shall be labeled “Prepayment.”
      
   4. If concerns expressed about the use of APR and Estimated APR are sufficiently compelling that the author and this Committee wish to strike these terms from this bill, they would strike page 5, lines 16 through 24.
      
      If, instead, this bill’s author and this Committee wish to retain the requirement that APR or Estimated APR be included, amendments will be necessary to clarify accuracy requirements and tolerance allowances, specify what types of fees and charges must be included in the APR calculation in cases where TILA does not contemplate the type of financing covered by this bill, clarify what is meant by the term “estimated APR,” and specify when that metric must be disclosed.
      

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

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Opposition

Commercial Finance Coalition

Electronic Transactions Association

Small Business Finance Association

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