California Requiring Disclosures for Business Purpose Loans

January 15, 2019 by Nema Daghbandan, Esq.

On September 30, 2018, Senate Bill 1235 was approved by Governor Brown (the “Act”). The Act imposes disclosure requirements designed to protect small businesses from predatory commercial lending practices by requiring certain disclosures to be provided by California Finance Lenders (“CFL”) to certain commercial borrowers.

The Act covers all “Commercial Financing” provided by CFLs greater than $5,000 but below $500,000, defined as “accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan[s], commercial open-end credit plan, or lease financing transaction intended by the recipient for use primarily for other than personal, family, or household purposes.” What is unique is that regulations generally cover consumer transactions which are primarily for personal, family, or household purposes and the Act is clearly aimed at regulating business-to-business transactions.

The Act generally requires lenders to provide the following disclosure in all Commercial Financing:

(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 payments.

(5) A description of prepayment policies.

(6) The total cost of the financing expressed as an annualized rate.

The Act applies to CFLs with some limited exemptions such as depository institutions which includes all banks and credit unions. The Act will does not apply to Department of Real Estate licensed lenders who are already required to provide disclosures in business purpose loan transactions.

More importantly, the Act does not apply to any transaction that is secured by real property so many non-conventional lenders will not need to comply with the new regulations. However, there are some situations where the Act will still apply:

  1. Loan hypothecations (loan secured by underlying loan even if the underlying loan is secured by real property).
  2. A loan secured by the shares of a company that is not otherwise secured by real property.

The Department of Business Oversight shall prepare regulations governing the specifics of disclosure and lenders shall not be required to provide the disclosure until the regulations are promulgated. The comment period for stakeholders is open now, and questions and comments will be accepted until January 22, 2019.

Once regulations are passed, Geraci Law Firm will prepare the necessary forms and offer guidance for lenders who must comply.

Concerned you’re complying with all lending regulations? Our expert team of attorneys can audit your closed loans for compliance.

Want to focus on growing your business rather than lending compliance? Have peace of mind by outsourcing your loan documents to the largest law firm in the country which is focused on the non-conventional lending space.

Geraci LLP is a vertically integrated organization focused on providing solutions for non-conventional lenders. We commonly provide the following services for our clients:

(1)          Entity formation, ongoing maintenance and licensing in all 50 states.

(2)          Securities offerings of all kinds (Reg D, Reg A, state offerings).

(3)          Lending compliance in all 50 states (guidance on licensing, usury, foreclosure, etc).

(4)          Loan documents in all 50 states.

(5)          Consumer lending compliance (TILA/RESPA/ECOA/HOEPA).

(6)          All loss mitigation (modification, forbearance, settlements, non-judicial/judicial foreclosure, inclusive of trustee services in CA, AZ and NV).

(7)          Creditor representation in bankruptcy/litigation in California.

(8)          Title claims of all kinds.

(9)           Website creation and review for compliance.

(10)         Investor pitchdeck preparation and review for compliance.

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