California is changing the lending landscape with a bill that is likely to be copied by other states in the not-too-distant future.
The Truth in Lending Act (“TILA”) is a federal law designed to ensure consumers are fully informed before making credit decisions by requiring full disclosure by finance providers. Surprisingly, there has never been a federal law that protects small businesses the same way TILA protects consumers. Now California is changing the lending landscape with a bill that is likely to be copied by other states in the not-too-distant future.
In response to complaints from small businesses about mistreatment and misrepresentations from finance companies, California approved a historic state law called the Small Business Truth-in-Lending Law (“SBTL”). The bill, also known as CA SB 1235, is the first of its kind in the nation. The SBTL is aimed at protecting small businesses from predatory commercial lending practices by creating transparency within the small business loan market.
The bill was approved in September 2018 with broad bipartisan support in the California Legislature, passing 28-6 in the Senate and 72-3 in the Assembly.
California’s SB 1235 covers all “commercial financing” between $5,000.00 and $500,000.00 intended for primary use other than personal, family, or household purposes. “Commercial financing” is defined as asset-based loans, accounts receivable loans, business loans and financing, open-ended lines of credit, factoring and merchant cash advance loans, and lease financing transactions.
The bill applies to non-depository financial institutions such as merchant lenders, private money lenders, and online finance companies, but exempts traditional depository institutions, including credit unions and community banks.
Previously, finance companies were not required to disclose the rate they were charging in a way that may have allowed borrowers to make informed decisions about their financing options. For example, loans and cash advances that were presented as flat rates around 20 percent. However, many business owners found out the actual annual percentage rate was upwards of 55%, or even higher.
While TILA required APR disclosure for credit cards, auto loans, mortgage, and other consumer loans, there was nothing on the books that extended that requirement to commercial financing. With SBTL, commercial lenders will now be required to provide an APR to their borrowers, which will allow them to compare loan costs with other lenders and make a more informed decision before committing to a specific loan product.
Similar to TILA, the SBTL requires that lenders clearly and consistently provide accurate details about the terms of the financing they offer to small businesses. The law requires lenders to disclose the: (1) total amount of funds provided; (2) total dollar cost of financing; (3) term or estimated term of loan; (4) method, frequency, and amount of payments; (5) description of defined prepayment policies; and (6) the annualized rate for the total cost of financing.
Though signed into law by California Governor Jerry Brown on September 30, 2018, the SBTL has yet to be implemented, and providers are not required to comply with the law until final regulations are in effect. That task falls to the Department of Business Oversight (DBO), which has already begun to develop rules and guidance regarding how APR’s are to be calculated so finance companies can provide this information to their borrowers with certainty and consistency.
Even though the DBO’s regulatory process may take several more months to finalize, now is the time to get your disclosure procedures in place so you are ready when the new law takes effect.