A new bill, SB 1235 (Steve Glazer, D-Sacramento), has been introduced in the California State Senate that would require disclosure of interest rates, as well impose other regulations, for commercial loans. Currently, interest rate disclosures have never been required for commercial loans. If passed, this bill would surely have significant effects on the commercial lending industry in California. Legal observers expect many trade groups to lobby against the bill in its present form.
The bill applies to Licensed California Financial Lenders, and thus some lenders may be exempt from its requirements. Also, it only applies to certain commercial financing loans, which are A/R financing over $5,000, cash advances of $5,000 or more, or a line of credit of $5,000 or more.
SB 1235 mandates a “Reg. Z” type disclosure of interest rates, which is part of all consumer installment contracts. If passed, SB 1235 would make California the first state to require Reg. Z disclosure for commercial loans.
The bill requires lenders to specify the term of the loan and repayment policies, primarily ACH disclosures regarding the latter, and any prepayment options and penalties. Finally, the disclosure language may not cause borrower confusion, must be in at least 10 point type and be in the language used to negotiate the loan. The borrower must initial each of these statements.
According to the Legislative Counsel’s Digest:
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.
Some critics point out that for many short-term, working capital loans, the calculation of payments requires a daily ACH analysis. Thus, the bill may cause substantial systemic problems for commercial lenders, who would have to make the necessary calculations and provide notice.
Stay tuned for more on this as legislation in future blogs!
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