Under legislation signed September 30, 2018, by Governor Brown, California will become the first jurisdiction in the United States to provide small business owners with the same protections that Truth-in-Lending laws have provided consumers for more than fifty years.
Senate Bill 1235, introduced and sponsored by Senator Steve Glazer, D-Orinda, will require lenders to provide certain disclosures with specificity, clarity, and consistency to small business owners at those instances that they offer them financing and close a transaction.
Glazer’s bill, which passed both houses of the Legislature with large, bipartisan majority votes, was modeled after recommendations from the Conference of State Bank Supervisors’ advisory panel on lending by financial technology (“FinTech”) firms. SB 1235 was supported by a broad coalition that included lenders, small business groups and advocates for policies that promote economic opportunity for all. The vote was 72-3 in the Assembly and 28-6 in the Senate.
SB 1235 addresses and remedies a growing problem in the small business finance market, which is quickly evolving and chiefly unregulated as online financing firms that offer innovative lending alternatives are replacing traditional lenders like banks.
In commenting about the law’s purpose and effect, Glazer stated “I applaud this new online lending industry because it is bringing capital to people who need it badly. “This law offers a modest measure – disclosure — to help level the playing field for small business owners. It will make California a leader in placing the interests of small business owners on par with the big players in the financial industry.”
Until the enactment of SB 1235, federal and state truth-in-lending and disclosure laws have applied only to consumer borrowers and loans. The prevailing attitude was that even the owners of the smallest business enterprises were sufficiently sophisticated to understand the dealings of the business world.
Today, this “presumption” of sophistication no longer holds true as studies by the U.S. Federal Reserve Bank and others have found that many entrepreneurs simply have very little knowledge of the finance industry. The result is that a problematic situation arises where small business owners “overborrow” and lenders are challenged to assist them in providing some remedy.
With the enactment of SB 1235, a lender will have to disclose certain facts at the time it offers financing of less than $500,000 to a business owner. These factual disclosures include:
- The total amount of financing;
- The total cost of financing;
- The length of the loan term;
- The frequency and amount of payments;
- Any pre-payment policies; and
- The annualized rate of interest.
The law applies to traditional term loans, lines of credit, merchant cash advances, lease financing, factoring, and asset-based financing. SB 1235 applies to online enterprises that act in partnership with banks to market and underwrite any financing ultimately made by a banking institution.
Regulations will be promulgated and adopted by the Department of Business Oversight to implement the law. These rules should provide guidance to lenders on the exact information necessary to be disclosed to comply with California law. While the law takes effect January 1, 2019, disclosures as required will not begin until after the DBO performs this function and completes the disclosure requirement formula.
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