Where We Are Now
Effective since December 9, 2022, California’s legislation enforces the disclosure of specific information when extending a commercial financing offer of $500,000 or less. These regulations encompass various commercial financing transactions, including sales-based financing such as merchant cash advances. California was the first state to establish such safeguards for small business borrowers.
How We Got here
California’s Commercial Financing Disclosure Law (CFDL) came into effect four years after Governor Jerry Brown signed it in September 2018. The Department of Financial Protection and Innovation (DFPI) finalized the rules on June 9, 2022, leading to a six-month implementation period.
In December 2022, the Small Business Finance Association (SBFA) filed a lawsuit against the California DFPI Commissioner, claiming that the state’s custom formulas and disclosures lead to inaccuracies and confused customers. The lawsuit also argues that the federal Truth in Lending Act governs APR disclosures, potentially pre-empting these regulations.
Despite dismissal attempts in early 2023, a federal judge ruled in April 2023 that the case would proceed. Later that year, on December 4, the judge ruled in favor of the DFPI. Despite this setback, the SBFA persisted and filed an appeal with the United States Court of Appeals for the Ninth Circuit on December 29, 2023.
Meanwhile, Senate Bill 869 seeks to broaden licensing requirements for brokers handling commercial loans over $5,000. While brokers currently need licenses for specific commercial loans, this bill aims to extend these obligations to encompass more loan types.
The California Senate discussed the bill on January 18, 2024, and it was sent for further review.
What Funders Need to Know
The California legislation applies to entities who offer commercial financing—including non-bank partners and brokers.
Subject
The California legislation applies to entities who offer commercial financing—including non-bank partners and brokers.
Exemptions
Certain entities and transactions are not covered by these rules. This includes banks, depository institutions, loans backed by real estate, and lenders regulated under the federal Farm Credit Act.
Additionally, transactions below $5,000 or above $500,000 are exempt from these regulations. The rules also do not apply to individuals or businesses that engage in five or fewer relevant transactions in a 12-month period.
Compliance Requirement
Under current legislation, providers are not mandated to register to offer commercial financing in California. However, Senate Bill 869 may eventually require all commercial brokers to be licensed.
Disclosure Requirements
Providers must disclose information including the funding provided, finance charge, total payment amount, Annual Percentage Rate (APR), as well as other details akin to most other state disclosure laws.
Penalties
No penalties are stipulated in the law.
