Source: https://www.paulhastings.com/publications-items/details/?id=b2e9b66b-2334-6428-811c-ff00004cbded
Timestamp: 2019-11-14 11:16:16
Document Index: 717911795

Matched Legal Cases: ['art 1026', '§ 2200', '§ 22002', '§ 1', '§ 22502', '§ 22050', '§ 22050', '§ 22800', 'art 1026', '§ 22804', '§ 22002', '§ 1', '§ 22803']

By Lawrence Kaplan & Lauren Kelly D. Greenbacker
California became the first state to mandate specific disclosures for a broad array of commercial financings under amendments to the California Financing Law (“CFL”) adopted on October 1, 2018 that are expected to become fully effective no earlier than 2020 (the “California Disclosure Law”).[1] As described below, these new disclosure requirements apply to a broader subset of financial services providers than those previously subject to the CFL’s licensing requirements and would broadly apply to providers of commercial financing in amounts equal to or less than $500,000.
The CFL[3] historically has been a licensing regime for non-bank providers of credit originated in California or to borrowers located in California. A key benefit of maintaining a CFL license is that a licensee is exempt from California’s 10% Constitutional usury limitation.[4]
Governor Jerry Brown approved the California Disclosure Law on October 1, 2018; the law will become effective as of January 1, 2019, but will likely not be fully implemented until at least 2020 (upon the promulgation of the necessary implementing regulations).[13] During this year-long implementation period, the California Department of Business Oversight (“DBO”) will be charged with promulgating implementing regulations setting forth, among other things, required definitions, methods of calculating the figures that must be disclosed, and time, manner, and format of the required disclosures.
Moreover, California will be electing a new governor in November, and a new DBO Commissioner is expected to be appointed and confirmed by early 2019. This new DBO Commissioner will likely play a substantial role in guiding this process, which due to the complexity of the necessary regulations is unlikely to be complete until 2020.
Paul Hastings attorneys actively represent clients seeking CFL licenses and exemptions thereunder. A summary of the existing provisions of the CFL and the scope of their applicability, is available through a previously published Paul Hastings client alert “The California Finance Lenders Law: Gaining Traction with Both Lenders and Regulators.”
[1] New Section 22780.1 will be added to the California Finance Code. The text of the bill is available at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235.
[2] See 12 C.F.R. Part 1026.
[3] Cal. Fin. Code §§ 2200 et seq.
[4] Cal. Fin. Code § 22002; see also Cal. Const. art. XV, § 1.
[5] Cal. Fin. Code § 22502. These provisions further provide that: “For purposes of determining whether a loan is a commercial loan, the lender may rely on any written statement of intended purposes signed by the borrower. The statement may be a separate statement signed by the borrower or may be contained in a loan application or other document signed by the borrower. The lender shall not be required to ascertain that the proceeds of the loan are used in accordance with the statement of intended purposes.” Id.
[6] As the California Disclosure Law does not impose licensing obligations on alternative finance providers, the new law effectively confirms existing industry practice that entities offering alternative finance products, such as merchant cash advances, are not subject to the licensing requirements of the CFL.
[7] Similar to the language set forth under the existing commercial loan provisions of the CFL, the California Disclosure Law specifies: “For purposes of determining whether financing is commercial financing, the provider may rely on any written statement of intended purpose signed by the recipient and is not required to ascertain whether the proceeds of the commercial financing are used in accordance with the recipient’s statement of intended purposes.”
[8] This exemption is consistent with the current exemption from licensure requirements under the CFL. See Cal. Fin. Code § 22050.5. We note, however, that Section 22050.5, which expires on January 1, 2022, has in the past expired and then later been added back into the CFL—most recently as of January 1, 2017.
[9] This exemption is consistent with the exemption from licensure requirements under the CFL. See Cal. Fin. Code § 22050(e).
[10] California Disclosure Law, § 22800(n).
[11] The California Disclosure Law does not impose any new requirements on consumer lending, which remains subject to the disclosure regime under federal Regulation Z, See 12 C.F.R. Part 1026.
[12] These new requirements are currently scheduled to sunset on January 1, 2024.
[13] Cal. Fin. Code § 22804(c) (“A provider shall not be required to comply with the disclosure requirements of this division until the final regulations are adopted by the commissioner pursuant to this section and become effective on the applicable date described in Section 11343.4 of the Government Code.”)
[14] Cal. Fin. Code § 22002; see also Cal. Const. art. XV, § 1.
[15] See Cal. Fin. Code § 22803(a) (“As an alternative to the disclosures required in subdivision (b) of Section 22802, a provider who offers commercial financing that is factoring or asset-based lending and that offers the recipient an agreement that describes the general terms and conditions of the commercial financing transaction that will occur under the agreement, may provide the following disclosures as an example of a transaction that could occur under the general agreement for a given amount of accounts receivables . . .”).