California Code of Regulations › Title 10 - Investment › Chapter 3 - Commissioner of Financial Protection and Innovation › Subchapter 3 - Commercial Financing Disclosures › Section 931 - Estimates - Sales-Based Financing - Underwriting Method

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) This section shall apply only to
				sales-based financing.
(1) With respect to any
				assumptions about a recipient's future sales, income or receipts, and as an
				alternative to the methods described in section
				930 for calculating disclosures
				required by this subchapter, a provider may elect to calculate the required
				disclosures in accordance with this section.
(2) A provider shall calculate the
				disclosures using an "internal estimated sales, income, or receipts projection"
				through the particular payment channel or mechanism designated in the
				contract.
(3) The "internal
				estimated sales, income, or receipts projection" through the particular payment
				channel or mechanism shall be calculated using the best information reasonably
				available to the provider.
(4) Once
				every four months, a provider who makes disclosures based upon internal
				estimated sales projections shall conduct an audit of its commercial
				financings.
(A) The audit shall cover all
				sales-based financings paid off during the previous four-month period where the
				provider made disclosures based upon internal estimated sales projections,
				including transactions with contractually required true-up payments, but
				excluding transactions where:
(i) The provider
				or financer initiated legal action against the recipient in court or
				arbitration for breach of the contract or to collect amounts due under the
				contract;
(ii) The provider or
				financer stopped collection of amounts due under a contract after determining
				that the recipient had violated the terms of the contract; or
(iii) The provider modifies the contract
				terms pursuant to an agreement with a recipient.
(B) The provider shall calculate the
				retrospective annual percentage rate for each sales-based financing in the
				audit. With respect to financing where a lump sum payment is used to pay off
				the financing faster than required by the contract, a provider may calculate
				the retrospective annual percentage rate by ignoring the lump sum payment and
				assuming that the contract would have been repaid in periodic payments that are
				an average of the past periodic payments under the contract.
(C) The provider shall calculate the
				percentage of the difference between the disclosed annual percentage rate and
				the retrospective annual percentage rate for each sales-based financing in the
				audit. The provider shall subtract the disclosed annual percentage rate from
				the retrospective annual percentage rate for each sales-based financing in the
				audit, divide the resulting amount by the disclosed annual percentage rate, and
				multiply that number by 100. The percentage resulting from this calculation
				shall be called the "APR spread".
(D) The provider shall find the median APR
				spread for all sales-based financings in the audit. The median shall be called
				the "audited APR spread."
(5) After completing its audit, the provider
				shall calculate the weighted average of the audited APR spreads for the last
				three audits, the last five audits, and the last seven audits using the total
				number of transactions used to calculate the audited APR spreads for each audit
				period. This paragraph does not require a provider to calculate a weighted
				average for the last three audits if the provider has not conducted three
				audits, the weighted average for the last five audits if the provider has not
				conducted five audits, or the weighted average for the last seven audits if the
				provider has not conducted seven audits.
(A)
				If the weighted average for the last three audits is greater than 15 percent,
				the provider shall not utilize the method described in this section to
				calculate the required disclosure terms for 24 months, but shall instead employ
				the methods described in section
				930 unless the provider determines
				that the method described in section
				930 would have yielded a higher
				weighted average.
(B) If the
				weighted average for the last five audits is greater than 10 percent, the
				provider shall not utilize the method described in this section to calculate
				the required disclosure terms for 24 months, but shall instead employ the
				method described in section
				930 unless the provider determines
				that the method described in section
				930 would have yielded a higher
				weighted average.
(C) If the
				weighted average for the last seven audits is greater than 5 percent, the
				provider shall not utilize the method described in this section to calculate
				the required disclosure terms for 24 months, but shall instead employ the
				method described in section
				930 unless the provider determines
				that the method described in section
				930 would have yielded a higher
				weighted average.
(D) If the
				weighted average for the last three audits is 5 percent or less, the provider
				may reduce the frequency of the audit process required by paragraph (4) to once
				every twelve months. For any audit conducted twelve months following the
				previous audit pursuant to this subparagraph, the provider shall review all
				sales-based financings paid off during the previous twelve-month period, rather
				than the previous four-month period, but shall otherwise comply with the
				process required by paragraph (4).
(6) Following the end of the 24-month period
				described in paragraph (5) above, the provider may begin calculating estimated
				payments, term and annual percentage rate in accordance with this section only
				if the provider has made a good-faith effort to modify its method for
				calculating internal estimated sales projections to make its disclosures more
				accurate.
(7) If a provider must
				make additional estimates or assumptions other than an estimate of a
				recipient's future sales, income or receipts in order to provide disclosures
				required by this subchapter, the provider shall:
(A) Base those estimates or assumptions on
				the best information reasonably available to the provider at the time of the
				disclosure;
(B) State clearly that
				any disclosure based upon an estimate or assumption is an estimate by adding
				the word "estimate" to the descriptive language of any required disclosure
				under this subchapter; and
(C)
				State clearly any assumptions or estimates used as the basis for the disclosure
				in any description associated with the
				disclosure.