Andrew K. Alper,
Vice President & Shareholder,
Frandzel Robins Bloom & Csato

Since September 2018, when Assembly Bill 375, otherwise known as the California Consumer Privacy Act of 2018, was enacted in California, commercial finance has contended with consumer-like disclosures required for certain commercial transactions required with respect to lending transactions in California. Other states, including New York and Utah, have followed California’s lead with respect to commercial finance disclosure laws, but the laws passed in New York and Utah are not yet effective as of the date of this article, while other states have only introduced bills for similar types of disclosure requirements in commercial transactions.

California’s disclosure law is codified in Financial Code §§22800 (the statutes). However, the law passed was only the framework for the disclosure requirements and the statutes tasked the California Department of Financial Protection and Innovation (DFPI), which regulates lending in California, to create the regulations which would implement the law. Since 2018, the DFPI has created the regulations for the statutes, but it requested multiple comment periods, and various lenders, law firms, trade associations and other groups submitted comments and requested changes.

Following this process, the regulations in California are now final and will become effective and enforceable on Dec. 9.

For those who don’t know, California’s disclosure law requires lenders who facilitate commercial financing to a borrower to disclose specific information relating to the major terms of the financing by extending a specific offer of commercial financing before the loan documents are presented to the borrower. The lender must obtain the signature of the borrower on the specific commercial offer of financing before any loan or lease documents are executed. The disclosure law also mandates what the specific offer of commercial financing (the offer) should look like and what information it must contain so the borrower can compare the lender’s offer with offers from other lenders. Once the offer is signed, the loan documents for the financing are presented for signature.

Because of space limitations, this article is only an overview of California’s disclosure law and because of its complexities, it is recommended that any lender, borrower or broker consult with counsel to comply with the law.

Basic Definitions

Some of the more important definitions in California’s disclosure law are as follows:

• A commercial loan is any loan of more than $5,000 not used for personal, family or household purposes.
• A commercial financing transaction means any accounts receivable purchase transaction, including factoring, asset-based lending, commercial loans, commercial open-end credit, sales-based lending or lease financing transaction.
• A specific offer of commercial financing occurs at any time a specific commercial financing offer is quoted to a recipient (see definition later in this section).
• Lease financing means a lease of goods if the lease includes a purchase option that creates a security interest in goods under Sections 1201 and 1203 of the Uniform Commercial Code. Another way to define lease financing is that the lease is not a “true lease” under California law.
• A provider is the lender or other person who extends a specific offer of commercial financing to a recipient (see definition later in this section). There are some differences in the definition of a financier and a provider, but for the purpose of this article, these terms can be used interchangeably.
• A recipient is a borrower or lessee under lease financing who is presented with a specific offer by a provider less than or equal to $500,000.

These are not the only definitions in the disclosure law, but they will be most helpful to understand this article.

Transactions Covered

As indicated in the definition section, under the California disclosure law, commercial financing relates to the following types of transactions: open-end financing (credit line), closed-end financing (loan/equipment finance agreement), sales-based financing, factoring transactions, lease financing (not true leases as defined by law), asset-based financing and other forms of financing not set forth here.

In California, the amount financed by the provider that requires the furnishing of disclosures to the recipient is less than or equal to $500,000. If the transaction exceeds $500,000, no disclosures need to be given by the provider to the recipient. For an open-end credit transaction, the amount of the credit limit is the amount of the credit line. For an asset-based lending transaction or a factoring transaction, if the transaction is expected to exceed $500,000 at any time during the transaction, then no disclosures are necessary. For a lease financing transaction, if the lessor does not select, manufacture or supply the goods leased, then the amount of the funding is the price that the provider would sell or acquire the goods for in a cash transaction minus any down payment or deposit paid by the recipient, including any certain costs. In all other transactions, it is the amount of funds to be provided to the recipient in connection with the transaction.

The disclosures only apply to recipients whose business is principally directed or managed from California. The provider may rely on any representation by the recipient as to whether the recipient is principally directed or managed from California or on the business address provided by the recipient in any application for financing.

Lender Exemptions

Besides the foregoing limitations on having to provide disclosures to recipients, the following persons and/or types of transactions are also exempt from having to provide the disclosures for a loan or lease financing in California:

• Any provider entering into a true lease and not a lease intended as security
• Any depository institution, such as a bank, trust company, industrial loan company, federally chartered savings and loan association, federal savings bank or federal credit unions, although subsidiaries are not exempt
• Any commercial transaction secured by real property
• A lender regulated under the Federal Farm Credit Act
• Motor vehicle dealers and rental vehicle companies as defined under California law
• An individual commercial transaction in an amount of more than $500,000
• Any person who enters intro no more than one commercial financing transaction in California in a 12-month period or any person who makes five or fewer commercial financing transactions in California in a 12-month period, with those loans incidental to the business of the person relying on the exemption

Disclosure Content Requirements

California’s disclosure laws are very specific as to what information must be disclosed and how it must be disclosed. The top of any disclosure form must state in no less than 16-point Times New Roman font “OFFER SUMMARY FOR __________________________________________________ (a one- to five-word description of what the financing is for, such as OFFER SUMMARY FOR LEASE FINANCING).

While there is no safe harbor form provided in the regulations, there are strict guidelines as to what must be in the offer summary and how that information must be formatted. Throughout an offer summary, depending on what column is being disclosed, font size ranges from anywhere between 10- to 16-point Times New Roman font. There are columns which must be set up with a 3:3:7 ratio and no column may contain an explanation that exceeds 60 words.

The necessary information which must be in the various columns is as follows:

1. The total amount of commercial financing and the disbursement amount, if different from the financing amount, after any fees deducted or withheld at disbursements.
2. The finance charge.
3. The annual percentage rate or APR expressed as a yearly rate, inclusive of any fees and finance charges and calculated in accordance with the Truth in Lending Act, Regulation Z which is found in 12 Code of Federal Regulations §1026.22.
4. The term of the financing.
5. The total repayment amount (disbursement plus finance charges). For fixed payments, the payment amount and frequency (daily, weekly, monthly, quarterly) and, if the term is more than one month, the average monthly payment amount (if there are different payment amounts over the term, it is the average of all payments for the entire term of the loan). For variable payment amounts, the full payment schedule or description of the method used to calculate the amounts and the frequency of the payments, and if the term is longer than one month, the estimated average monthly payment amount.
6. Prepayment penalties.

In addition, above the signature on the offer summary, the provider must include the following text:

“Applicable law requires this information to be provided to you to help you make an informed decision. By signing below, you are confirming that you received this information.”

The recipient’s signature and the date should follow this text.

Following the date, there is a separate section called Itemization of Funds, which breaks down the financing. This section of the disclosures has a format which is contained in Regulation 956, which is where specific fees are disclosed, such as broker fees, appraisal fees, inspection fees and other fees.

Brokers Under the Disclosure Law

California’s disclosure law expects that brokers may transmit disclosures to recipients. A broker is anyone who, for compensation, participates in the financing negotiation, counsels or advises the recipient about financing options, participates in the preparation of any financing documents, gathers financing applications or delivers the documentation to the provider, communicates financing decisions or inquiries to the recipient and/or obtains the recipient’s signature on the financing documents.

The provider is responsible for preparation of the disclosures, not the broker. If the provider furnishes the disclosures for the broker to provide to the recipient, the broker must not alter it and present it “as is” to the recipient. If the broker is transmitting the disclosures, then the broker must provide evidence of the transmission to the provider, including the date and time of the transmission.

No offer can be presented by the broker or the provider to the recipient until the disclosures are provided to the recipient.

Since the broker cannot negotiate or alter the offer presented to the recipient, the broker has no liability to the recipient if the disclosures do not comply with the disclosure law. However, if the broker makes a representation concerning the commercial financing transaction which is not in conformity with the offer, the broker may have liability to both the provider and recipient and also have an issue with the DFPI for breaching its duties. Brokers are also required to maintain a copy of the disclosures presented to the recipient for four years after it is presented to the recipient.

Lastly, brokers can expect their broker agreements with providers will be modified to include the broker’s duties and obligations under the disclosure law.

Conclusion

This article is just a short summary of some of the relevant aspects of California’s disclosure laws, which are complex. Moreover, there are areas of the disclosure law which are still not clear and, therefore, providers, recipients, brokers and the DFPI will have to work through the disclosure law as it evolves and as various transactions create disclosure problems and issues not covered or contemplated in the disclosure laws.

Andrew K. Alper is a vice president and shareholder with the law firm of Frandzel Robins Bloom & Csato in Los Angeles. The firm specializes in representation of all lenders and secured creditors with a large concentration of clients in the equipment leasing and real and personal property secured transactions areas. Alper’s practice includes litigation, documentation, insolvency, transactional matters and all matters affecting lenders and lessors except for tax related matters.