On Sept. 30, Gov. Gavin Newsom signed Assembly Bill 2116 into law, in essentially the form discussed in my two previous articles. California will now require even more companies that provide or broker commercial financing to obtain licenses from the Department of Financial Protection and Innovation.
The good news is that the industry has time to prepare. The bad news is that it may need every minute.
AB 2116 covers commercial financing offers of $500,000 or less made to a qualifying small business or small-business owner. “Small business” generally means a for-profit business with annual gross receipts of no more than $16 million, subject to future adjustments.
Covered transactions include commercial loans, factoring, accounts-receivable purchases, sales-based financing, asset-based lending, open-end credit and “lease financing.” The latter generally refers to leases that create security interests under the Commercial Code. A conventional true lease should not become regulated merely because someone calls it equipment financing. As always, however, labels are no substitute for substance.
The law also regulates brokers and defines them broadly. A company may be acting as a commercial financing broker if it transmits sensitive information in expectation of compensation, participates in negotiations, advises an applicant based on financial information, helps prepare application documents, communicates an approval decision or charges the applicant a fee. Calling oneself an “ISO,” “consultant,” “vendor” or “technology platform” will not control the analysis.
The statute contains exemptions, including for specified regulated institutions, real-property-secured transactions, certain vehicle-dealer and rental-company financings, and limited numbers of incidental transactions. Those exemptions should be applied carefully. The statute is not written as a general exemption for everyone whose program ultimately involves a bank.
Most of the new regulatory provisions become operative Jan. 1, 2028. Beginning July 1, 2028, licensing will extend beyond conventional commercial lending to a much broader range of commercial financing. Providers and brokers of covered transactions, including factoring, accounts-receivable purchases, merchant cash advances, asset-based financing and certain lease financing, will need the appropriate license unless an exemption applies. A company that submits a complete application by July 1 may continue operating while the department considers it.
The statute appears to create an uncomfortable six-month transition issue. Section 22658 protects agreements entered into before Jan. 1, 2028, while the licensing prohibition does not become operative until July 1, 2028. The department will need to issue guidance on transactions entered into between those dates and on when applications for the new licenses may be submitted. The statute also raises questions about how companies already holding California finance lender licenses will transition into the new licensing categories. “Hopefully,” of course, is not a compliance strategy.
Licensing is only the beginning. The law imposes recordkeeping, reporting, advertising and examination requirements; prohibits pre-default confessions of judgment and powers of attorney; restricts contractual confidentiality provisions; and expressly prohibits unlawful, unfair, deceptive or abusive practices. Brokers must publish the average and maximum annual percentage rates of transactions facilitated during the preceding year. Providers must begin filing detailed annual transaction and APR reports in 2029.
Most important, the Legislature retained the provision making a covered agreement unenforceable unless the provider was licensed, had submitted a complete application and was awaiting a decision, or entered into the transaction before Jan. 1, 2028.
That is not merely an administrative penalty. It may determine whether the provider, or perhaps even an assignee, can collect the money owed. Under existing California law, courts have held that the absence of a required finance lender license does not, by itself, render a commercial loan illegal or unenforceable. See Side, Inc. v. Official Partners New York, LLC, 2025 WL 81576 (N.D. Cal. Jan. 13, 2025). AB 2116 changes that rule prospectively. For covered agreements entered into under the new law, the absence of the required provider’s license may make the entire agreement unenforceable.
The implications for portfolio acquisitions, warehouse facilities and securitizations are significant. Purchasers and funding sources may need to treat the originator’s licensing status as an asset-eligibility requirement. Transaction documents should address licensing through representations, warranties, covenants, indemnities and mandatory repurchase provisions. A portfolio may have excellent payment performance and pristine documentation, but that will offer little comfort if some of its contracts are legally unenforceable.
Brokers may face a similar problem. Many broker agreements require the broker to warrant that transactions were lawfully originated, are enforceable and comply with applicable law. A broker that places a transaction with an unlicensed provider, falsely represents its own licensing or compliance status, or breaches a contractual compliance warranty could face indemnity, commission clawback or repurchase claims from the funding source, depending on the language of the broker agreement. Brokers should review those provisions before assuming that licensing is solely the provider’s responsibility.
Commercial finance companies should identify every entity involved in their California transactions and determine what each one actually does. They should review true-lease classifications, bank partnerships, broker relationships, advertisements, data flows, licensing representations, portfolio eligibility criteria and repurchase obligations.
January 2028 may seem far away. It is not.
AB 2116 began as another California regulatory proposal. It is now an implementation project. Companies that begin that project early will have a substantial advantage over those that wait until 2028 to discover that their contracts, and not merely their licenses, may be at risk.
Kenneth C. Greene is principal at the Law Offices of Kenneth Charles Greene.
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