On April 7, 2021, in response to public comments, the California Department of Financial Protection and Innovation (DFPI) issued redlined modifications to its proposed regulations for SB 1235, a groundbreaking law requiring consumer-like disclosures for certain types of commercial financing. Comments on the proposed changes are due on April 26, 2021; DFPI will not consider comments on any unchanged aspects of the regulations.
SB 1235 was signed into law by then-Governor Jerry Brown on September 30, 2018, but it will not take effect until DFPI adopts regulations specifying the form and content of the required disclosures. Since then, there have been five rounds of comment solicitations and four sets of proposed or modified regulations. There also was a public hearing in November 2020.
The redline released by DFPI is 52 pages, with too many proposed changes to be discussed in detail here. The changes (or absence of changes) we view as most important are as follows:
- The modified regulations continue to require use of the annual percentage rate (APR) metric, rather than annualized cost of capital (ACC), to disclose the total cost of financing as an annualized rate. This appears to be a final decision, which will make it difficult if not impossible for many commercial finance companies to comply given the significant challenges of calculating APR on products with substantial variance in the amounts and timing of payments or remittances.
- The modified regulations continue to require all disclosures to be made whenever a payment amount, rate, or price is quoted based on information provided by the proposed recipient of financing, rather than simply before the transaction is consummated as required by Regulation Z for consumer loans. Many companies will not be able to comply with this requirement absent radical changes to their California application and underwriting procedures, as it is common today for companies to have preliminary discussions with applicants about potentially available financing terms before full underwriting has been completed. Comments likely will be considered on this requirement, which is inconsistent with the language of the statute and possibly an unconstitutional restriction on commercial speech.
- The modified regulations continue to require disclosures regarding “reasonably anticipated true-ups” on merchant cash advances, despite the fact that such true-ups are by definition never anticipated.
- Although the modified regulations continue to require the use of loan terminology to describe the terms of sales-based financing such as merchant cash advances, they now include some limited safe harbor language stating that the use of such terminology, by itself, shall not constitute evidence that the transaction is a loan. There also are new tolerances for APR disclosures and limited safe harbors for certain inadvertent disclosure errors.
- Although DFPI previously indicated that the final regulations would take effect at least six months after adoption, language in the notice accompanying the latest round of modifications suggests that the effective date could be sooner. This obviously is a critical issue to be commented upon, given the huge operational difficulties many companies will have in complying.
This may be the last opportunity for public comments before the regulations are finalized, so we urge commercial finance companies and their trade associations to take advantage of it. If you need assistance preparing a comment letter or complying with the law when it takes effect, please contact any of the authors or the Manatt professional with whom you work.