These final regulations, once in effect, will require certain commercial finance providers to provide consumer-type information modeled after the federal Truth in Lending Act at the time such providers offer specific commercial finance offers to commercial borrowers. . Regulations require, among other things, disclosure of a transaction’s annual percentage rate, amount financed, finance charges, payment methods and repayment terms, including prepayment policies.
The regulations cover a wide range of trade finance transactions, including closed-end transactions, indefinite credit schemes, factoring, sales-based financing, certain lease financings and asset-based lending. Disclosures must follow very specific content and format requirements for each category of transaction covered, including specific tables that must be used and content that must appear in specific rows and columns of the tables.
Several entities and transactions are excluded from the scope of California regulations, including banks and other depository institutions; transactions secured by real estate; certain transactions involving vehicle dealerships, vehicle rental companies or affiliates; and lenders governed by the federal Farm Credit Act. In addition, transactions below $5,000 or above $500,000 are not subject to regulation.
The regulations also will not apply to any person or entity who does not complete more than one Applicable Transaction in California in a 12-month period, or to a person or entity who completes five or fewer Applicable Transactions. that are incidental to the person’s or entity’s business in California. a period of 12 months. While these last two exemptions mirror licensing exemptions under the California Finance Act (CFL), commercial finance providers should note that the scope of these regulations as a whole does not accurately reflect the scope of the CFL. In other words, transactions may be subject to this regulation even if they are not loans subject to the CFL.
California’s final rule is a precursor to a series of similar requirements that will soon be in effect in other states. Like California, New York has enacted legislation requiring consumer-type disclosures for certain trade finance transactions, as noted in our previous Customer Alert. The New York regulations will likely be finalized soon and should require disclosures with similar content and format to the California regulations. However, New York’s requirements will be broader in some respects, including applying to transactions of up to $2.5 million.
Earlier this year, two other states joined California and New York in adopting similar legal requirements for commercial finance disclosure. On March 24, 2022, Utah Governor Spencer Cox signed into law SB 183. And on April 11, 2022, Virginia Governor Glenn Youngkin signed into law SB 1027. Virginia’s legislation is expected to take effect on November 1, 2022; Utah’s law is expected to go into effect on January 1, 2023. Unlike the other three states, Utah’s law includes a requirement that covered entities register with the Utah financial services regulator. Utah, Utah Department of Financial Institutions.
Several other state legislatures have considered bills this year that would impose similar requirements on commercial funding disclosures, including Maryland, Missouri, New Jersey and North Carolina. While these states have not enacted such legislation as of the date of this alert, it seems only a matter of time before other states follow suit with California, New York, Utah and Virginia. . Covered entities should be aware of this trend and should be prepared to provide this information in California and other states implementing similar requirements.
The author would like to thank summer legal assistant Zachary G. Garrett for his contribution to this client alert.