The California Department of Business Oversight (DBO) has issued an invitation for comments from stakeholders in developing regulations to implement SB 1235, the bill signed into law on September 30, 2018 that requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances.  Companies providing such financing are not required to comply with the new disclosure requirements until the DBO’s final regulations become effective.

The DBO’s invitation provides an important opportunity for providers of commercial financing products to engage with and educate the DBO as it develops proposed regulations.  Comments must be submitted by January 22, 2019.

In the invitation, the DBO lists the following 14 specific potential topics for rulemaking:

• Definitions (The DBO’s questions include whether the definitions can be read to cover transactions, individuals, or entities not intended to be regulated by the disclosure requirements or result in ambiguity regarding whether a transaction, individual, or entity is subject to the disclosure requirements.)

• Commercial financing requiring estimated term disclosures (The DBO asks what commercial financing transactions may require an estimated term disclosure and why and suggests that stakeholders provide sample contracts that may require such a disclosure.)

• Disclosure of method, frequency, and amount of payments for commercial financing with flexible or contingent repayment obligations (The DBO suggests that stakeholders provide examples of these types of financing and asks how providers should make the disclosures required for such contracts.)

• Annualized rate disclosure (The DBO notes different methods that might be used for the annualized rate disclosure and asks about the benefits and drawbacks of each disclosure and ways to reduce potential confusion to financing applicants caused by the disclosure.)

• Types of commercial financing (The DBO asks for examples of transactions other than fixed-rate, fixed-payment financing that are subject to SB 1235 (noting such examples may include merchant cash advances and recourse and non-recourse factoring), anticipated compliance obstacles in such transactions, and how the DBO can address such obstacles.)

• Types of financing requiring estimated annualized rates (The DBO asks for the types of commercial financing that will require estimated annualized rates and why.)

• Fees and charges included in an annualized rate calculation (The DBO asks what fees and charges should be included in the calculation.)

• Calculating estimated terms and estimated annualized rates (The DBO asks how estimated terms and rates should be calculated for the transactions subject to SB 1235, such as transactions with payments set as a percentage of a business’s gross receipts.)

• Reliance upon internal underwriting criteria to calculate estimated terms and estimated annualized rates (The DBO asks if the calculation methodology it establishes should require a provider to rely upon the internal assumptions or calculations it used to underwrite the transaction.)

• Explanatory and qualifying language in connection with estimated terms and estimated annualized rates (The DBO asks what explanatory and qualifying language providers should include when disclosing such estimates.)

• Disclosures for factoring and asset-based lending transactions with master financing agreements (The DBO asks what rules it should establish to clarify when disclosures based on estimates are permitted and to govern what examples, such as financing amount, a provider may use in disclosures.)

• Tolerances (The DBO asks what accuracy requirements and tolerances it should establish and why.)

• Disclosure formatting (The DBO asks what information should be highlighted or prioritized and about the placement and font to be used.)

• Prepayment policies (The DBO asks what prepayment policies and charges are common for transactions subject to SB 1235 and how such policies and charges are currently characterized to customers.)