After an almost two-year regulatory process, the California Department of Financial Protection and Innovation (DFPI) adopted final administrative regulations on June 9, 2022 to implement the state's 2018 commercial financing disclosure law. Most importantly, the final rules come with a long-awaited effective date: December 9, 2022. The effective date honors prior DFPI statements that a six-month window for compliance would be afforded to covered providers of business-purpose financing.
As industry observers will know by now, California SB 1235 requires a wide variety of providers of business-purpose financing to disclose certain information to a recipient at the time of extending a commercial financing offer of $500,000 or less and to obtain the recipient's signature on the disclosure before consummating the commercial financing transaction. Beginning in 2020, the DFPI introduced a series of proposed rules for public comment. The proposed rules described at a high level of detail the formatting and content of disclosures that covered providers must provide to recipients in accounts receivable purchase transactions, merchant cash advances, factoring, asset-based lending transactions, commercial loans, commercial open-end credit plans and lease financing transactions intended by the recipient for use primarily for other than personal, family or household purposes.
Providers of small business financing that have studied the several iterations of the DFPI's proposed rules to glean a sense of what their compliance obligations will look like once final rules are promulgated will not have to re-invent the wheel in response to these final rules. The changes from the most recently issued version of proposed rules published in November 2021 are minor technical changes to wording and numbering. That means that companies that have analyzed the applicability of the law's requirements to their business model, and have begun preparing their systems to generate California commercial financing disclosure forms, are already well on the way to compliance. On the other hand, no new exemptions or substantive clarifications are included with the DFPI's final rules.
The DFPI's Final Statement of Reasons details the many comments submitted by stakeholders (such as regulated entities and trade associations) and the DFPI's responses, for those wanting a closer look at the deliberative process involved in adopting the rules. The Final Statement addresses the agency's decision not to allow a covered provider to use a federal Truth in Lending Act-compliant disclosure to satisfy the California disclosure law, confirms that the DFPI will not read an exemption for subsidiaries and affiliates of depository institutions into the law, and confirms that the DFPI does not presently intend to publish sample disclosure forms, among other topics.
The California law's December 9, 2022, effective date places it ahead of New York's 2020 law, which does not yet have an official effective date but has its own six-month grace period that has not yet started running. Virginia's April 2022 law technically could take effect first, although we would not be surprised to see Virginia's effective dates (July 1, 2022, for disclosures; November 1, 2022, for registration) pushed back to allow time for administrative regulations to be promulgated. Utah's March 2022 law does not take effect until January 1, 2023, at the earliest.
Given the DFPI's final rule adoption, all future questions about the meaning or applicability of the California law will have to be answered by regulator guidance or, less ideally, enforcement. Providers of business financing should prepare to be in compliance with their California disclosure obligations by December 9, 2022.
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