Introduction
New regulations affecting commercial credit of less than $500,000 have been rolled out and will become effective in December 2022! The question is, do you need to pay attention to them? If you are in the business of making commercial loans[1] in an amount of less than $500,000, the answer is… well, maybe!
Why Do We Have New Regulations for Commercial Loans?
During 2018 California enacted a law concerning disclosures that must be made on commercial loans of less than $500,000. One of the primary objectives was to make consumer-like loan disclosures (interest rates, total cost of the loan, etc.) applicable to small commercial loan transactions. Pursuant to the law, a new Division 9.5 was added to the California Finance Code.
Since that time, the California Department of Financial Protection and Innovation has been laboring to develop the necessary regulations to implement this law. The regulations were recently finalized and become effective on December 9, 2022.
Which Lenders are Required to Comply with the Commercial Loan Disclosure Regulations?
The short answer is many lenders are unaffected! The law is directed to lenders and transactions of less than $500,000, which is below the minimum loan amount for many providers, and even where a loan is below that size limit, numerous other exceptions might apply. By way of example, the following lenders and loan transactions are excepted from the law: banks and depository institutions; lenders regulated under the federal Farm Credit Act; any loan secured by real estate; and most wholesale auto finance transactions. As well, the exception applies to any person who makes not more than one commercial financing loan during a 12-month period or any person making five or fewer commercial financing transactions during any 12-month period that are incidental to the person making the loans.
That said, numerous non-institutional factoring companies, asset- based lenders and leasing companies (by way of example only; others also will be required to comply), as well as parties who may loan funds periodically as an adjunct to their business, will need to comply with respect to those transactions.
Conclusion
As is often the case, the devil may be in the details concerning application of the law to you. If you have a question about the new law’s applicability, we suggest you consult with legal counsel who can review your unique circumstances. If the commercial loan disclosure law does affect your business, we suggest the time to gear up for implementation is now so you will be ready to comply on the December 9, 2022 implementation date.
This blog is written as of September 12, 2022. Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.
All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.
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[1] A “commercial loan” means a loan of $5,000 or more which is not for personal, family, or household purposes. (CA Fin Code § 22502)
