In December 2022, California’s new commercial lending disclosure law and complementary regulations went into effect, leading the way for other states to follow.
The new California law imposes disclosure requirements in commercial lending transactions. While this is not new for consumer lenders that are accustomed to complying with the Truth in Lending Act, this is uncharted territory in the commercial lending space. Like the federal Truth in Lending Act, the new California law is meant to provide prospective borrowers with an opportunity to see a concise summary of the obligation’s terms in an easy-to-read format. Ideally, this allows a prospective borrower to take the terms offered by two or more lenders and compare them, side by side, to determine the best offer.
California’s regulation — which does not apply to loans under $5,000 or over $500,000 — requires lenders to follow extremely prescriptive disclosure guidelines. The law covers closed-end transactions, open-end credit plans, factoring, sales-based financing, lease financing and general asset-based lending transactions. Required disclosures include, among others, the obligation’s annual percentage rate, amount financed, finance charge, payment methods and repayment terms.
Lenders exempt from complying with the law include depository institutions, lenders regulated under the federal Farm Credit Act and those making less than one commercial financing transaction in California in a 12-month period. Commercial financing transactions secured by real property are also exempt, as are transactions where the recipient is a dealer under the California Vehicle Code or a vehicle rental company.
Critics of the law have stated that the law’s exemption for depository institutions is inconsistent with the goal of giving commercial borrowers an apples-to-apples comparison of various financing offers. Those critics claim that borrowers will be unable to compare disclosures from various lenders when only some lenders are required to provide the disclosures.
California’s law has paved the way for others that are racing toward completion. New York, Utah and Virginia have already passed similar laws; expect more states to follow suit.