California Truth in Lending Law Will Apply to Small Business Loans

California has become the first jurisdiction in the United States to provide small business owners with consumer protections under Truth-in-Lending laws.

Under newly enacted Senate Bill 1235, commencing January 1, 2019, lenders are now required to provide certain disclosures with specificity, clarity and consistency to small business owners when they offer them financing and close a transaction. Until enactment of SB 1235, federal and state truth-in-lending and disclosure laws have only applied to consumer borrowers and loans.

With the enactment of SB 1235, a lender will have to disclose certain facts at the time it offers financing of less than $500,000 to a business owner. These factual disclosures include:

• The total amount of financing;
• The total cost of financing;
• The length of the loan term;
• The frequency and amount of payments;
• Any pre-payment policies; and
• The annualized rate of interest.

The new law applies to traditional term loans, lines of credit, merchant cash advances, lease financing, factoring, and asset-based financing as well as online enterprises that act in partnership with banks to market and underwrite any financing ultimately made by a banking institution.

Regulations will soon be forthcoming from the Department of Business Oversight that should provide guidance to lenders on the exact information necessary to be disclosed to comply with California law. Required disclosures will not be mandatory until the Department of Business Oversight adopts the regulations and completes the disclosure requirement formula.

If you are seeking a business loan, or you loan money to small businesses, contact your legal counsel to discuss the impact of this new law.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.