California Passes Small Business Truth-in-Lending Law
In response to complaints about small businesses being gouged by finance companies, on September 30, 2018, California enacted Senate Bill No. 1235, the so called “Small Business Truth-in-Lending Law (“SBTL”). It is the first of its kind in this country. It aims to protect small businesses from predatory commercial lending practices through better disclosure.
While the federal Truth in Lending Act imposes disclosure requirements for consumer loans, it does not protect business borrowers. SB 1235 covers “commercial financing,” defined to include asset based loans, receivable financing, commercial loans, commercial open-end credit plans, factoring, and merchant cash advances, for transactions over $5,000 but under $500,000. The bill applies to non-depository institutions, such as private money lenders and online lending platforms, but it exempts traditional depository institutions.
SBTL requires all lenders to clearly and consistently communicate their terms to small businesses seeking financing. Disclosures required by the law include the: (1) total amount of funds provided, (2) total dollar cost of the financing, (3) term or estimated term length, (4) method, frequency, and amount of payments, (5) description of prepayment policies, and (6) annualized rate of the total cost of financing.
Fortunately for the private money loan industry, the SBTL does NOT apply to loans secured by real property. However, there may be private money situations where it DOES apply:
- An unsecured loan to a business entity backed by a personal guaranty secured by a deed of trust on the real property of the guarantor;
- A collateralized loan transaction, that is, a loan secured by a pledge of an existing mortgage; or,
- A loan secured only by an assignment of a LLC membership or LP partnership interest (mezz debt).
The Legislature tasked the Department of Business Oversight with the job to develop regulations and hopefully model forms to implement the law.
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