Increased regulation of commercial financing shows no signs of stopping. California SB 1482, which would require commercial financing providers and brokers to register with the California Department of Financial Protection and Innovation (DFPI), recently passed the Senate 39–0 (with one abstention) and will move on to the Assembly. The law would require providers and brokers of certain commercial financing products that are not currently covered by California's existing lender licensing regime, including merchant cash advances, factoring, and lease financing, to register with DFPI.
Scope of the Proposed Law
The bill appears to be targeted primarily, although not exclusively, at financers not currently subject to the California Financing Law (CFL). The CFL has long required commercial lenders and brokers acting on behalf of such lenders to be licensed in the state. However, certain commercial financing products that do not meet the legal definition of a "loan" are not subject to the CFL.
The new proposed registration requirement applies to "commercial financing" as defined in California Financial Code Section 22800(d), which term includes, among other things, closed-end and open-end loans, factoring, and accounts receivable purchase transactions (including merchant cash advances). Section 22800 is part of California's commercial financing disclosure law, which was enacted in 2018 and went into effect in December 2022 after DFPI promulgated implementing regulations. As such, any company subject to the existing disclosure requirements would also be subject to the new registration requirement.
The bill also includes substantive conduct requirements, including prohibitions on confessions of judgment and on attaching or garnishing any of a recipient's money held in an account at a depository institution.
Will Some Companies Have to Register Twice?
Curiously, as currently constituted, the law does not exempt current CFL licensees from the registration requirement. Some companies offer multiple products, some already requiring CFL licensure and some subject only to the proposed law. As currently drafted, we read the proposed law to require duplicative registration by such companies, which would be counterintuitive and unnecessarily burdensome.
While the law would require covered entities to "register" with DFPI, in fact it is more akin to a traditional licensing regime. Financing providers would be required to provide detailed information and documentation regarding their business activities and their control persons and to pay annual registration and assessment fees, the latter of which would be based on the registrant's annual gross income. Notably, the law would require applicants to submit copies of their disclosures, financing contracts and application flows to DFPI for review. Registration would be conducted through the Nationwide Multistate Licensing System (NMLS).
As discussed here and here, the bill represents a continuation of a nationwide trend towards increased regulation of commercial financing providers. California is often a leader on issues like these, and, in the coming months and years, other states are likely to consider similar requirements. Commercial financing providers would be well advised to track these legislative developments carefully.
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