Governor signs nation’s first truth-in-lending bill for small business owners

Monday, October 01, 2018

SACRAMENTO – California will become the first state in the nation to give small business owners the same protections that Truth in Lending laws have given consumer borrowers for more than half a century, under legislation signed Sunday by Gov. Edmund G. Brown Jr.

Senate Bill 1235 by Sen. Steve Glazer, D-Orinda, will require lenders and other finance companies to provide clear and consistent disclosures to small business owners when they offer them financing and when they close a deal.

The bill was aimed at solving a growing problem in the rapidly evolving small business finance market, where fast-moving online lenders are replacing traditional banks in a largely unregulated world of loans and more innovative financing options.

“I applaud this new online lending industry because it is bringing capital to people who need it badly. But there are abuses,” Glazer said. “This law offers a modest measure – disclosure -- to help level the playing field for small business owners. It will make California a leader in placing the interests of small business owners on par with the big players in the financial industry.”

Until now, state and federal Truth in Lending laws have applied only to consumer finance. Even the owners of the smallest companies were left to fend for themselves on the theory that they were sophisticated merchants who understood the world of finance. Increasingly, however, that is no longer true. Today’s small business owners are often immigrant entrepreneurs struggling to get their enterprises off the ground with little knowledge of the finance industry. Others are young people or early retirees with no background in finance.

Studies by the U.S. Federal Reserve Bank and others have found that many small business owners do not understand the true costs of the financing they obtain for their businesses. And many responsible lenders have found that they need to help these business owners refinance their debt because the lack of clear information led them to borrow more than they could afford to repay, putting at risk the very business that they sought to sustain or expand.

Glazer’s bill, which passed both houses of the Legislature on broad, bipartisan majorities, was modeled after recommendations from the Conference of State Bank Supervisors’ advisory panel on lending by financial technology, or “FinTech” firms.

Under the new law, the financer will have to disclose the following at the time they offer financing of less than $500,000 to a business owner:

  • Total amount of financing
  • Total cost of financing
  • Term length
  • Frequency and amount of payments
  • Pre-payment policies
  • Annualized rate

The law will cover traditional term loans, lines of credit, merchant cash advances, lease financing, factoring, and asset-based financing. While federally chartered banks are exempt due to federal pre-emption issues, the bill does cover online platforms that partner with banks and do the marketing and underwriting that lead to financing that is ultimately provided by a bank.

The Department of Business Oversight will adopt regulations to implement the law, providing guidance to lenders on exactly what information they need to disclose in order to comply. The law takes effect Jan. 1 but disclosure will not begin until after the department completes its work.

SB 1235 was supported by a broad coalition that included dozens of responsible lenders, small business groups and advocates for policies that promote economic opportunity. These include Opportunity Fund, the Marketplace Lending Association, NFIB, Small Business California, Small Business Majority and the California Association for Micro-Enterprise Opportunity. The vote was 72-3 in the Assembly and 28-6 in the Senate.