California Bill Aims to Bring More Transparency to Small Business Loans
Following its passage in the state legislature, California governor Jerry Brown recently signed Senate Bill 1235 into law. This new act will require small business lenders and others to comply with certain transparency requirements, which lawmakers are hoping will help protect borrowers. As ValuePenguin notes, this makes the Golden State the first in the nation to make these types of disclosures mandatory.
Among the details that small business lenders operating in California will now have to include are specifics on what the loans true costs are. For example, lenders will be required to disclose the total amount of funds provided as well as the total dollar cost of the financing. Lenders must also share the financing cost as an annualized rate, while also acknowledging any prepayment fees. Some have suggested that these added rules essentially offer businesses some of the same protections offered to consumers of personal loans.
The California bill comes as some small business owners have voiced concern about various lenders and their processes. A report by the Federal Reserve notes that, “most [small business owners] found the lack of standardization in presentation and the inconsistency of terminology [in online lenders] across the descriptions of product costs and features to be problematic.” That’s something SB 1235 aims to correct, with the hope being that business owners will now find it easier to compare lending options easily and ultimately choose the best funding option for their businesses.
Currently it’s not exactly clear when the new law would take effect. According to JD Supra, “[T]he California Department of Business Oversight (“DBO”) is now required to adopt regulations addressing details such as calculation methods and the time, manner, and format of the new disclosures. The DBO also may specify the date by which finance companies are required to comply.” With that, it seems unlikely that enforcement of these new standards would begin until late 2019 or 2020.
It should be noted that there are those who are opposed to the new rules proposed in California SB 1235. In an article on American Banker, D. Michael Monk argues, “Requiring those term lenders, who do not already do so, to disclose their hidden fees and true cost of financing is a worthwhile pursuit. But, the bill does not accomplish this goal and has serious unintended consequences, which could actually impede small business owners’ access to capital and expose honest and well-intentioned commercial lenders to litigation.” However a dueling American Banker piece penned by Louis Caditz-Peck, Heidi Pickman, and, Mark Herbert rebuts, “It’s hard to imagine why anyone wouldn’t support a measure meant to make sure entrepreneurs are fully aware of the financing terms they are offered before they sign on the dotted line,” later concluding, “At the end of the day, financing companies opposed to this bill may simply be worried that if small businesses see the estimated rates they will be charged, they could think twice about taking the financing or seek a less expensive option.”
Ultimately it’s not what the bill says on paper but how it functions in the real world. Thus small business owners, lenders, and observers will have to wait and see whether this new bill achieves its intended effects or proves to stifle the lending market.