California Enacts New Licensing Regime for Commercial Financing Providers and Brokers
On September 30, California Governor Gavin Newsom signed into law Assembly Bill 2116, which provides for the licensure and regulation of commercial financing providers and brokers, and expands upon California's existing commercial financing disclosure regime. These entities should note two key components of the new law:
- Beginning January 1, 2028, covered commercial financing agreements are unenforceable unless the provider is licensed by, or has submitted a complete license application to, the California Department of Financial Protection and Innovation (DFPI).
- Beginning July 1, 2028, commercial financing providers and brokers must obtain a license from the DFPI unless exempt.
This alert summarizes the key provisions of the new law, including its licensing requirements, unenforceability provisions, and other requirements and restrictions.
Licensing Requirements
Beginning July 1, 2028, commercial financing providers and brokers must be licensed to engage in commercial financing transactions.
- Commercial Financing: The definition of "commercial financing" is consistent with the existing California Commercial Financing Disclosure Law.
- It broadly includes accounts receivable purchase transactions, factoring, asset-based lending, commercial loans, commercial open-end credit plans, and lease financing intended primarily for a non-consumer purpose.
- Commercial Financing Providers: The definition includes any person that extends a specific offer of commercial financing to a recipient.
- Notably, the definition expressly includes a nondepository institution that arranges financing by a depository institution through an online lending platform it administers.
- Commercial Financing Brokers: The definition includes any person engaged in the business of performing certain acts in connection with commercial financing extended by a commercial financing provider, including, among others: (1) transmitting sensitive data about a prospective recipient to a provider with the expectation of compensation; (2) making a referral to a provider under an agreement; (3) participating in negotiations between a provider and a recipient; and (4) counseling, advising, or making recommendations to a recipient.
The requirements apply only to commercial financing transactions of $500,000 or less made to small businesses, meaning for-profit entities with annual gross receipts of no more than $16 million (or a higher biennially adjusted amount).
Exclusions
The licensing requirements exclude:
- Providers that are lenders regulated under the federal Farm Credit Act.
- Transactions secured by real property.
- Transactions in which the recipient is either (1) a dealer, as defined in the California Vehicle Code, or (2) a vehicle rental company or its affiliate, for open-end credit plans of at least $50,000.
- Persons that make no more than one commercial financing transaction in California in a 12-month period, or no more than five such transactions that are incidental to their business.
Agreements Are Unenforceable Without a License
The law also includes an enforceability provision that will affect providers before the licensing requirement takes effect. Specifically, beginning January 1, 2028, a commercial financing agreement is unenforceable unless the provider (1) is licensed, (2) has submitted a complete application and is awaiting the DFPI's approval or denial, or (3) entered into the transaction before January 1, 2028.
As a result, providers and brokers may want to consider submitting license applications before January 1, 2028, which is six months ahead of the July 1, 2028, licensing deadline, to ensure that their agreements remain enforceable after that date.
Notable Requirements and Restrictions
The law also imposes several affirmative requirements and restrictions on providers and brokers in connection with offering financing products, including:
- Ability to Repay: Providers must consider a recipient's ability to repay when determining financing terms, such as the size, duration, and repayment features. A provider that repeatedly fails to do so may face license suspension or revocation.
- Publish APR on Website: Brokers must post on their websites the average and maximum annual percentage rates (APR) for transactions they facilitated in the most recent calendar year.
- Terms of the Agreements: Commercial financing agreements must not (1) require a confession of judgment or power of attorney before a recipient defaults, or (2) restrict recipients from disclosing information obtained from the provider, including the terms or conditions of the product or service.
- Unlawful, Unfair, Deceptive, or Abusive Acts or Practices: Providers and brokers may not engage in unlawful, unfair, deceptive, or abusive acts or practices.
Key Takeaway
California joins a growing number of states that have enacted licensing regimes for commercial financing providers and brokers. Providers and brokers that offer or arrange commercial financing to California small businesses should begin preparing now by:
- Assessing Coverage: Evaluating whether their products, transaction sizes, and recipients fall within the law's scope, and whether any exclusion applies.
- Planning for Early Applications: Preparing to submit complete license applications before January 1, 2028, so that agreements entered into on or after that date remain enforceable.
- Reviewing Agreements and Practices: Updating agreement forms to remove pre-default confessions of judgment, powers of attorney, and confidentiality restrictions, and reviewing underwriting, website disclosure, and marketing practices for compliance with the ability-to-repay, APR publication, and UDAAP requirements.
- Monitoring DFPI Rulemaking: Tracking any implementing regulations and application guidance the DFPI issues before the effective dates.
Stinson LLP attorneys routinely advise financial institutions in their compliance with commercial financing licensing, registration, and disclosure requirements and are actively following states' rulemakings. For additional information, please contact Heidi Wicker, Tom Witherspoon, Marisa Perfetti, or the Stinson LLP contact with whom you regularly work.
