California’s new SB 362 goes beyond APR disclosures, imposing sharp limits on how commercial financing providers can use terms like “interest” and “rate,” which is raising new compliance risks for the industry.
In 2018, the Golden State (which these days seems to mean it’s on fire again) enacted first-in-the-nation legislation requiring commercial financing providers to give prospective financing recipients specific disclosures in a whole array of commercial financing transactions. These transactions include loans, lease financing, factoring, merchant cash advances and asset-based loans. One of the mandated disclosures in the 2018 law is the annual cost of financing to applicants, implemented as a requirement to disclose the APR of a contemplated transaction. The commercial finance industry wasn’t thrilled about it, but we got used to it.
With this brave new year comes new obligations. The California legislature has apparently determined that although the APR can be helpful to a small business in evaluating an offer, “deceptive, unscrupulous or confusing marketing tactics” can undermine that benefit. The new law cites examples of these tactics, including:
- Describing the price of credit as simple interest when referring to a nonannual rate as opposed to a non-compounding rate that a reasonable person would understand simple interest to mean;
- Describing the price of credit as simple interest when describing a daily, weekly or monthly rate and not an annual rate; and
- Describing the price of credit as X% fee rate or Y% factor rate, particularly when those rates diverge materially from the APR.
SB 362, Section 1(e)
Whether you agree with the assessment or not, there are new rules that providers must follow. Here they are:
- A provider may not use the term interest or rate in a deceptive way that could reasonably result in the recipient being misled.
- After extending a financing offer to a potential recipient, whenever a provider states a charge, pricing metric or financing amount to that recipient for a specific offer during an application process, the provider shall also state the APR of that offer by using the term annual percentage rate or the acronym APR.
- Use of the term interest or rate is not deceptive or likely to mislead for purposes of this division if the metric of financing cost is an annual interest rate or annual percentage rate that is either fixed or floating for the period of the financing and that is expressed as a margin over an index rate.
Noncompliance by licensees is deemed a violation of the California Finance Law (CFL) if the transaction is subject to the CFL. Interestingly, a violation involving a transaction that is not subject to the CFL, i.e., a true/operating/FMV lease, is deemed an unfair, deceptive or abusive act under the California Consumer Financial Protection Law. I find this hybrid penalty scheme a bit suspect, one that may end up challenged in court, as it makes no sense (to this author, at least) to invoke a consumer protection statute to penalize someone making an exempt commercial transaction. Oh well. As they say, it is what it is.
There is a bit of good news in the new statute:
No provision of this division imposes any liability on a provider as a result of the actual Annual Percentage Rate (APR) charged by a provider differing from the Estimated APR disclosed in conformity with any regulation, order, or written interpretive opinion of the commissioner or any such opinion of the Attorney General, whether or not such regulation, order, or written interpretive opinion is later amended, rescinded, or repealed or determined by judicial or other authority to be invalid for any reason.
Section 362, Section 3
Implicit in the new statute are a few admonitions that might not be obvious at first glance:
- This is more than a disclosure statute. It imposes ongoing duties to state or restate the APR or estimated until the financing is consummated.
- The term “interest” is now a loaded gun. Given the many meanings this word can have depending on the context, my advice is to avoid the term unless it clearly means (to the provider and recipient) an annual rate.
- The term “rate” is also risky. The statute prohibits use of the term in any manner that is “likely to be deceptive.” This is exactly the kind of law that motivates certain attorneys to file class actions. The law suggests that using the term “rate” or “factor rate” is suspect. Best not to use this terminology.
SB 362: https://calmatters.digitaldemocracy.org/bills/ca_202520260sb362
Ken Greene is an attorney at his SoCal firm, the Law Office of Kenneth Charles Greene. The Law Offices of Kenneth Charles Greene present this article. In his regular column, The Greene Room, he brings clarity to complex, high-stakes issues that matter to our readers, exploring the ever-evolving intersection of finance and law. Stay tuned to Monitor for more ongoing, timely insights from Greene.
The Law Offices of Kenneth Charles Greene present this article. All copyrightable text, the selection, arrangement, and presentation of all materials (including information in the public domain), and the overall design of this presentation are the property of the Law Offices of Kenneth Charles Greene. All rights reserved. Permission is granted to download and reprint materials from this article for the purpose of viewing, reading, and retaining for reference. Any other copying, distribution, retransmission, or modification of information or materials from this article, whether in electronic or hard copy form, without the express prior written permission of Kenneth C. Greene is prohibited. The materials available from this article are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any issue or problem. Use of and access to these materials does not create an attorney-client relationship between the Law Office of Kenneth Charles Greene and the user or viewer. The opinions expressed herein are the opinions of the individual author.
