July 2, 2022

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California finalizes long-awaited disclosures for small business loans

California finalizes long-awaited disclosures for small business loans

After a yearslong regulatory process, small businesses in California are set to receive more disclosures from lenders, including the total interest and fees they will pay on loans.

A new state regulation that takes effect on Dec. 9 will require nonbank lenders to disclose the annual percentage rate that businesses pay when they borrow $500,000 or less.

The rule dates back to a first-in-the-nation law that California lawmakers passed in 2018 requiring disclosures of APRs and other information. The law’s implementation has taken years, and the rule has come under criticism from some corners of the nonbank lending industry.

With a 2018 law, California became the first state to require annual percentage rate disclosures on small business loans.


The California Department of Financial Protection and Innovation finalized the rule last week after a few rounds of public comments. Supporters of the rule say APR disclosures will help businesses make simple comparisons on loan options, making it easier to find cheaper options instead of accidentally signing up for a triple-digit APR loan due to hidden fees.

APRs are critical for businesses to make “apples-to-apples comparisons when shopping for loans,” said Carolina Martinez, CEO of the California Association for Micro Enterprise Opportunity.

“Small businesses deserve the same protections that have long been available to consumers,” Martinez said, arguing that Congress should pass a bill requiring similar federal standards.

In a written statement, DFPI Commissioner Clothilde Hewlett called the new requirements “a major milestone in financial services oversight in California and a model for other states to follow.”

The California law, which exempts depository institutions and some types of transactions, covers a wide range of commercial financing, including loans, factoring transactions, sales-based financing, lease financing and asset-based loans.

Some lenders have criticized the APR disclosure requirement, saying the calculation is not workable for open-ended transactions like merchant cash advances, where lenders offer businesses money in exchange for a portion of their future sales.

The open-ended nature of sales-based transactions makes it difficult to calculate an APR, those critics say, requiring lenders to make estimates that may end up being inaccurate. The law will be costly for lenders to implement and confusing for borrowers, said Steve Denis, executive director of the Small Business Finance Association, one of the rule’s critics.

“Over-disclosure of terms and using confusing metrics simply hurt small-business owners,” Denis said. “We look forward to working with the California legislature next year on a much more modern and meaningful approach to disclosure.”

In response to comments on the rule, the DFPI said that while estimates of APR “are never guaranteed to predict future performance, the DFPI believes its regulations will nonetheless provide useful information to small-business owners, who will know when APR and other disclosures are estimates.”

The debate over APR disclosures is also happening elsewhere. New York’s still-pending rule takes a similar approach to California’s. Meanwhile, Virginia and Utah have chosen not to require the disclosure of APRs, but are still requiring lenders to disclose a wide range of information to small business borrowers.

Scott Pearson, a Los Angeles-based lawyer at the Manatt, Phelps & Phillips, LLP who represents lenders, said the patchwork nature of state requirements will make the compliance process for lenders “very costly and difficult,” and ultimately make credit more expensive for businesses.

Other states that have considered some version of a small-business disclosure measure include North Carolina, Missouri, Maryland, Connecticut and New Jersey.