Funding Companies Sue California Regulator Over Looming Disclosure Law

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California State CapitolThe alarm bells sounded over California’s commercial financing disclosure law were more than rhetorical bluster. This past Friday, a trade association representing dozens of small business finance companies filed a lawsuit against the Commissioner of the California Department of Financial Protection and Innovation (DFPI) on the basis that the regulations scheduled to go into effect on December 9th are unlawful.

The suit, filed by the Small Business Finance Association, makes two claims.

First, that the regulations violate the First Amendment on the premise that they compel the group’s members to make inaccurate disclosures to customers while at the same time prohibiting members from engaging in communications that could be used to clarify or correct the required false or misleading information to customers. This in part refers to the requirement that funders assign misleading and/or false APRs to purchase transactions while being forced to use language and terminology that contradicts the contracts themselves.

Second, that APR disclosures are defined and governed at the federal level by the Truth in Lending Act and that California’s custom formulas and disclosures would only serve to confuse customers. The SBFA argues that the regulations are “preempted” by TILA.

These controversies, which have been the subject of debate for years, are not new information, but enforcement of the law is finally slated to begin in just 3 days. The complaint argues that compliance with the law may expose its members to civil and criminal liability and thus they are left with no choice but to proceed accordingly. Given the circumstances, however, there does not appear to be hard feelings about the situation.

“The SBFA enjoys a great working relationship with the DFPI and share their commitment to providing meaningful disclosures to small business owners,” said SBFA Executive Director Steve Denis when asked what this lawsuit meant.

He continued:

“We recognize the challenges involved in implementing SB 1235 and appreciate the effort and transparency the DFPI provided during the regulatory process. This is a complex issue and our lawsuit reflects the comments we have made during the regulatory process. We believe there are significant issues with the regulation that not only makes it difficult for us to accurately comply, but are inconsistent, create liability, and will provide further confusion for our small business customers. Again, we appreciate the effort by the DFPI and look forward to continuing our work together as the matter is resolved.”

The actual complaint is available for download here.

The law is scheduled to go into effect on December 9th.

Last modified: March 28, 2023
Sean Murray


Category: merchant cash advance, Regulation

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