California Legislature Passes Bill to Expand Commercial Lender Licensing Requirement

Last week, the California Legislature passed (the Bill), which would expand the scope of the state’s existing California Financing Law (CFL) lender licensing requirement to include providers of certain non-loan commercial financing products, including merchant cash advances and factoring, and certain non-bank entities that have partnered with depository institutions to arrange for commercial financing transactions. The Bill was presented to Governor Gavin Newsom for signature on August 27.

The Bill provides that, effective July 1, 2028, no person may engage in the business of providing or brokering “commercial financing” products in the state without a lender license. “Commercial financing” is defined as “an accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing,” as those terms are defined in California’s existing commercial financing disclosure law (CFDL). Transactions exceeding $500,000 would essentially be exempt from the licensing requirements of the Bill, similar to the CFDL.

While commercial lenders and loan brokers have long been subject to the CFL licensing requirement, the Bill would for the first time require providers and brokers of non-loan financing products to obtain a license under the CFL. It also adopts an expansive definition of “commercial financing provider” that would require licensure of a non-depository institution that enters into a written agreement with a depository institution to arrange for extensions of commercial financing by the depository to a recipient via an online lending platform administered by the non-depository institution.

The Bill would also impose certain substantive requirements on commercial financing providers and transactions, including:

• Adding to the CFL an existing requirement in regulations issued under the statute, effectively requiring providers to conduct an “ability to repay” analysis and providing for license suspension or revocation for failure to do so.
• Prohibiting certain contractual provisions including confessions of judgment.
• Requiring commercial financing brokers to post the average and maximum annual percentage rates for commercial financing transactions facilitated by the broker in the most recent calendar year on their website.
• Rendering a commercial financing agreement as “not enforceable” unless certain licensing requirements have been met or the transaction was entered into prior to January 1, 2028 (although it is likely that the intent is to exempt transactions entered into before July 1, 2028, the date the licensing requirement goes into effect).

The Bill is a continuation of a longstanding trend towards increased regulation of financing extended to small- and medium-sized businesses (SMBs), especially in California. In recent years, states including California have begun to extend protections previously reserved for consumer financing recipients to SMBs. Among other developments, states have enacted laws requiring financing providers to provide specified disclosures of the cost and other terms of financing, extended protections against unfair, deceptive, or abusive acts or practices (also known as UDAAPs) to SMBs, and extended debt collection restrictions to certain commercial-purpose debts. And, while certain states have enacted registration requirements applicable to providers of non-loan commercial financing products, California is the first state to enact a licensure regime, which is generally much more burdensome. This trend towards increased regulation is likely to continue, with certain other states likely following California’s lead, and nationwide compliance becoming increasingly complex.

If you have any questions or would like assistance with compliance, please contact any of the authors or the Manatt professional with whom you work.