CA Proposes Lending Regs To Protect SMB Borrowers

Proposed regulations would give small businesses in California the nation’s most extensive set of truth-in-lending protections for small business borrowers. 

The new rules were released on Monday (July 29) by the Department of Business Oversight (DBO) and seek to protect the state’s 4 million small businesses from predatory lending practices, according to a press release from the Responsible Business Lending Coalition (RBLC). 

The mandate says borrowers must be given the opportunity to understand the financing being offered in a clear, concise manner that enables informed comparisons across different options. Lenders must also offer clear disclosure of the annual percentage rate (APR) and estimated monthly payments. 

In 2018, California began the journey of establishing lending transparency for small businesses in the state. While the federal Truth in Lending Act requires consumer creditors to disclose key information about transactions in a clear and comparable way, no such national standard exists to protect small business owners. 

“We especially commend the DBO’s decision to propose that APR or Estimated APR be disclosed for all small business financing products. APR is the only established metric that enables informed comparisons of the cost of capital over time and between products of different dollar amounts and term lengths. This is why APR is the long-standing, familiar price metric, vetted over 50 years of the Truth in Lending Act,” the RBLC release stated.  

The proposed regulations recognize that small business financing has changed as many small businesses now commonly pay effective APRs of higher than 50 percent — and sometimes as high as 350 percent — without these rates ever being disclosed to them, the RBLC said. 

“We look forward to continuing our work with the DBO to further strengthen and implement their proposed regulations. We also encourage other states and the federal government to follow California’s lead,” the RBLC release said. 

Support for the initiative won approval from the state’s Assembly Appropriations Committee and the California Senate. The Electronic Transactions Association (ETA), which includes Amazon and PayPal as members, opposed the bill last year.

The comment period for the proposed regulations extends to Sept. 9.