By Lydia Beyoud
California is a step closer to becoming the first state to require online small-business lenders such as OnDeck Capital Inc., LendingClub Corp., or Kabbage Inc. to disclose financing costs to borrowers.
The state Assembly’s Appropriations Committee approved a bill Aug. 27 by a party-line 11-0 vote, with the committee’s six Republican members abstaining, to mandate commercial loan term disclosures by online or other nonbank lenders. The version passed by the committee was heavily amended Aug. 16 from an earlier version that drew strong opposition because it used a new and untested annualized cost metric on commercial finance products.
The revised version has the support of a broad coalition of fintech companies, nonprofit community development financial institutions, and community advocacy groups. The legislation (S.B. 1235), however, would still need to clear several procedural hurdles to get through the state Assembly and Senate before the legislative session’s Aug. 31 deadline, though supporters of the bill believe it will be able to pass this session.
Some business groups have chosen not to support the bill, including the Electronic Transactions Association (ETA), whose members include companies that offer merchant financing, like PayPal Inc. and Amazon.com Inc.
More than 3.8 million small businesses operate in California, helping drive the state to its status as the world’s fifth-largest economy, according to federal data. Given the state’s economic heft, supporters of the bill hope it may set a model for the rest of the nation to follow for small-business financing. Unlike consumers, commercial borrowers don’t receive the same truth-in-lending protections provided under federal law.
“This is an opportunity for California lawmakers to work together on a bipartisan basis to solve real people’s problems,” Conor French, Funding Circle’s general counsel, told Bloomberg Law after the amendment’s Aug. 16 introduction.
The bill is dividing online lenders between supporters and those who worry they could be forced to use annualized cost metrics that don’t adequately reflect the pricing of their products, such as merchant cash advances.
The most recent version of the bill dropped any prescribed cost metric and instead would ask the state’s top financial services regulator, the Department of Business Oversight, to write new rules for a metric to be used to estimate financing costs.
“The advantage of this approach is that it allows additional stakeholder input as various lenders claim their product does not fit into a particular disclosure format, and once the disclosure is adopted, DBO can be a resource for lenders who have questions about how to comply,” bill sponsor Sen. Steve Glazer’s (D) office said in a document obtained by Bloomberg Law explaining the amendment language.
The Responsible Business Lending Coalition and the California Association for Micro Enterprise Opportunity (CAMEO) have formed a coalition of more than 60 business and community development groups to push for the state legislature to pass the bill. Fintech companies supporting the bill include Funding Circle, LendingClub, Prosper, Avant, Marlette, PeerStreet, and SoFi, among others.
The amended bill contains metrics for estimating annualized finance costs that supporters such as the Opportunity Fund view as critical to help small businesses make better financial decisions, Gwendy Brown, the group’s vice president for research and policy, told Bloomberg Law.
Annualized cost estimates help borrowers already familiar with such metrics as the annual percentage rate make comparisons among financing options, Brown said.
The presumption that small-business borrowers are more sophisticated about understanding their financing options doesn’t always hold true, Heidi Pickman, CAMEO’s associate director, told Bloomberg Law. Many small businesses don’t have a chief financial officer, and some still keep their receipts in boxes, she said.
Estimated cost requirements would “go a long way to helping protect small businesses and helping them understand their financing choices,” she said.
Though the bill amendment doesn’t define which metric should be used, its supporters are backing the use of an estimated annualized rate to give borrowers something akin to an apples-to-apples comparison among products.
But some companies that offer open-ended financing products such as merchant cash advances and other nonfixed term financing say APR doesn’t give an accurate picture of the cost of their products, which can depend on the volume of transactions to repay credit.
As a result, some industry groups, including the ETA, continue to oppose the legislation.
“We are fully committed to providing small businesses with transparent, readily understandable, and comparable financing options. Unfortunately, SB 1235 will not achieve those objectives and will prevent small businesses from being able to compare apples to apples,” PJ Hoffman, director of regulatory affairs for the ETA, told Bloomberg Law by email.
Others said the repeated changes in legislative text signal a bowing to political pressures. “It’s disappointing that Senator Glazer has chosen political expediency over doing the right thing for California small businesses,” Steve Denis, executive director of the Small Business Finance Association, whose members include merchant cash advance companies, told Bloomberg Law by email. The SBFA supported the bill when it included the annualized cost of capital metric.
“We believe his new approach to this bill will create uncertainty and put at risk small-businesses access to responsible capital,” Denis said.
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