California is close to finalizing legislation that will “make it mandatory for small business lenders to make their rates and terms transparent to borrowers.” The law known as SB 1235 is currently awaiting the signature of Governor Jerry Brown and would make California the first state to require such transparency.
The law is targeted at the online lending industry (aka fintech) which grew in popularity after banks decreased loans to small businesses after the financial crisis of 2008-09. According to Value Penguin, “while they [fintech companies] were willing to issue funds to more risky borrowers, these online lenders were also unclear on the total cost of financing.” This led to lending organizations purposely dodging ways to display the true cost of a loan. “Online business lenders also charge significantly higher interest rates than those on consumer loan products. The Opportunity Fund found that business owners in California pay an average APR of 94% for small business loans.”
SB 1235 will eliminate this and require lenders to “show business owners the true costs of a loan before they sign up for one and agree to any terms. Online business lenders in California would now be required to display:”
- The total amount of funds provided
- The total dollar cost of the financing
- The term or estimated term
- The method, frequency and amount of payments
- A description of prepayment policies
- The total cost of the financing expressed as an annualized rate
While California may be the first state to implement this rule, they will not be the last. The Treasury Department recently endorsed a national fintech charter, to create rules surrounding fintech companies. They are currently working within the space to figure out appropriate regulation on a national scale.