Issue Overview

Finance Licensing

All state and local governments regulate business operations, specifying registration and licensing requirements that must be met in order to undertake commercial activity. However, California stands out as the state with the most onerous licensing requirements impacting the commercial equipment leasing and finance sector. Provisions of the law and regulations are too often based on purchase rather than lease transactions that take place in a traditional retail store, which ELFA members do not possess.  Concentration on the consumer market with disregard for realities of the business-to-business equipment leasing industry drives up the cost of funds loaned to businesses in the state, reducing availability of credit and limiting access to vital economic capital.

No other state requires registration for the commercial equipment leasing and finance sector in a manner similar to the requirements under the California Finance Lenders Law (CFL). Under the CFL, any person engaged in the business of making consumer or commercial loans must be licensed in California. California’s requirements are onerous and efforts to expand the law’s scope create an increasingly unfriendly finance environment for small businesses and the lenders and brokers who make loans to them.

Current California law fails to account for the unique nature of the commercial equipment leasing and finance industry. While traditional depository institutions are exempted from the California law, other types of lenders are caught up in the law’s requirements, even though they are not traditional retail stores and may never see the piece of equipment they are financing for commercial purposes. Disregard for the realities of the industry drives up the cost of funds loaned to businesses in the state, reducing availability of credit and limiting access to vital economic capital.

Businesses depend on financing to make equipment, machinery, and inventory acquisitions that are critical to their successes. Limiting access to commercial equipment financing by imposing onerous compliance requirements has negative economic effects.

A handful of other states have attempted to copy California lender’s license law but none of those efforts have been successful due to the issues related to the California law. Legislation based on California’s law would establish finance lenders licensing regimes that would severely restrict the financing of commercial equipment leases and increase the cost of financing. ELFA continues to monitor state legislatures’ interest in lender’s license laws and works with in-state coalitions in the states where they arise to educate lawmakers on the negative economic impacts.

Enhanced Finance Disclosure

Highlighted by the introduction and passage of California SB 1235, there is a movement by state legislators to introduce consumer-like enhanced finance disclosure requirements for commercial transactions.

While the bills differ, the purpose of the proposed new rules concentrates on requiring lenders and other commercial financing companies to provide clear and consistent disclosures with the focus most often on protecting small business owners. ELFA has led the industry in obtaining exemptions for all equipment true leases in California and NY and secured a full suite of ELFA exemptions in every state that has introduced and/or passed disclosure legislation since New York. Those exemptions include UCC 2A True Leases, UCC 9 Purchase Money Obligations, Captive Transactions and Bank Subsidiary and Affiliate Transactions. To date, since CA and NY, 13 states have introduced and/or passed finance disclosure laws - all incorporating ELFA 's full suite of exemptions.

Certain of these states who have passed the disclosure legislation (CA, NY, CT) require disclosure of the annual's percentage rate or APR, all other states with passed legislation (UT, GA , FL, VA) do not. APR is expressed as a nominal yearly rate, inclusive of any fees and finance charges; the finance charge, which means the amount of any and all costs of small business credit, including interest, transaction fees, origination fees, and any third party fees; the payment schedule, which includes the number, amounts, and timing of payments scheduled to repay the obligation, which amounts shall include principal, interest, and any other finance charges incurred after closing; as well as any third party agreements entered into between the entity that provides the small business loan and any broker or other third party involved in the loan, any fees paid pursuant to their involvement, and a description of their relationships and any conflicts of interests. The bill summaries also say that an entity providing a small business loan shall, as applicable and appropriate under the terms of the small business loan, notify a small business concern at least 45 days before the effective date of any increase in the annual percentage rate of the loan and any other change that significantly affects the responsibilities or obligations of the small business concern under the loan.