California Commercial Financing Disclosures
How is DLL complying with the California Department of Financial Protection and Innovation (DFPI’s) Commercial Financing Disclosure Regulation?
Beginning on December 9, 2022, the State of California in the United States will require that certain providers that extend specific terms of lease financing and closed-end and open-end commercial financing to a CA customer recipient provide consumer-like financing disclosures for certain non-consumer financing transactions involving those CA customers.
Is DLL considered a certain provider in the regulation?
Yes. De Lage Landen Financial Services, Inc., in Wayne, PA; and DLL Finance LLC, in Des Moines, IA; known as DLL in the US and globally, fall under the definition of a “provider” of commercial financing including presenting specific offers on behalf of a third parties, as well as our three joint ventures. State and Federal banks are exempt from this requirement, however, their equipment leasing subsidiaries may not be exempt.
As a financial services company, not a bank or depository institution, DLL cannot avail itself to the exemption for banks and depository institutions. A depository institution accepts deposits of money and other securities for safekeeping. DLL does not store assets for safekeeping or assist in the trading of securities. DLL lends funds to borrowers to help them grow their businesses.
And even though DLL is a wholly owned subsidiary of Rabobank Group, a cooperative banking organization headquartered in the Netherlands, these regulations do not exempt subsidiaries of banks, either foreign or domestic.
Therefore, beginning December 5, 2022, all DLL funded commercial capital ($1buyout) equipment leases, loans, and open-end credit plans equal to or less than $500,000 initiated for businesses whose location is in the state of California will contain a disclosure statement that will need to be signed and returned to DLL (or our vendor partners) with the rest of the document package in compliance with California’s Commercial Financing Disclosure Regulation.
What customer address will drive the disclosure?
These disclosures will be driven by where the customer principally directs or manages its business, i.e., not the equipment location or the state of incorporation. We may rely on any written representation by the customer that the business is principally directed or managed from California, or the business address provided by the customer on the application for financing.
When will the disclosure be presented?
The disclosure will be presented at the time the documents to execute the approved agreement are presented with the disclosure being the first page of the document package. The disclosure must be signed by the recipient and returned at the same time the agreement documents are signed and returned to DLL to proceed further with the commercial financing transaction application. Disclosures cannot be signed and returned after the agreement documents have been signed and returned. In this case, the entire document package must be re-signed. The disclosure may also appear with quotes or proposals prior to agreement approval where reasonably possible in an effort to present the disclosures to such customer as early as commercially possible dependent on DLL’s access to such customer.
What is being disclosed?
Certain information about the offer to the recipient, including information concerning the financing amount, finance charges, the annual percentage rate, the total repayment amount, the term, payment amounts, other potential fees, and any prepayment costs is required to be disclosed.
What is the Annual Percentage Rate (APR) calculation?
The APR calculation is the annual cost of a loan — including certain fees. The APR is expressed as a percentage (similar to an interest rate); however, it also includes other charges or fees (i.e., administration, or dealer add-on).
Are other fees included in the disclosure?
No. Late fees, for example, can be avoided with on-time payment. Document fees that are waived are also not included.
What financing contract types will or will not require these disclosures?
See table below.
|AFFECTED Financial Products/ Dollar Threshold||EXEMPTED Financial Products|
Closed-End Commercial Financing
Open-End Commercial Financing
What is the difference between Interest Rate and Annual Percentage Rate (APR)?
|Refers to the annual cost of a loan to a borrower and is expressed as a percentage.||
The annual cost of a loan — including fees. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees.
DLL fees may include but are not limited to:
Does this regulation affect POs approved prior to December 9, 2022, but have not yet been funded?
It may, therefore, DLL will be monitoring our pipeline to have as few of these cross-over deals as possible. It’s also possible we may begin issuing the disclosures prior to December 9 to avoid these concerns as much as we can.
Are other states requiring this disclosure?
Not at this time, however, New York is finalizing its commercial financing disclosure law and it is anticipated that other states will be requiring similar disclosures in the future.
How does this affect DLL’s vendor partners?
DLL’s vendor partners who initiate the lease document packages on behalf of the proposed DLL funding are also required to use the specific disclosure template required by the state of California in their document packages and have them signed by the end-user customer at the same time the rest of the document package is signed. Vendors will be notified of this requirement in October 2022 and given access to the templates DLL has created per the specifications in the California regulation at that time. Company logos are permitted to be added to the documents.
What if the documents are prepared by the equipment vendor who is offering financing through DLL?
DLL will provide equipment vendors access to the pre-populated disclosure document through our vendor partner portal. DLL has developed an APR calculator to automate this process. At a minimum, the disclosure must be signed and returned as the first page of the signed and returned document package. If lease documents are returned with the signed disclosure, booking will commence. If lease documents are returned without the signed disclosure, a new document package will need to be issued with the disclosure and documents resigned and returned.
If the interest rate is being subsidized by the vendor, what interest rate will be disclosed?
The interest rate disclosed will be the interest rate given to the customer (including any financed broker fees) regardless of any vendor subsidies.
What if the interest rate changes due to indexing processes? Will the interest rate need to be re-disclosed?
Likely no. Estimation language will appear on the original disclosure.
How is “finance charge” defined in this regulation?
“Finance charge" for all commercial financing transactions means all charges that would be included in the finance charge under 12 C.F.R. Part 1026.4 (1-1-21 Edition) if the transaction were a consumer credit transaction and the financer were a creditor under federal law. Finance charges are required to include any charge that would be a finance charge under 12 C.F.R. Part 1026.4, regardless of whether the transaction in question would be considered an “extension of credit” under federal law and regardless of whether the financer would be considered a “creditor” under federal law. In any lease financing transaction, the sum of lease payments (including any regular periodic payments and irregular payments) and price of the purchase option that the lessee may pay to acquire the leased goods at the end of the lease, minus the amount financed.
What is the definition of specific commercial financing offer?
“Specific commercial financing offer” means a written communication to a recipient, based upon information from, or about, the recipient, of (i) a periodic payment amount, irregular payment amount, or financing amount, and (ii) any rate, price, or cost of financing (including, without limitation, any total repayment amount), in connection with a commercial financing. Information “about the recipient” includes information about the recipient that informs the provider’s quote to the recipient, such as the recipient’s financial or credit information, but not the recipient’s name, address, or general interest in financing.
What is the definition of closed-end transactions?
“Closed-end transaction” means a transaction in which credit is extended only once over a specific term (including contracts that include an option in which the recipient may extend the term), and is repaid: (A) in regular predetermined payments of a specified amount over a fixed period of time; or (B) in the case of sales-based financing, in payments calculated as a percentage of sales or income, but with a minimum required payment or payments such that the recipient is eventually required to repay the amount advanced regardless of the sales or income the recipient collects.
What is the definition of open-end financing?
"Open-end financing" means an agreement for one or more extensions of open-end credit, secured or unsecured, the proceeds of which the recipient does not intend to use primarily for personal, family or household purposes. "Open-end financing" includes credit extended by a provider under a plan in which: (i) the provider reasonably contemplates repeated transactions; (ii) the provider may impose a finance charge from time to time on an outstanding unpaid balance; and (iii) the amount of credit that may be extended to the recipient during the term of the plan (up to any limit set by the provider) is generally made available to the extent that any outstanding balance is repaid.
For more information, contact fm.dll.U.S.Compliance@leasedirect.com. DLL is committed to complying with the CA Commercial Financing Disclosure regulation and all other regulations governing our business in pursuit to enabling businesses to more easily access equipment, technology, and software to help them grow. We deliver sustainable and effective financing solutions that drive smarter and more economical use of capital assets.
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