In the third in our series on the California Commercial Financing Disclosure Regulations, we focus on the disclosure requirements for merchant cash advances (MCAs).
Background
In previous client alerts, we discussed the California Commercial Financing Disclosure Law enacted in September 2018 (the "Act"), provided a high-level overview of the recent final regulations implementing the Act, and took a deeper dive into the content and format requirements. In this alert, we focus on disclosures, APR and finance charge calculations, and estimates for MCAs.
Scope
The Act applies broadly to sales-based financing transactions, including MCAs, made to California recipients. Specifically, the definition of sales-based financing covered by the Final Regulations includes MCAs if they meet one of two requirements:
- The funding is repaid as a percentage of sales or income in which the payment amount is impacted by the volume of sales made or income received; or
- The agreement includes a true-up mechanism.1
A true-up mechanism is defined as a contractual term by which the financer receives periodic payments based on an amount(s) specified in the contract and the contract allows for adjustments to the payment amount or amounts paid so that the amount paid is closer to the split rate in the contract. The split rate is the percentage used to calculate payment amounts or the true up.2
Note that this definition of sales-based financing transactions is broad enough to include not only MCAs, but also loans or other transactions that meet on of the two criteria above.3
MCA Disclosure Requirements
We discussed the general disclosure requirements that apply to all types of commercial financing (such as font size, use of columns, etc.) in our previous client alert. For MCAs specifically, the Final Regulations require a three-column by nine/ten-row table containing the following information using the following font sizes and column widths, with annotations in red:
Footnotes
1 Cal. Code. Regs. tit 10, § 900(a)(28).
2 Cal. Code. Regs. tit. 10, § 900(a)(34), (a)(31).
3 See California Department of Financial Protection and Innovation, Response to Comment 1.2.18, Final Statement of Reasons at 38 (PRO 01/18) (stating that the definition of sales-based financing does not require that the recipient's payment obligation be contingent on the recipient's income or sales volume (e.g., an MCA), but includes transactions (with or without minimum payment amounts) where the payment amount increases or decreases based on income or sales volume (e.g., closed-end loans with sales-based repayment terms)).
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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