Just days before Halloween, California passed Senate Bill 666, which imposes a number of restrictions on the fees that commercial financiers can charge their small business clients. Legislation signed by the governor on Oct. 13 strengthens the state’s regulation of commercial financing. What began as a disclosure-based regime with California’s 2018 commercial finance disclosure law (“CFDL”) has evolved into direct regulation of commercial finance business practices with an affirmative ban on certain payments to “small businesses.” SB 666 An Act of 2023 that targets unfair, deceptive, or abusive acts or practices (“UDAAPs”) in commercial financing by the California Department of Financial Protection and Innovation (“DFPI”) and requires commercial financiers to submit annual reports It closely follows the August rulemaking. operates to the state.
New payment limits under Senate Bill 666
Beginning January 1, 2024, a provider or broker of “commercial financing” (as commercial financing is defined in the CFDL) is prohibited from charging a small business or small business owner the following fees:
- Automated Clearing House Transfer Debit Acceptance Fee (excluding applicable NSF fees)
- Payment for account statements
- A fee charged in addition to the origination fee, including but not limited to a risk assessment, due diligence or platform fee, without a “clearly relevant service provided for payment”.
- Small business foreclosure monitoring fee if the contract is unpaid for more than 60 days
- A fee for filing or terminating a UCC lien against the entity’s assets.
Commercial financing subject to the CFDL, and thus subject to the payment restrictions of SB 666, includes closed-end and open-end loans, finance leases, merchant cash advances, and factoring.
SB 666 defines a small business as:
- An independently owned and operated enterprise that does not dominate the field of activity;
- Headquartered in California;
- Officers residing in California; and
- Has 100 or fewer employees, including affiliates, and average annual gross receipts of $15 million or less over the preceding three years.
Accordingly, although SB 666 goes beyond the CFDL, SB 666 applies only to a subset of transactions subject to the CFDL.
The California connection that triggered SB 666 also differs from the CFDL. SB 666 applies to transactions where the principal office and employees of the acquirer are small businesses located in California, and the CFDL applies to transactions where the acquirer is “mainly managed or controlled from California.”
Perhaps most importantly, SB 666 lacks the safe harbor available under the CFDL, which allows a provider to rely on the business address provided by an applicant in their application for funding to determine whether a transaction is an address to which the law applies.
Helpfully, however, the exemptions from SB 666 are essentially the same as the exemptions from the CFDL, so companies outside the scope of the CFDL will also be exempt from SB 666.
New Commercial UDAAP and Annual Reporting Rules
SB 666 follows recent regulations promulgated by DFPI in August that impose new restrictions on UDAAPs and an annual reporting requirement for certain providers of commercial financial products or services. Beginning October 1, 2023, any covered provider is prohibited from engaging in UDAAPs.
The UDAAP ban applies to providers subject to the CFDL, as well as other entities engaged in the business of offering or providing a “financial product or service.” This term is broadly defined under California’s Consumer Financial Protection Act (“CFPL”), which covers most loans. The UDAAP under the new rule is defined largely the same as the UDAAP under existing federal law, but the DFPI rule additionally incorporates California unfair competition law and relevant case law.
The new DFPI rules also require providers subject to the CFDL to electronically submit an annual report to DFPI by March 15 of each year beginning in 2025. The report should include the following:
- Funder’s identity and contact information
- The total number and dollar amount of commercial financing granted to certain small businesses and households during the previous year, broken down by type of financing and amount financed.
- The minimum, maximum, average and average annual interest rates are disclosed in the disclosures issued by CFDL where such disclosures are required.
Transactions made under a provider’s California Financing Act license are excluded from annual reports.
Signs of Things to Come?
These regulations, considered alongside SB 666, are an indication that states are not regulating small business financing. Given California’s history as a bellwether, it is highly likely that other states will follow California’s lead in imposing significant requirements on the commercial finance industry that go beyond those states’ existing disclosure and registration requirements.
In the meantime
Companies subject to the CFDL should consider their customer/borrower base and fees to determine whether SB 666 will require them to change their fee structures. This may require the collection of additional information from applicants or borrowers. In addition, businesses should determine if they need to make any changes to their practices to comply with California’s new UDAAP restrictions, and should also begin thinking about system updates needed to begin submitting the required annual reports by 2025.