After being the first state to impose disclosure requirements on small business finance transactions, California has now added an annual reporting requirement and subjected commercial finance companies to UDAAP claims. On August 2, 2023, California finalized its Department of Financial Protection and Innovation’s (“DFPI”) final rule prohibiting commercial financing providers from engaging in unfair, deceptive or abusive acts or practices, and requiring these companies to file annual reports with the agency. The rule is effective on October 1, 2023.
The UDAAP provisions of the new rule have been expected since 2020, when California converted its Department of Business Oversight into the DFPI, intending for the renamed agency to act as a “mini-CFPB.” The law creating the DFPI expressly allowed the agency to apply by rule its new UDAAP authority to commercial financing, and DFPI has now done so. This means that commercial finance companies are subject to the same potentially draconian penalties as consumer lenders for committing unfair, deceptive, or abusive acts or practices.
The annual reporting requirement applies (with some very limited carve-outs) to any financer that originates at least one commercial financing transaction of $500,000 or less to a small business, nonprofit, or family farm whose activities are principally directed or managed from California. The first reports are due on or before March 15, 2025 and annually thereafter. Each report must identify the financer and provide the number and aggregate dollar amount of commercial financing transactions with covered entities, broken down by type of commercial financing. Financers also will have to break down their deals by transaction size, as well as provide minimum, maximum, average, and median APRs broken down by type of financing and transaction size.
As they did with disclosure requirements, other states may well follow California’s lead. Connecticut, Georgia, and Florida recently passed laws requiring commercial financing disclosures, joining California, New York, Utah, and Virginia. We expect the list to grow in the coming years.
If you have any questions or need assistance complying with any of the foregoing requirements, please contact any of the authors or the Manatt professional with whom you work.