Bad Omen: CA Imposes New Fee, UDAAP, and Annual Reporting Requirements on Small Business Financers

Mere days before Halloween, California enacted California Senate Bill 666, imposing a set of restrictions on the fees that commercial financers may charge their small business customers. Signed by the governor on October 13, the legislation marks an escalation of the state’s regulation of commercial financing. What began as a disclosure-based regime with California’s broad 2018 commercial finance disclosure law (the “CFDL”) has developed into the direct regulation of commercial financing business practices with the affirmative prohibition of charging certain fees to “small businesses.” SB 666 closely follows an August 2023 rulemaking by the California Department of Financial Protection and Innovation (“DFPI”) targeting unfair, deceptive, or abusive acts or practices (“UDAAPs”) in commercial financing and requiring commercial financers to submit annual reports of their activities to the state.

New Fee Restrictions Under Senate Bill 666

Effective 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:

• A fee for accepting an automated clearinghouse transfer debit (except for related NSF fees)
• A fee for account statements
• A fee that is charged in addition to an origination fee and that is without a “clear corresponding service provided for the fee,” including, but not limited to, a risk assessment, due diligence, or platform fee
• A fee for monitoring the small business's collateral unless the agreement is more than 60 days delinquent
• A fee for filing or terminating a UCC lien filed against the business's assets that exceeds 150% of the cost of the filing or termination

Commercial financing subject to the CFDL—and thus subject to SB 666’s fee restrictions— includes closed- and open-end loans, finance leases, merchant cash advances, and factoring.

A small business is defined under SB 666 as:

• An independently owned and operated business that is not dominant in its field of operation;
• The principal office of which is located in California;
• The officers of which are domiciled in California; and
• Together with affiliates, has 100 or fewer employees and average annual gross receipts of $15 million or less over the previous three years.

Accordingly, although SB 666 piggybacks off of the CFDL, SB 666 applies to only a subset of the transactions that are subject to the CFDL.

The California nexus that triggers SB 666 also differs from the CFDL. SB 666 applies to transactions where the recipient is a small business having its principal office and its officers located in California, whereas the CFDL applies to transactions where the recipient is “principally directed or managed from” California.

Perhaps most importantly, SB 666 lacks the safe harbor available under the CFDL that allows a provider to rely on the business address an applicant provides in its application for financing to determine whether the transaction is one to which the law applies.

Helpfully, however, the exemptions from SB 666 are substantively identical to the exemptions from the CFDL, so companies that are outside the scope of the CFDL will be exempt from SB 666 as well.

New Commercial UDAAP and Annual Reporting Rules

SB 666 arrives in the wake of recent regulations promulgated by the DFPI in August that impose new restrictions on UDAAPs and an annual reporting requirement on certain providers of commercial financial products or services. Effective October 1, 2023, any covered provider is prohibited from engaging in UDAAPs.

The UDAAP prohibition applies to providers subject to the CFDL as well as to other entities engaged in the business of offering or providing a “financial product or service.” This term is defined broadly under California’s Consumer Financial Protection Law (the “CFPL”) to include most extensions of credit. A UDAAP under the new rule is defined largely the same as a UDAAP under existing federal law—but the DFPI rule additionally incorporates California’s unfair competition law and relevant case law.

The new DFPI rules also require providers that are subject to the CFDL to electronically file an annual report with the DFPI by March 15 of each year beginning in 2025. The report must include:

• The financer’s identifying and contact information
• The total number and dollar amount of commercial financing extended to certain small businesses and family farms over the prior year, broken out by type of financing and amount financed
• The minimum, maximum, average, and median annual percentage rate disclosed in CFDL-mandated disclosures where such disclosures were required.

Transactions made under a provider’s California Financing Law license are excluded from the annual reports.

Signs of Things to Come?

These regulations, considered alongside SB 666, are an indication that states are not done regulating small business financing. Given California’s history as a bellwether, there is a strong possibility that other states will follow California’s lead in imposing substantive requirements on the commercial financing industry that go beyond those states’ existing disclosure and registration requirements.

In the Meantime

Companies that are subject to the CFDL should consider their customer/borrower base and fees to determine whether SB 666 will require them to alter their fee structures. This could require the collection of additional information from applicants or borrowers. In addition, businesses should determine whether they need to make any changes to their practices to comply with the new California UDAAP restrictions and also should begin thinking about any systems updates needed to start submitting any required annual reports come 2025.