Just days before Halloween, California passed Senate Bill 666, putting limits on the fees that commercial financiers can charge their small business customers. Signed by the governor on Oct. 13, the bill marks an overhaul of the state’s commercial finance regulations. California’s sweeping Commercial Finance Disclosure Law (CFDL) of 2018 began as a disclosure-based regime that directly regulates commercial financing businesses and prohibits charging certain fees to “small businesses.” SB 666 closely follows legislation passed by the California Department of Financial Protection and Innovation (DFPI) in August 2023 targeting unfair, deceptive, or abusive practices or practices (“UDAAPs”) in business finance and requiring business finance professionals to submit their annual reports. Activities to state.
New payment limits under Senate Bill 666
In the year Effective January 1, 2024, a “business finance” provider or broker of business finance—as defined in the CFDL—is prohibited from paying the following fees to a small business or small business owner:
- Fee to receive automatic clearinghouse transfer debit (excluding related NSF fees)
- Payment of account statements
- A fee in addition to an origination fee and “obviously related services provided for the fee,” including, but not limited to, risk assessment, due diligence, or staging fees.
- Unless the agreement is for more than 60 days, the fee is paid to control the guarantee of the small business
- The fee for filing or terminating a UCC lien filed against the business’s property is greater than 150% of the cost of filing or terminating
Commercial financing covered by the CFDL—and therefore subject to SB 666 payment limits—includes closed-end and open-end loans, finance leases, merchant cash advances, and factoring.
A small business is defined under SB 666 as:
- An owned and operated business that is not dominant in its field of operation;
- Main office located in California;
- Officers residing in California; And
- With its affiliates, 100 or fewer employees and average annual gross receipts of $15 million or less for the past three years.
Accordingly, although SB 666 eliminates the CFDL, SB 666 applies only to a subset of transactions subject to the CFDL.
The California bond that inspired SB 666 also differs from the CFDL. SB 666 applies to transactions where the receiver has its headquarters and officers located in California as a small business, while the CFDL applies to transactions where the receiver is “principally conducted or managed in California.”
Perhaps most importantly, SB 666 lacks the safe harbor available under the CFDL, which allows a provider to rely on its business address on an applicant’s financing application to confirm that the transaction is subject to the law.
Importantly, however, the exemptions from SB 666 are similar to the CFDL exemptions, so companies outside the scope of the CFDL would be exempt from SB 666.
New commercial UDAAP and annual reporting rules
SB 666 comes on the heels of recent regulations announced by DFPI in August that included new restrictions on UDAAPs and annual reporting requirements on certain providers of commercial financial products or services. Beginning October 1, 2023, any covered provider is prohibited from participating in UDAAPs.
The UDAAP prohibition applies to providers under the CFDL as well as other entities engaged in the business of providing or offering a “financial product or service.” This term is broadly defined to include most extensions of credit under the California Consumer Financial Protection Act (“CFPL”). Under the new law, the UDAAP is largely defined by the same federal law as the UDAAP—but the DFPI Act incorporates California’s unfair competition law and related case law.
The new DFPI regulations will require providers subject to the CFDL to submit annual reports electronically every March 15, starting in 2025. The report should include the following:
- The identity and contact information of the financier
- Total number and dollar amount of business financing extended to selected small businesses and family farms last year, by type of financing and amount financed
- The minimum, maximum, average and median annual percentage rates in CFDL mandated disclosures where such disclosures are required.
Transactions made under the issuer’s California financing law license are excluded from annual reports.
Signs of things to come?
These regulations, proposed in conjunction with SB 666, are an indication that states are not done regulating small business financing. If we look to California’s history as a bellwether, it is highly likely that other states will follow California’s lead in imposing substantive requirements on the commercial finance industry and go beyond these states’ 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 structure. This may require collecting additional information from applicants or borrowers. In addition, businesses should determine if they need to make any changes to their practices to comply with the new California UDAAP limits, and should also begin thinking about any system updates needed to file the annual reports required by 2025.