On October 1, 2023 the California Department of Financial Protection and Innovation’s (“DFPI”) final regulations impacting those who provide commercial financial products and services will become effective. The regulations implement the California Consumer Financial Protection Law’s (“CCFPL”) prohibition on engaging in unfair, deceptive or abusive practices (“UDAAP”) in connection with the offering or provision of certain commercial financial products and services. The rules apply to entities who offer such products and services to “covered entities,” which are defined to include small businesses (for profit entities with annual gross receipts of no more than $16 million, as adjusted), nonprofits, and family farms whose activities are principally directed or managed from California. In addition to the UDAAP prohibition, the regulation establishes reporting requirements for providers of commercial financial products or services, which include reporting: (1) the covered provider’s name, any fictitious business names, entity type, mailing address, phone number, email address, website address, and the designated contact person; (2) by the type of commercial financing, the total number and dollar of commercial financing transactions with covered entities; and (3) the type of commercial financing and the number of commercial financing transactions with covered entities for amounts up to $500,000. While we have seen consumer-like disclosure requirements for commercial products becoming more prevalent in different jurisdictions, California is the first state in the nation to have a financial services regulator oversee commercial financial products and services in this manner.
The UDAAP prohibition applies to any unfair, deceptive, or abusive act or practice “in connection with the offering or provision of commercial financing or another financial product or service to a covered entity.” While the definitions of unfair, deceptive, or abusive largely track those set forth in the federal Consumer Financial Protection Act, the definitions of unfair and deceptive also include acts and practices that would violate California Business and Professions Code section l7200 “and the case law thereunder.”
The covered providers, except those who make no more than one commercial financing transaction to a covered entity in a 12-month period or who make five or fewer commercial financing transactions in a 12-month period that are “incidental to the business of the covered provider relying on this exemption,” are required to submit annual reports to the DFPI beginning on March 15, 2025. As explained above, the final regulation requires covered providers to track and report the number of transactions in defined amount ranges up to $500,000. Entities exempt from the CCFPL under Cal. Fin. Code § 90002, including banks, thrifts, and CFL licensees, continue to be exempt from these requirements.