DFPI releases modified proposed California Consumer Financial Protection Law regulations addressing certain commercial transactions

On February 24, 2023, the California Department of Financial Protection and Innovation (“DFPI”) released a Notice containing modifications to previously proposed regulations addressing the Consumer Financial Protection Law (“CFPL”).  The CFPL, in addition to its consumer focused provisions, contains UDAAP and reporting rules regarding certain commercial financial products and services offered to “covered entities,” which is defined to include small businesses, nonprofits, and family farms whose activities are principally directed or managed from California.  These rules and restrictions apply to “covered providers,” which are defined as any person engaged in the business of offering or providing commercial financing or another financial products or services to the aforementioned covered entities.

Regarding the UDAAP restrictions, the newly modified regulations remove the prior draft’s prohibition on simply proposing to engage in UDAAP activities (no express reason was disclosed for this change), but leaves the prior draft’s prohibition on engaging in UDAAP activity intact.  The modified regulations further clarify that the UDAAP prohibitions apply 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.”

Further, the modified regulations significantly redefine the term “small business,” changing it from the prior draft’s incorporation by reference of the term’s definition under CA Civ Pro Code § 1028.5, to a new express definition, which attempts to provide both greater clarity in application, as well as a safe-harbor provision for covered providers:

“Small business” means a business entity organized for profit with annual gross receipts of no more than $16,000,000 or the annual gross receipt level as biennially adjusted by the Department of General Services in accordance with Government Code section 14837, subdivision (d)(3), whichever is greater.  For the purpose of determining a business entity’s annual gross receipts, a covered provider may rely on any relevant written representation by the business entity, including information provided in any application or agreement for commercial financing or other financial product or service.

Lastly, the prior draft of the regulations implemented annual reporting requirements for covered providers.  The modified regulations clarify that the reporting requirements would not go into effect until 2025, with the first round of annual reports being due on March 15, 2025.  While the modified regulations still maintains the prior draft’s requirement that transactions must be reported by various dollar values organized by bands, it eliminates the requirement to report any commercial financing transactions in excess of $500,000.  However, it is important to note that these requirements do not apply to “covered persons” who would otherwise be exempt under CA Fin Code § 90002, which includes banks and thrifts.

Public comment on the modified regulations is open until March 12, 2023.  The new draft of the proposed regulations can be found here.

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