New DFPI Regulations on small business loans in California
Impact of New DFPI Regulations on Small Business Loans in California
Introduction
In a move aimed at bolstering financial protections, California's Department of Financial Protection & Innovation (DFPI) recently introduced regulations pursuant to AB 1864, granting them authority to define unfair, deceptive, and abusive acts and practices associated with offering financial products and services to small businesses, nonprofits, and family farms. However, concerns have arisen regarding the potential consequences of these new rules on the availability and cost of small business loans in the state.
Free domain with shared hosting
Not what you're looking for?
Check out these articles:
DFPI's New Regulations: A Closer Look
Three years ago, Governor Newsom signed AB 1864, empowering the DFPI to establish rules defining unfair, deceptive, and abusive practices linked to commercial financing and financial offerings to small business recipients. The DFPI's latest regulations, slated to take effect on October 1, 2023, aim to shed light on these practices. However, critics point out that these rules might not achieve their intended objectives due to a lack of specificity in certain areas.
Check out these other articles:
The Challenge of Vague Definitions
A central issue with the new rules revolves around their lack of precision. One instance of concern pertains to the rule's classification of a practice as "unfair." The criteria listed include causing substantial injury to covered entities, being unavoidable by these entities, and not being outweighed by countervailing benefits. However, this vague language could open the door to litigation surrounding the application of these standards to specific practices.
The Scope of Application
The regulations, as outlined, pertain to practices connected with providing "commercial financing" or other "financial product or service" to a "covered entity." The definition of a "covered entity" encompasses small businesses, nonprofits, and family farms predominantly operated in California. This definition's breadth raises the question of whether these regulations might inadvertently have unintended consequences.
Unintended Consequences on Small Business Loans
Similar to how federal regulations requiring sesame to be labeled as an allergen led to an increase in sesame-containing products due to cost considerations, it's possible that the DFPI's rules could inadvertently impact small business loans. The concern is that lenders might opt to avoid lending to these entities or increase loan costs to mitigate the heightened risk introduced by the DFPI's regulations.
Conclusion
While the DFPI's intentions with the new regulations are well-placed, the potential unintended consequences on the availability and cost of small business loans in California are cause for concern. Striking a balance between safeguarding businesses and ensuring economic viability is a delicate task. As the October 1st effective date approaches, stakeholders and observers will be watching closely to assess the true impact of these regulations on the state's small business financing landscape.