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UDAAP Rule and small business in California

California's New UDAAP Rule: Strengthening Protections for Small Business Financing


Introduction

In a significant development for small businesses, the California Department of Financial Protection and Innovation (DFPI) recently finalized a rule to curb unfair, deceptive, or abusive acts and practices (UDAAP) in the realm of small business financing. This move aligns with a growing trend to extend consumer-style safeguards to the small business sector. Let's delve into the key aspects of this rule and its implications.



UDAAP Rule and small business in California

UDAAP Prohibition

The finalized rule, issued on August 2, 2023, under the California Consumer Financial Protection Law (CCFPL), establishes that certain individuals are prohibited from engaging in UDAAP in connection with offering commercial financing or financial products to small businesses, nonprofits, and family farms. The rule adopts federal standards for unfairness, deception, and abusiveness without explicitly banning specific behaviors. Notably, the DFPI asserts that this rule provides familiar guidance to the regulated community through longstanding standards.


Scope and Definitions

It's important to note that the rule's coverage is more limited than it might appear initially. The term "covered provider" encompasses individuals offering commercial financing or financial products to qualifying entities. However, exemptions exist for entities such as banks, credit unions, and licensed finance lenders and brokers. To be subject to this rule, the recipient of the financing, product, or service must be a small business, nonprofit, or family farm whose primary activities are directed or managed from California.


Defining "small business," the DFPI considers entities organized for profit with annual gross receipts of up to $16 million or the biennially adjusted California law threshold, whichever is higher. Covered providers can rely on a business's written declarations about its annual gross receipts and California-centric activities.


Covered Products and Reporting Requirement

The rule's coverage extends to "commercial financing" as defined in California's Commercial Financing Disclosures statute. It applies to a range of financial products or services meant for small businesses, nonprofits, or family farms, excluding personal, family, or household purposes. This encompasses traditional loans as well as alternative finance options like factoring and revenue-based finance.


Additionally, a new annual reporting requirement applies to a specific subset of covered providers. Starting from March 2025, providers offering commercial financing must submit a verified report to the DFPI, detailing information about their commercial financing transactions from the preceding year.


Significance and Future Trends

California's rule stands out for a few reasons. It addresses abusive practices within financial product offerings to small businesses, a realm where federal authority doesn't extend to abusiveness. By adopting the abusiveness standard set by the federal Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB), California sets a precedent that could influence other states. As a frontrunner in consumer protection, California's regulatory actions often pave the way for other states to follow suit.


Conclusion

With the finalization of this UDAAP rule, California is taking significant strides in protecting small businesses from unfair, deceptive, and abusive financial practices. As the state continues to establish itself as a pro-consumer leader, the effects of this rule could ripple through other states and industries, fostering enhanced safeguards for small business financing across the nation.

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