September 2023 in Brief: Bankruptcy & Finance

California Finalizes UDAAP Rule for Small Business Financing

By Susan Seaman, Chris Friedman, and Daniel Wilkinson, Husch Blackwell LLP

On August 2, 2023, the California Department of Financial Protection and Innovation (DFPI) issued a final rule that prohibits covered providers from engaging in unfair, deceptive, or abusive acts or practices (UDAAP) in connection with offering or providing commercial financing or other financial products or services to small businesses, nonprofits, or family farms. The final rule adopts the general standards for unfairness, deception, and abusiveness under federal law. With respect to the unfairness and deception standards, the rule also states that an act or practice is unfair or deceptive in accordance with the California Unfair Competition Law and California case law under that law.

The persons and products covered by the new UDAAP rule are more limited than they initially appear. The term “covered provider” excludes those persons exempt from the California Consumer Financial Protection Law (CCFPL), including but not limited to banks, credit unions, California-licensed finance lenders, and California-licensed brokers. The recipient of the financing, product, or service must be a small business, nonprofit, or family farm whose activities are principally directed or managed from California. The definition of “small business” includes business entities organized for profit with annual gross receipts of no more than $16 million or the annual gross receipt level as biennially adjusted under California law, whichever amount is greater.

The types of products covered by the new UDAAP rule include “commercial financing,” as defined in California’s Commercial Financing Disclosures statute, and an array of financial products or services offered to small businesses, nonprofit, or family farms for use primarily for purposes other than personal, family, or household purposes.

The final rule also establishes an annual reporting requirement beginning in March 2025 for a narrow set of covered providers offering commercial financing.