Two weeks after the DFPI set a Dec. 9 effective date for its long-threatened commercial financing disclosure requirement (we discussed these regulations in a previous bog, here), the DFPI issued proposed commercial UDAAP and annual reporting regulations likely impacting many of the same companies. Specifically, the proposed regulations would apply to providers of commercial financing or other financial products and services to small businesses, nonprofits, and family farms, and would (i) expand the DFPI’s UDAAP authority, and (2) impose annual reporting requirements on covered providers (we briefly discussed these proposed regulations in a previous blog post here).

The proposed UDAAP and annual reporting regulations follow the DFPI’s nearly four-year effort to promulgate commercial financing disclosure rules, which garnered much industry concern and comment as comprehensively chronicled in the DFPI’s 200+ page final statement of reasons. In light of the lengthy process for finalizing the disclosure regime and the proposed regulations arising under a separate consumer protection statute, some weary industry participants appear to have been caught off-guard.

Notably, the definition of “small business” references a definition set forth in California’s Code of Civil Procedure, which includes a business that is independently owned and operated, not dominant in its field, and below specified maximum thresholds in annual gross receipts. The proposed regulations will require commercial financers to file reports annually, indicating the (i) total number and dollar amount of transactions with small businesses, family farms, and non-profits, (ii) number of transactions by amount financed and type of commercial financing or other financial product or service, and (iii) minimum, maximum, average, and median total cost of financing by type of transaction, calculated in accordance with the commercial financing disclosure regulations.

Written comments on the proposed regulations are due by August 8.

Putting It Into Practice: Some commercial financers may consider the DFPI’s promulgation of proposed commercial regulations under a consumer protection statute somewhat troubling, notwithstanding the fact that the statute does give the DFPI this authority. Setting aside policy debates, which undoubtedly are prolific if the back-and-forth between industry and the DFPI regarding commercial financing disclosures is any indication, the regulation brings into question some potential operational challenges that commercial financers may face, including among others:

  • The proposed regulations will require impacted businesses to report information that they may not currently collect from commercial customers, such as gross annual revenue, which is critical to determining what transactions are to be reported and how. The proposed regulations do not set forth a preferred protocol or safe harbor method as to how commercial finance companies should go about collecting and vetting the information required to determine whether a company meets, for example, the definition of a “small business.”
  • Unlike the commercial financing disclosure requirements, the reporting requirements apply more broadly to companies not involved in the origination of commercial credit. Specifically, companies that service commercial credit accounts will be required to report loan amount and APR information, even if such servicing companies did not extend such credit or make the calculations that are required to be reported. As a result, loan servicers may need to certify to the accuracy of information and data provided by the originators of such products. It is not clear whether the DFPI expects companies to prepare reports based on derivative information, and how such information should be identified if it is not based on a loan servicer’s independent analyses or verification. Further, it remains to be seen whether the reporting of such information by servicers may be exempted if it were to be duplicative of information already provided by originators.

Commercial finance companies wishing to participate in the rulemaking process should submit comments to the DFPI.