One improvement to look at: California’s “mini CFPB” and small enterprise finance

In late September, California enacted the California Consumer Financing Protection Act (“CCFPL”), renaming the California Department of Business Supervision (now the California Department of Finance and Innovation) and giving the Department extensive powers to regulate the supply and provision of various financial products or consumer services under California consumer finance laws “and” exercise of non-exclusive regulatory and enforcement authority under California consumer finance laws and, where permitted, federal consumer finance laws “.[1] Following the example of the Federal Office for Consumer Financial Protection (“CFPB”), some have called the newly named Department for Financial Protection and Innovation (“Department”) the “Mini-CFPB”.

In addition to granting full oversight and enforcement powers to the department, the CCFPL makes it unlawful for an “insured person” or “service provider” to commit, commit, or propose an illegal, unfair, misleading, or abusive practice (“UDAAP”) ) in relation to “consumer financial products or services”.[2] The CCFPL gives the department extensive powers to set rules for implementing the new law. For example, the department can typically identify actions or practices that the department deems to be unlawful, unfair, misleading, or abusive in connection with a transaction with a consumer for a financial product or service.[3] In the provision that gives the UDAAP division the authority to create regulations for consumer financial products or services, the CCFPL requires the division to interpret the terms “unfair” and misleading in a manner consistent with Section 17200 of the California Unfair Practices Act is compatible[4] and jurisdiction below.[5] The CCFPL adopts the broad definition of “abusive” act or practice contained in Title X of the Dodd-Frank Reform and Consumer Protection Act on Wall Street 2010 (the “Dodd-Frank Act”) Encourages the Department to interpret the term “Abusive” in a manner consistent with the Dodd-Frank Act.[6]

The above-mentioned UDAAP rules-making provisions and most of the other rules-making provisions in the CCFPL enable the division to issue rules that apply to individuals involved in “consumer financial products or services” that Defined in a relevant part as “a financial product or service being supplied”, offered or made available for consumer use primarily for personal, family or household purposes.[7] Despite the name of the law and the scope of its core provisions, the CCFPL gives the department the authority to rule-identify UDAAPs related to small business financing products and to require data collection and reporting on small business financing products. In particular, the CCFPL allows the department to:

Define unfair, misleading, and abusive acts and practices related to the offering or provision of commercial funding under Section 22800 (d) or otherwise offering or provision of financial products and services to small business, nonprofit, and family business recipients. The regulation may also include the collection and reporting of data on the provision of trade finance or other financial products and services.[8]

The CCFPL includes the definition of “commercial finance” from California’s relatively new Commercial Finance Disclosure Act, which includes a variety of small business finance products, such as: B. Merchant cash advances, asset-based loans, commercial loans, commercial revolving loans, and lease finance. [9] These products generally do not meet the definition of “consumer financial products or services” in the CCFPL, and persons involved in these products should not be “insured persons” or “service providers” subject to other provisions of the CCFPL .

The Small Business Finance Products Division’s “surprise” UDAAP and data collection agency does not directly affect all small business finance providers. The CCFPL exempts, but is not limited to, a number of regulated businesses including banks, California licensed financial lenders, and California licensed financial brokers.[10] However, a future regime could apply to merchant prepayment providers, unlicensed (but legal) credit intermediaries and other non-exempt providers who provide services related to the offering or provision of financing products to small businesses. Because vendors supporting small business financing products may be subject to a future UDAAP or data collection rule by the department, exempt companies may be indirectly affected by a future rule.

At the federal level, the Federal Trade Commission (“FTC”) has exercised extensive jurisdiction under the Federal Trade Commission Act and other laws “to stop misleading, unfair and other illegal practices by small business finance providers and their marketers, services, or collectors. ”[11] In mid-September, the CFPB published comments on proposals to implement Section 1071 of the Dodd-Frank Act, requiring financial institutions to report selected data relating to loan applications from women, minority groups and small businesses and the data to the CFPB annually.[12] It remains to be seen whether and to what extent the FTC’s use of its authority for unfair or misleading acts or practices and the promulgation of a rule to collect data for small businesses by the CFPB will affect the division’s use of its rule-making authority for small business funding. Of course, the use of the UDAAP and data collection regulatory agency in California as a populous, individualized state could affect the actions of federal agencies with similar powers and other states. The use of the new regulatory authority by the Ministry of Finance for Small Businesses is an observable development. The CCFPL comes into force on January 1, 2021.

[1] Cal. Fin. Code § 90006 (a).

[2] I would. Section 90003 (a).

[3] I would.

[4] Cal. Bus. & Prof. Code § 17200.

[5] Cal Fin. Code § 90009 (c) (1).

[6] I would. Section 90009 (c) (2) – (3).

[7] I would. Section 90005 (e) (1).

[8] I would. Section 90009 (e).

[9] I would. Section 22800.

[10] I would. Section 90002.

[11] Strictly Business: An Employee Perspective, Fed. Trade Commission (February 2020), https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf/.

[12] The Bureau of Consumer Financial Protection publishes an overview of the proposals being considered to implement the data collection requirements for small business loans. Fin. Protection Bureau (September 15, 2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-releases-outline-proposals-implement-small-business-lending-data-collection-requirements/.

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