Earlier this month, the California Department of Financial Regulation and Innovation (CA DFPI) announced a new rule expanding the definition of unfair, deceptive and abusive acts and practices (UDAAP) to commercial financing. Specifically, the rule makes it unlawful “for a covered provider to engage or have engaged in any unfair, deceptive, or abusive act or practice in connection with the offering or provision of commercial financing or another financial product or service to a covered entity.” The new rule also includes annual reporting requirements (described below) for any covered provider who makes more than one commercial financing transaction to covered entities in a 12-month period or who makes five or more commercial financing transactions to covered entities in a 12-month period that are “incidental” to the business of the covered provider. Importantly, this rule does not apply to banks, credit unions, federal savings and loan associations, current licensees of the CA DFPI or licensees of other California agencies “to the extent that licensee or employee is acting under the authority of” the license.

Annual Reporting Requirement:

On or before March 15 of each year, beginning in 2025, covered providers who offer commercial financing will need to electronically file a verified report containing the following information:

• Contact information, including name, any fictitious business names, entity type, mailing address, phone number, email address, website address, and designated contact person.
• By type of commercial financing, the total number and total dollar amount of commercial financing transactions with covered entities during the preceding calendar year.
• By type of commercial financing, the number of commercial financing transactions with covered entities for the following amounts financed: $10,000 or less; $10,001 – $25,000; $25,001 – $50,000; $50,001 – $100,000; $100,001 – $250,000; and $250,001 – $500,000.

UDAAP Definition:

Under the rule, a UDAAP violation could be found if any of the below applies:

• An act or practice is unfair if either:
  • The act or practice causes or is likely to cause substantial injury to covered entities;
  • The injury is not reasonably avoidable; and
  • The injury is not outweighed by countervailing benefits.
• An act or practice, including a representation or omission, is deceptive if either:
  • The act or practice misleads or is likely to mislead the covered entity;
  • The covered entity’s interpretation of the act or practice is reasonable under the circumstances; and
  • The act or practice is material.
• An act or practice is abusive if either:
  • The act or practice materially interferes with the ability of a covered entity to understand a term or condition of commercial financing or another financial product or service; or
  • The act or practice takes unreasonable advantage of:
    • A lack of understanding on the part of the covered entity of the material risks, costs, or conditions of the commercial financing or other financial product or service;
    • The inability of the covered entity to protect its interests in selecting or using commercial financing or another financial product or service; or
    • The reasonable reliance by the covered entity on a provider to act in its interests.

The new rule becomes effective October 1, 2023.