New CA Rules Prohibiting Certain Fees by Lenders/Factors to Take Effect January 1st

SFNet is providing the following explanation of the new California regulations taking effect on January 1, 2024. Should you have specific questions please consult your legal counsel (or Michele Ocejo mocejo@sfnet.com or Rich Gumbrecht rgumbrecht@sfnet.com.

Effective on and after January 1, 2024 all “Covered Entities” (defined below) are prohibited from charging certain specified fees to California “Small Businesses” or “Small Business Owners” (defined below) in connection with certain commercial financing transactions. This legislation is intended to affect certain fees charged both current and future Recipients (defined below)  (See https://legiscan.com/CA/text/SB666/id/2827694).  Set forth below is a summary of the legislation:

For purposes of this legislation a Covered Entity includes a “Provider” who extends a specific offer of commercial financing to a “Recipient”. The terms “Provider” and “Recipient” have the same meanings as used in the California Commercial Disclosure Laws (See SFNet Guide to the California Disclosure Laws and Regulations).  A Provider would include such non-depository, non-regulated entities as an asset-based lender, factor and any entity which provide advances against future sales. Similarly, Recipient means a borrower/client who is presented a specific commercial financing offer by a Provider that is equal to or less than $500,000.  The definition of a Recipient would effectively be further limited by the Small Business/Small Business Owner qualification.

A “Small Business” or “Small Business Owner” for purposes of this legislation is defined as:

1. An independently owned and operated entity that is not dominate in its field of operation;
2. The principal office of which is located in California;
3. The officers of which are domiciled in California;
4. Together with its affiliated entities has 100 or less employees; and
5. Having average annual gross receipts of $15,000,000 or less over the preceding three years.

Excluded from the reach of the statute are:

1. Commercial financing transactions secured by real estate.
2. A Provider who makes no more than one commercial financial transaction in California in a 12 month period.
3. A Provider who makes five or fewer commercial transaction in California in a 12 month period that are incidental to the business of that person.

The fees for which the Provider is prohibited from charging its Recipient are specific:

1. A fee charged by the Provider for accepting or processing a payment required by the terms of the financing contract as an ACH transfer debit, except for non-sufficient funds fees.
2. A fee charged by the Provider for providing a statement to the borrower/factored client setting forth the amount due to satisfy the remaining indebtedness owed to the Provider, including, but not limited to, interest accruing to the due date of the facility.
3. A fee charged by the Provider, in addition to an origination fee that does not have a clear corresponding service provided for the fee, including, but not limited to, a risk assessment fee, a due diligence fee or a platform fee.
4. A fee for monitoring the small business’s collateral, unless the underlying financing transaction is delinquent for more than 60 days.
5. A fee charged by the Provider for filing or terminating a lien filed in accordance with the provisions of the Uniform Commercial Code against a business’s assets that exceeds 150% of the cost of filing or termination.

The law makes a waiver of the provision of this title contrary to public policy and the collection of the prohibited fees void and unenforceable. Damages include actual damages, statutory damages of at least $500, but no greater than $2,500 injunctive relief attorney’s fees and costs. Clearly a private cause is contemplated by the legislation.

The foregoing is not meant to be legal advice and we strongly suggest that you consult with your counsel to better understand your potential exposure to this new legislation.