California continues to lead the way in strengthening regulation of the commercial lending sector. Most recently, on October 13, 2023, California Governor Gavin Newsom signed Senate Bill 666 into law, prohibiting commercial lenders from charging “small businesses” certain fees for loans. The law goes into effect on January 1, 2024. In recent months, California has also finalized rules prohibiting unfair, deceptive, or fraudulent acts or practices related to commercial lending and imposing annual reporting requirements on certain commercial lenders.
Commercial Lending Fee Limits
The bill would limit or restrict the following fee categories:
Fees for processing payments required by ACH debit transfer (unless insufficient funds are involved), repayment statement fees, loan origination fees, plus any fees for which there is no clearly corresponding service, such as platform fees, collateral monitoring fees (unless the transaction is 60 days or more delinquent), and fees for filing or releasing a lien against the assets of the company where the fee exceeds 150% of the actual cost of filing or releasing.
SB 666 applies to small business commercial lending transactions of $500,000 or less, including factoring and revenue-based lending. The bill defines a “small business” as a business that is independently owned and operated, not dominant in its field, has its principal offices and officers located in California, has 100 or fewer employees, including affiliates, and has average annual gross receipts of $15 million or less over the past three years. This is more limited in scope than California's broader commercial lending disclosure law, which applies to all recipients “principally directed or controlled” by the State of California. SB 666's fee limitations do not apply to certain commercial transactions, such as real estate secured transactions, or to certain providers, such as depository institutions.
Violations of the new law may result in actual damages, including but not limited to the amount of the prohibited fees paid by the recipient, and statutory damages ranging from $500 to $2,500. The law also allows for injunctive relief, attorneys' fees, costs, and “any other relief the court deems appropriate.”
What this means for you
California's enactment of SB 666 highlights a growing trend toward increased regulatory oversight of non-bank commercial finance practices that particularly affect small businesses. If California's SB 666 has a similar ripple effect as the Commercial Financial Disclosure Act, other states are expected to follow suit. While intended to promote transparency and protection for small businesses, restrictive fee structures and expanded legal recourse could pose operational and financial challenges for finance providers in this sector.
Lenders, factors, merchant cash advance companies, and other covered entities should carefully review their customer agreements to ensure that no prohibited fees are imposed. Changes or eliminations of fees by covered entities may impact customer agreements as well as disclosures required by California law. For example, such changes may affect financing fees and, therefore, annual percentage rates (APRs). Conduct a comprehensive analysis to understand how this new law will affect your business operations.
inquiry
We are tracking increasing regulatory requirements for small business lending in California and other states. If you have questions about new state regulations on commercial lending products, please contact Christopher Friedman, Susan Seaman, Alex McFall, Shelby Lomax or any of the attorneys at Husch Blackwell.