New California Consumer Law Could Regulate SMB Loans

California’s new law expanding financial watchdog powers includes a provision that could help protect small business borrowers by making it easier to regulate small business loans, a report from Bloomberg Law says.

The bill intends to transform the state’s Department of Business Oversight, which will be renamed the Department of Financial Protection and Innovation (DFPI). The legislation gives the DFPI wider abilities to charge companies in some categories of misconduct that are deemed to be unfair, deceptive or abusive acts or practices (UDAAP). The provision is a smaller version of the protocol used by the Consumer Financial Protection Bureau (CFPB), according to the report.

In doing this, the legislation gives the department the ability to regulate nonbank small business lenders, a field which has been little regulated in the past. Ryan Metcalf, spokesman for the Responsible Business Lending Coalition and head of regulatory affairs at online lender Funding Circle, said the new rules would help to “provide much needed protection for the state’s 4 million small businesses,” Bloomberg Law wrote.

The bill will shift the DFPI’s focus from regulating financial service providers to financial products and activities themselves, and allows DFPI to take action against companies utilizing deceptive practices to get around the law.

Nonbank small business financing has grown exponentially since the 2008 recession. The proposed regulations would force lenders to start being more discerning, said Vaishali Rao, partner at Hinshaw & Culbertson LLP.

“Lenders will need to start thinking about small businesses the way they would an ordinary consumer, without the presumption of sophistication,” Rao said, according to the news outlet.

The CFPB, authorized by Dodd-Frank Wall Street Reform and Consumer Protection Act from a decade ago, handles issues of consumer protection in the finance sector.

The push for California to create its own financial protection watchdog, PYMNTS reported, comes from the changes the Trump administration has made to the CFPB, including an 80 percent drop in enforcement. California Assemblywoman Monique Limón said the point of the new regulation is to show California cares about consumer protections.