Victory! Court Upholds California Regulations Protecting Small Businesses from Predatory Lending

December 13, 2023

Last week, a federal court in Los Angeles upheld regulations promulgated by the California Department of Financial Protection and Innovation (DFPI) that require sales-based financing providers to disclose their products' APR and other costs to borrowers, typically small businesses and micro-entrepreneurs. The Center, along with our co-counsel Public Counsel and fellow amici California Association for Microenterprise Opportunity (CAMEO), Responsible Business Lending Coalition, and Office of Kat Taylor, filed an amicus brief in support of the DFPI's regulations.

As we noted in an earlier dispatch, the regulations for the first time put guardrails on business financing products like merchant cash advances that are marketed as alternatives to traditional loans. Before the regulations went into effect, companies offering these products did not reveal to borrowers the actual costs or the APR, which routinely exceeds 100 percent.

The case at issue involved a two-pronged constitutional challenge to the DFPI regulations. The Small Business Finance Association, an industry trade group, asserted that the regulations violated the First Amendment because the required disclosures were allegedly misleading, and the Supremacy Clause because the disclosures purportedly conflicted with and were therefore preempted by the federal Truth in Lending Act. The district court – essentially reversing position from its decision earlier in the case – rejected both contentions. The court held that the disclosures are accurate and uncontroversial and therefore comport with the First Amendment, and that the Truth in Lending Act addresses consumer lending, not business financing, so the regulations are not preempted by federal law.

The court's decision upholding the regulations means that small businesses throughout California will continue to be able to "make apples-to-apples comparisons when seeking financing," as our fellow amicus the Responsible Business Lending Coalition put it. Because small business owners, like consumers, deserve protection from often-predatory (and until recently unregulated) financing businesses, we are proud to have worked to uphold this essential, well-crafted, first-in-the-nation law.