On December 5, 2023, Small Business Finance Association v. Clothilde Hewlett , Judge Klausner of the United States District Court for the Central District confirmed the propriety of the DFPI’s regulation of small business lending.  The background of the DFPI’s regulations is as follows:

On September 30, 2018, California enacted Senate Bill (“SB”) 1235, codified at California Financial Codes sections 22800-22805. The statute requires that an offer of commercial financing for $500,000 or less be accompanied by disclosures of: (1) the amount of funds provided, (2) the total dollar cost of financing, (3) the te1m or estimated te1m, (4) the method, frequency, and amount of payments, (5) a description of prepayment policies, and (6) the total cost of financing expressed as an annualized rate. Cal. Fin. Code§§ 22802(b), 22803(a). The statute also tasked the DFPI with issuing regulations implementing the disclosure requirements. Id. § 22804. On June 9, 2022, the DFPI promulgated the Regulations, effective December 9, 2022, setting fo1th in detail the required disclosures for (1) close-end loans, (2) open-end lines of credit (“OECs”), (3) factoring transactions, ( 4) sales-based financings (“SBFs”), (5) leases, ( 6) asset-based lending, and (7) a catchall catego1y of “all other” financial products. 10 Cal. Code Regs. §§ 910-17. The exact content and fo1mat of disclosures differ depending on the catego1y of product. See generally id. Pe1tinent to this
action are the disclosures for OECs and SBFs. . . .After DFPI promulgated the Regulations, Plaintiff brought the instant action on behalf of its members, seeking injunctive and declai·at01y relief to prevent enforcement of the Regulations. Specifically, Plaintiff claims that (1) the compelled disclosures violate its members’ free speech rights under the First Amendment, and (2) the Regulations are preempted by TILA to the extent the APR and finance charge disclosures are inconsistent with TILA’s requirements. (Id. 58- 69.)

Judge Klausner found that the Regulations did not force small business lenders to engage in deceptive, false, or inaccurate speech.

To the contrary, the record shows that the disclosures will help small businesses understand the cost of SBFs and OECs and do comparison shopping. As the Federal Reserve Board’s survey indicated, small businesses often misunderstand the costs of SBFs and OECs, mistake them for loans, and fail to consider fees and other charges hidden in footnotes and fine print. (FRB Study at 25.) Small businesses have asked for standardized disclosures that uncloak the true cost of financing and highlight useful information like “APR, repayment amount, frequency of payments, and prepayment penalties.” (Id. at 28.) The Regulations mandate such disclosures, thereby helping small businesses make info1med credit decisions. As a further indication that the disclosures are not misleading, several of Plaintiff’s members admitted that they have no record of customers complaining about the disclosures, which have been mandated since December 2022. (Price Deel. ,r 5, ECF No. 52-11 ; Tunentine Deel. ,r 4, ECF No. 52-12; Reward Network Resp. to Subpoena at 4, ECF No. 52-13; Tumulty Dep. at 310:4-10, ECF No. 52-26.) The CEO of one financer, Fo1wai·d Financing, was deposed about a spreadsheet that purpo1tedly contained a list of 34 customer complaints about the disclosures. (Pl. ‘s Opp’n Summ. J., Bakes Dep., Ex. 1 at 45:5-21 , ECF No. 72-3.) However, the deposition transcript, as it stands, does not demonstrate that any customer was misled by the disclosures. Crucially, the CEO could not explain whether the customers were complaining about the existence of the disclosures, or merely that the disclosed costs were too high. (Id. at 49:7- 20.) The fact a handful of customers might have complained about the
disclosures is insufficient to establish that the disclosures are misleading. Accordingly, the record does
not demonstrate that the SBF and OEC disclosures mislead recipients into believing that the products are
traditional loans.

Judge Klausner found that the regulations were not unduly burdensome and were within the State’s governmental interest.

The parties do not dispute that the disclosures are reasonably related to the state’s substantial interest in protecting small businesses from unwittingly entering into unaffordable financing contracts.  Indeed, the record is replete with evidence that the state has a legitimate concern about misinformation or insufficient info1mation in commercial financing offers, and that the Regulations are intended to alleviate this concern. Accordingly, the final requirement under Zauderer is easily satisfied.  To sum up, the undisputed evidence establishes that each element under Zauderer is satisfied. Accordingly, the Court GRANTS Defendant summary judgment as to the First Amendment claim.