In recent years, California has been taking measures to ensure transparency and fairness in their lending industry, specifically in relation to small businesses, nonprofits and family farms. Governor Newsom signed AB 1864 into law three years ago, giving the Department of Financial Protection & Innovation (DFPI) the authority to define what counts as unfair, deceptive, and abusive acts and practices in connection with commercial financing, as mentioned in JD Supra.
The new law’s main objective is to protect California small businesses from predatory lending practices. This brings up the question: will these new DFPI lending rules lower the availability and increase the cost of small business loans?
It is thought that, while the new regulations are made with good intentions, there could be unforeseen negative effects on the availability of funding for small businesses. The DFPI now has the power to monitor and scrutinize lending practices more closely, which could lead lenders to be more cautious and restrictive in their lending policies. This could inadvertently reduce the availability of loans and raise the cost of borrowing for small businesses.
In addition, stricter guidelines could also deter new entrants into the market, limiting competition and potentially leading to higher loan costs for small businesses. This is because startups might lack the resources to comply with the more stringent regulations. These possible consequences should be taken into account when assessing the impact of the new lending rules in California.
It remains to be seen if the potential protective benefits of this protective law outweigh the potential challenges it may create. The financial and legal worlds will undoubtedly watch with interest to see exactly how this law affects the lending practices in California.