Senate Standing Committee on Banking and Financial Institutions

All right. The Senate Committee on Banking and financial institutions will come to order. We do have six bills on the agenda. We do not have quorum now, so we will begin as a Subcommitee, and then once we have quorum, we will go ahead and officially open up. We have first here on the agenda, Senate Bill 919, with author, Senator Umberg. Senator Umberg, you may begin when you're ready.

Thank you, Madam Chair. I want to thank you and your staff, particularly Michael Burdick, for their hard work on this Bill. We appreciate it. I present SB 919, which will increase transparency in the franchise sales process for prospective franchisee by providing information that ensures a prospective franchisee understands the role of the third party franchise seller and the incentives that they may receive for referring the prospective franchisee to one franchise opportunity over another.

What this Bill does is it provides notice to the Commissioner of the third party franchise sellers actively selling franchises and discloses to a prospective franchisee about the third party franchise sellers professional experience and credentials, listing of franchisor clients by industry and the number of clients within each industry, services performed for their clients and compensation received, their litigation history, and the names of franchisees to whom franchises were sold during the past year.

Prospective franchisees will also receive a form providing a General description of the role of third party franchise sellers in the franchise sales process and suggested questions to ask their third party franchise seller. To facilitate due diligence of the third party franchise seller, in addition to franchise opportunities being considered, requires annual notice of filing with the Commissioner and payment of a registration fee.

I urge you and I vote I have with me Mister Matthew Kagel, who has come from the East Coast here with the International Franchise Association as the primary witness.

Great. Thank you, Senator Umberg, Mister Kagel, please begin your testimony and support.

Yes, thank you. Thank you, Madam Chair, Members of the Committee, and thank you for the opportunity to testify here in support of Senate Bill 919. My name is Matthew Kagle. I am the Director of state and local government relations at the International Franchise Association, the world's oldest and largest trade Association for franchising. IFA works to promote, enhance, and protect franchising on behalf of its franchisee, franchisor, and supplier Members, many of whom reside and do business here in the State of California.

The registration and disclosure requirements outlined in Senate Bill 919 further IFAs mission critical priority of advancing responsible franchising, an IFA initiative that calls for all key stakeholders in franchising, including franchisors, franchisees, and suppliers, to play a proactive role in the protection of the franchising model.

Suppliers to the franchise system include the growing body of third party franchise sellers, including individual brokers, broker networks, lead generators, franchise sales organizations and franchise consultants, all who play a pivotal role in the earliest stage of the franchise relationship, which is the franchise sales process.

Many third party franchise sellers play an invaluable role in the strategic growth of franchise systems, providing mentorship and sustainable expansion that align with an emerging franchisor's infrastructure and financial resources and guidance to prospective franchisees in selecting the franchise opportunity that aligns with experience and expectations. Yet some third party franchise sellers perpetuate irresponsible franchising, motivated by their own compensation, generated from high volume franchise sales and incentivized to usher prospective franchisees through the sales process as quickly as possible.

Regardless of whether a franchise opportunity is a good fit for either the prospective franchisee or the franchisor. By the time the misalignment is recognized, the third party franchise seller has been paid their Commission, but the franchise buyer is unaware the franchisor does not have the infrastructure or financial stability to provide ongoing operational support to their new franchise. And basically what this does is. As.

It stands, these third party franchise sellers operate without any necessary oversight, leaving prospective franchisees and franchises vulnerable to the misinformation left in the dark about critical information into making a sound investment. SB 919 addresses this issue by mandating minimal yet effective disclosures from third party franchise sellers to prospective franchisees and registration with the Department of Financial Protection and Innovation to provide visibility to the franchise sales activity conducted by the state.

And I will say, notably, the call for greater transparency in the franchise sales process through the registration disclosure by third party franchise Sellers is shared by franchisors, franchisees and suppliers with the coalition of Franchisee associations and American Association of Franchisees and dealers joining IFA in support of this Bill. This call of greater transparency is not new, particularly during a Federal Trade Commission's 2020 public workshop on pre sale disclosures.

Under the franchise rule, franchise attorney, regulator and franchisee consultant participants cited a need for the examination of the role of third party franchise sellers in the sales process, and I think this unified support continues to show and demonstrates the greater need for transparency in the role of third party franchise sellers. And so, in closing, you know, SB 919 is a critical piece of legislation designed to enhance transparency for prospective franchisees and accountability of third party franchise sellers throughout the franchise sales process.

And I thank Senator Umberg for his leadership on this Bill. And you know, we are committed to working with the Committee on making this a good Bill and urge your support of it to help promote the responsible franchising in the State of California. And just thank you for your time today and happy to take any questions.

Great. Thank you. And we do have a quorum, so I'm going to ask that the roll be called so we can establish quorum, please.

[Roll Call]

Great, thank you. We've established quorum. Any additional witnesses in support in the room, please feel free to come up to the podium. Seeing none, we have no official opposition, but any witness, any witnesses or folks in the room in opposition, please feel free to come to the podium. All right. Seeing none Members, we're going to go ahead and turn it to any member's comments, feedback. All right, we have a motion by Senator Minh. All right. Seeing no, no other.

Yeah, you want me to do that again? Yeah, yeah. Okay. Franchisee. Franchisor franchises. Yeah, right. There we go.

Thank you. The only thing that I'd like to point out, as the analysis says, is we don't have any opposition to this Bill, but there are several items listed for your consideration. Senator Umberg. You know, just things related to definitions, refining definitions to affecting a sale, just specificity, third party requirements. In the future, you may want to consider that.

We would like to ask as a Committee that as this Bill moves forward, you engage with the Committee simply because we don't know if at some point there will be some opposition or not. And we would love to be helpful. And in trying to figure this out, I have personally run bills related on brokers and know a lot about lead generators, and they're not easy to figure out.

So happy to be supportive and want to be supportive, but we also just want to recognize that there's recommendations in here to consider. And as this Bill moves forward, if there is any official opposition at any point, we definitely would love to be, be of help in how this Bill moves forward. So with that, I'll let you close.

Well, thank you, Madam Chair. And we will keep you informed as to the permutations of the Bill. Number one. Number two, if it should pass from this Committee, it'll head to judiciary. I know people on that Committee.

Number three is that I share your concern to make sure that when a piece of legislation passes out a Legislature, that the terms are defined well enough for people in the marketplace to be able to understand them and follow them, and that we're consistent among various pieces, various pieces, both of legislation as well as law. So with that, I urge and I vote.

Thank you very much, Senator Umberg. The motion is do pass and refer to the Committee on Judiciary, who you may know. We will go ahead

I have a relationship with the Vice Chair.

oh, there you go. All right, we'll go ahead and have. And call the roll on that motion.

[Roll Call]

All right, so we're going to go ahead and leave the roll open, put the Bill on call.

Thank you.

Thank you.

Thanks. All right.

Thank you, Steve.

Thank you. All right, we'll go ahead and take up consent as we wait for authors to come to the banking and financial service financial institutions hearing. So we'll go ahead and take consent.

Senator Limone.

So we need a motion for consent. Thank you, Senator. Min moves the motion for consent. All right.

Roll Call

Thank you. So those two bills I just went on consent, and now we will wait for. Oh, the bills. Let me read to you the bills. Senate Bill 1146 and Senate Bill 1521 is what we just voted for on consent. Thank you for the reminder. All right, we do have Senator Durazo here, and we are ready for you. Thank you.

Okay. Thank you, Madam Chair and Members. SB 1201 requires corporations and limited liability companies to report information about their beneficial owners when those business entities file with the Secretary of State's office. Existing law allows for the creation of LLCs and similar entities to provide legal protection for assets not owned by the LLC. This is very important. It can protect an owner's family's owner's family home from liquidation during a business bankruptcy, for example.

However, some owners can abuse LLCs to shield not only their assets, but also their identities. LLCs. Many LLCs are owned in the name of another LLC, which creates additional layers of anonymity. None of this is necessary to achieve the legal and the financial protections afforded by forming an LLC in the first place. Additionally, there is no required public disclosure of who the real owners of an LLC or corporation are.

The ability for LLCs to abuse the structure to remain anonymous ends up presenting numerous issues and even enables dishonesty in some cases, and in some cases, illegal practices. Take, for instance, how anonymous LLCs are pervasive among employers that skirt laws meant to protect workers by the time a business is found responsible for violations, the owners often have dissolved the LLC and created a new one, leaving nobody to pay back wages or address safety issues.

In fact, few workers who win wage judgments are able to collect their money. Three quarters of workers were recorded as receiving no payment after the Labor Commission revealed $32 million worth of wage judgments to 1,800 employers. It can take years for justice departments and labor representatives to connect the dots to show that a single person is responsible for repeated violations. This allows abuses to continue unimpeded, which often happen among the lowest wage industries.

The lack of owner transparency also provides an avenue to skirt responsibility for substandard housing. SB 1201 is a good governance Bill. It simply requires the disclosure of their beneficial owner, the same information that we ask from CEO's, directors, managers and members. Without owner transparency, we, as policy makers and enforcement agencies and the public, lack critical information to make informed policy decisions. SB 1201 will make it easier to enforce existing laws to protect the people who live and work in our communities.

Today, I have with me two witnesses in support of this Bill, Suzanne Dershowitz, Senior Staff Attorney at Public Advocates, one of the sponsors of the Bill, and Sheheryar Kaoosji, Coos G, Executive Director of Warehouse Worker Resource Center thank you, and I respectfully ask for your aye vote.

Thank you, Senator Durazo. We welcome the witnesses in support. You're welcome to sit here if you'd like.

Good afternoon, Chair and Members. My name is Suzanne Dershowitz. I'm a senior Staff Attorney at Public Advocates, a nonprofit law firm and advocacy organization and proud cosponsor of SB 1201. Anonymity is not necessary to achieve the legal and financial protections afforded by forming an LLC and often frustrates enforcement efforts. Property owners hide behind LLCs to avoid accountability.

It can take years to identify and prove a single person is responsible for repeated violations across multiple businesses, delaying justice, wasting public resources and driving up costs to the detriment of all Californians. When I was a lawyer in the Oakland City attorney's office, it was my job to address public health and safety issues facing Oakland's neighborhoods. In 2018, a code inspector walked into my office to discuss a case that kept him up at night.

Families with young children, pregnant women and low income immigrants were renting dangerous units in a converted warehouse near the airport. With no heat, no hot water, major leaks and serious fire hazards. It took over a year to uncover the scope of the problem. This landlord owned 130 properties in Oakland, including numerous unsafe properties.

Through a web of different LLCs and corporate entities, our investigation ultimately led to a 2019 lawsuit to hold this landlord accountable for subjecting dozens of working families to grave health and safety risks at six different rental properties, investigating the interrelated ownership of these properties was unnecessarily time consuming and resource intensive. We were only able to link all the companies controlled by this local real estate empire. After studying hundreds of city code enforcement records and connecting the dots, it was a monumental task.

As a local government lawyer funded by taxpayer dollars, I alone spent hundreds of hours investigating this case. If there had been owner transparency like that proposed in SB 1201, this monumental task would have taken half a day at most. SB 1201 would make it easier to enforce existing laws to protect the people who live and work in our communities across the state, increase government efficiency, and ultimately save taxpayer dollars. This Bill will also give everyone the information they need to enforce their rights.

While only the most egregious cases rise to the level of enforcement by local and state governments, shining a light on the people doing business in California is good for everyone who calls the state home. I respectfully ask for your support.

Thank you. Next witness in support, please.

Good afternoon. My name is Sheheryar Kaoosji. I'm the Executive Director of the Warehouse Worker Resource Center. We're an organization based in the Inland Empire, San Bernardino, Riverside counties, and we organize workers in the goods movement industry and also support a variety of workers across Southern California. Legal and administrative claims on issues health and safety, and wage theft, issues that are really rampant in that industry, unfortunately.

We also organize communities that are beginning to face displacement, especially around warehouse development, including tenants who are facing displacement for the development of warehouses in communities like San Bernardino. All the communities we support are affected by people using the LLC structure to mask their identities. The warehouse industry includes big employers and employers like Amazon and Walmart, but also a huge number of small players, staffing agencies, and warehouse operators that utilize this structure to mask their ownership and the relationship between their corporations.

As somebody who's had to do the research on these, a lot of the time we come across a worker who's facing wage theft, their employer shut down, they're missing their checks, and I have to figure out who owns the company. Does that company actually have a person I can find who actually owes those folks money?

When we're filing wage claims with the state, when we're bringing those claims to, you know, to the Labor Commissioner or private claims, it's often very difficult for us to understand whether there's a potential case there who we actually are filing against. We have to do a lot of that legwork to figure it out. Sometimes we can, sometimes we can't. Often it's just the agent for service is all we can really find. The Labor Commissioner and other agencies have that same situation, right?

They can't find out who's responsible when workers are often losing thousands of dollars in wage theft or facing really serious health and safety issues, and we can't figure out who's responsible. These legal structures also frustrate efforts by the communities we work with to help shape the future of the neighborhoods and protect the well being of our families.

In recent years, we've been organizing residents in the San Bernardino Highland Airport area, calling for a community benefits agreement in a neighborhood of working class and poor residents, tenants who are facing displacement again for warehouse development. The residents are facing displacement by developers who are assembling parcels under llcs that we cannot trace, buying up properties, evicting tenants, creating situations that are destabling our communities. And we can't figure out who's responsible. We can't figure out who is actually liable for what's going on.

The lack of transparency makes it impossible for these residents to know who's making these deals and for us to be able to organize, to call for community benefits agreements, to call for any kind of basic kind of support for those who are facing this displacement. Only once a project is applying for a permit or rezone, maybe years down the road, will we actually know who's behind these projects.

These are basic reasons why it's important for our communities, especially the working class communities of the Inland Empire, to have SB 1201. We believe it will be great benefit to our communities and to advocates who work for them, as well as the enforcement agencies who have the responsibility to protect them. Thank you.

Thank you. Any other witnesses in the room in support, please come forward. Just state your name and organization and position. Thank you.

Thank you. Chair Members. Elmer Lizardi, on behalf of the California. Labor Federation, in support.

Thank you.

Brian Augusta, on behalf of the California Rural Legal Assistance foundation, the National Housing Law Project and Public Interest Law Project in support.

Natalie Spievak with Housing California in support.

Andrew Dawson with the California Housing Partnership in support.

Good afternoon. Robert Harrell with the Consumer Federation of California in support.

Hi, Carol Gonzalez here on behalf of inclusive action for the city and support. Thank you.

Heidi Pickman with the Cameo Network, California Association for Microenterprise Opportunity and support.

Thank you. And now any lead witnesses in opposition, feel free to come up to wherever you'd like. If you want to be there, you're, welcome to have the table. That's cool.

Good afternoon. Jyotswaroop Bawa with Rise Economy proud co-sponsor in support.

All right, thank you very much. Deborah Carlton with the California Apartment Association. Corporations and limited liability companies already file an extensive amount of information. In fact, your beneficial owner information is filed with the Federal Government, and the Secretary of State, of course, has extensive amount of information, including your agent for service of process. If you wish to sue our organization, and our members are sued all the time. So it's unclear to us why this Bill is necessary.

You can find information with the local, on local deeds if you want to look for information of who owns the property. Last year, in the past, identical bills were slated to cost the State of California $9 million the first year out of appropriations, and then another 3 million to continue this change to the law. So for those reasons, we will respectfully ask for your no vote. Thank you.

Thank you. Any other witnesses in opposition? All right, seeing none Members will take it back for questions or comments. None. All right, so we don't have any questions or comments. And Senator Min moves the Bill. And the only thing that I want to add is that I think that the analysis also raises some further considerations, particularly as it relates to the Secretary of State and their ability to be able to do this, having just gone through a technology system.

And so that will be something that, as the Bill moves forward, will be, of course, considered in this process. I hope, and certainly interesting to see how New York was able to get a signature on a Bill like this last year and seeing kind of what comes out of there and what kinds of information they're able to secure, but also the benefit for the public good. So with that, would you like to close?

Yeah. Thank you very much. Just one small thing that was raised by the opposition with regards to federal. That information is not publicly available. And so even though the Federal Government gathers that information, it's not publicly available because it's meant for other purposes, terrorists and other things that go on at the federal level.

But I just want to thank you all, and also with regards to the Secretary of State, we are in conversations with the secretary, and just as a reminder that this is not simply adding one line on the forms that anybody fills out for the LLC, and it's not asking for any more, you know, verification, nothing. It's just adding the information and making it available. Okay with that? Thank you all very much, and I urge and aye vote, thank you.

Senate Bill 1201. The motion is do pass, and we refer to the Committee on Appropriations. We'll go ahead and call the roll, please.

Roll Call

All right, thank you. And we will leave the roll. Put the Bill on call.

Okay. Thank you. Thank you, Members. Thank you, Madam Chair.

All right. And we have Senator Glazer here.

Good morning, madam Chair. How's your day going?

It is going okay, Senator Glazer, how are you doing?

Fantastic. So good to be here with you all. Okay. For those who are watching and don't know, this is like one of the busiest days of our lives here in the Legislature. Just take a breath, okay?

Take a breath and feel free to begin when you're ready.

Thank you, Madam Chair and the Committee for hearing this Bill. I just want to refresh your memory that it was only two months ago that we were here hearing a Bill almost identical to this. I want to thank the Committee for passing out that Bill on a 6 to 0 vote. It materially is the same Bill that.

There's some technical changes we've made in one change in response to concerns from the opposition, which I'll go through, but it is materially the same Bill that you heard in January. As small business borrowers have increasingly struggled to access traditional bank loans, they've resorted to alternative forms of financing to start, maintain, and grow their businesses. Alternative financing products include sales based financing like merchant advances, factoring, and lease financing, all of which are structured in ways that do not make them look like regular loans.

Unfortunately, gaps in California's commercial financing law have allowed some bad actors, just some. But they're there to take advantage of small business borrowers. Often unscrupulous actors steer small business borrowers into a higher cost financing so they can get a better Commission. Borrowers are also encouraged to sign financing contracts with clauses that waive their right to legal representation and proper court procedure. SB 1482 regulates predatory practices, such as some brokers acting as merchant cash advance mills that focus on placing applicants into high rate financing.

My Bill also closes loopholes in our current law by prohibiting any action that can be construed as a confession of judgment, unquote. Confessions of judgment prohibit borrowers from legal representation if they default on a loan. I made an amendment recently that I mentioned at the start that resolved a pending issue with opposition. It removed the requirements that brokers disclose the lowest approximate APR a borrower could potentially qualify for. With me today, I have Bianca bloomquist with the small business majority, and at the appropriate time.

I respectfully request an aye vote.

Thank you. And we'll go ahead and begin. You may begin, Heidi.

Actually, it's Heidi Pickman with Cameo Network. Thank you, Chairman Lee, Chairman Limon, Vice Chair Niello, Members of the Committee, I'm Heidi Pickman, Vice President of Engagement and External Relations for the CAMEO Network, our statewide network of 400 plus business service providers and community lenders.

We are a strong supporter of SB 1482, and I'll refresh you on why, as we were here two months ago, we commend Senator Glazer, this Committee, the California Legislature, Governor Newsom, for leading the country in responsible small business lending practices that SB 40, 1482 continues that leadership, as you may recall from a few months ago, it does three things, regulates predatory practices by brokers, levels the playing field for loan and nonloan products, and closes loopholes, reporting loopholes in our current law.

Working backwards, California's unanimously passed price disclosure regulations contain loopholes that enable bad actors to police themselves. The Department of Financial Production and Innovation acknowledged the need to correct this in the rulemaking process SB 1482 directly addresses this needed fixed closes several other loopholes that New York state closed when it passed its disclosure law that was inspired by our law here in California, small businesses need access to capital, be it a loan or a non loan product. They need money. They don't really distinguish it.

Most of the clients that our Members work with, the regulatory framework shouldn't distinguish the different difference and should treat non loan products the same as loans. SB 1482 takes away the unfair advantage that unregulated non loan financing companies have over regulated lenders by providing all types of small business financing companies with the same roles to play by a hallmark of market competition.

Additionally, the Bill presents several other predatory practices that take advantage of small businesses, practices that skirt around confessions of judgment that Senator Glazer mentioned, and the confidentiality clauses that stop small businesses from speaking out if they're victimized. Closing loopholes and creating a competitive market for small business finance will catalyze good lending to small business. The opposition wants to narrow the Bill so loopholes remain and they remain unregulated. They are the same opposition who unsuccessfully sued California to overturn transparent disclosure. Thank you.

And I respectfully ask for the second time here your aye vote.

Thank you. Any other witnesses in support of the Bill, please come forward. State your name, organization and position.

Brian Augusta on behalf of the California Coalition for Community Investment in support.

Dani Kandoh-Kaiser on behalf of the California Low Income Consumer Coalition in support.

Desiree Nguyen Orth on behalf of EBCLC, East Bay Community Law Center in strong support.

Thank you.

We're not reflected in the analysis, but, Robert Harald with the Consumer Federation of California in support. Thank you.

Thank you. All right, any witnesses in opposition, please come forward. You're welcome to take a seat up here or at the podium, whatever you prefer.

We haven't opposed unless amended position on 1482 and want to acknowledge the work of the Committee and the author to approve this Bill up to this point, including amendments to strike the requirement for brokers to disclose their best lowest APR estimate to potential customer. So appreciate that Ford agrees with the author's goal of creating transparency in the market so small businesses can make informed decisions and accountability for brokers and providers who are not doing what they're supposed to do.

Our main point of disagreement at this point is overlaying the proposed commercial financing licensing framework on top of the California financing law, especially given the department's current workload and fiscal issues. Instead of expanding the CFL to include commercial financing providers and brokers, our preference would be to explore alternative licensing frameworks separate from the CFL that are straightforward and less complicated. And I'll note on page six of the analysis Committee staff makes a similar recommendation.

We're happy to participate in conversations with the author and the Department to discuss alternative approaches. A simpler licensing framework for commercial financing providers and brokers, paired with the recent disclosure regulations under SB 1235, the expansion of UDAP enforcement to apply to commercial financing under AB 1864, and the prohibition of junk fees under SB 6 will create robust protections in the market for small businesses in California.

The three laws I just mentioned just went into effect the past year, so we'd like to encourage the Legislature to let the market adjust to these new rules and regulations because they are significant before piling on new rules and regulations that are complicated and difficult to implement under the CFL. For these reasons, we're opposed and encourage the author to work with DFPI, the advocates in the commercial finance industry, to look at alternative licensing frameworks to the CFL. Thank you.

Thank you. Any additional witnesses in opposition?

Good afternoon. Kris Rosa on behalf of Rapid Finance and Capitis, we echo the comments just made. We are not opposed to licensure. We just want to make sure it works well. Therefore, we have an opposed unless amended position. Thank you.

Hi, Kate Fisher from the Revenue Based Finance Coalition. We oppose the Bill in its current form.

We had a meeting with the Bill authors staff yesterday and we appreciate the steps that the Bill authors made to improve the legislation and we look forward to continuing to work with them. Thank you.

Thank you. Any other witnesses in opposition? All right, Members, we will take it back for any comments or questions. Senator Caballero.

I want to thank Senator Glazer for working so hard on this subject. I think there's definitely a need for regulations, and I hope you'll continue to work with the opposition to see if there's a sweet spot there. This is really important, and so I'm going to support the Bill today and look forward to having to see whether there is a sweet spot. Thank you.

Thank you. And next we're going to go to our Vice Chair, Niello.

Thank you, Madam Chair. Senator Glazer, could you comment on the requested amendments and what's your position toward that?

Yeah, from the revenue based financing, we took one of their amendments. That's the amendment that took away the Low APR. So the only other issue that they've raised is they prefer a registration, not a licensing option, and they'd prefer that we wait and allow the implementation of Senator Limon's Bill that she passed, Senator Min's Bill on fees that he passed. And I guess it takes the Department a long time to do these regulations. I had a Bill recently that it took five years.

So I have a Bill that might fix that.

And I may co author it. But seriously, look, we hope that they'll do their work on these previous measures, but my guess is there's going to be a two to three year lag before regulations come out to implement this Bill, and I think there'll be plenty of time to see it in practice. I actually think, though, that while those bills are laudable, they don't do what this Bill is proposing. It has enhanced protections that I think are necessary, that aren't duplicative. And they're modest.

Honestly, when you think about it, they're very modest. A licensee would look at those who are licensed with a little bit more depth. It would allow the Department to require that they, they look at not just the actual cost of financing that they've provided, but what they said upfront to see whether there's a bait and switch.

There's a few things that are of value in this space that go beyond the good work of the chair and then the other Member of your Committee that advance laws in this space. So I think it has its own lane. It's a very modest one, and I think that given the practice of the Department and implementing regulations, that there'll be a lot of time for us to have them examine the implementation of that work.

And how do you see the difference between registration and licensure?

Well, look, I will commit to continuing to work with the opponents who have raised this issue. They'd prefer to have a much more milder registration process. I'm still skeptical that that's enough to have some accountability in that space. There's a lot of vulnerability. You know this from your business background. There's a lot of vulnerability on financing, and there's a lot of folks in the small business space that don't have the sophistication of a bookkeeping or an accounting degree from a university.

And so they're very vulnerable with these new forms of financing. You've even heard the descriptions that I can talk to you and we can do a little quiz on what factoring is and using your receivables and a sales base. And it can be very complicated, and it can be a wild west of financing out there. And we've done some work with this Committee over the years to try to provide understandable language and terms so they can make good choices. It's tough, though, and it's easily manipulated.

So my conclusion is that just a registration requirement seems too much of a light touch, and a licensing is more serious. Let me just tell you that going the licensing route makes this Bill vulnerable. That's the irony. Okay. Because there's a cost involved in doing that, and that's going to make this measure vulnerable as it goes through our legislative process, as you know.

Yes, I do.

Okay. And so there's kind of an irony of kind of trying to do it better and smarter yet actually putting the Bill in jeopardy. They should be arguing for licensing for those reasons, but I know that they're genuine about their concerns that they see in the Bill, and I appreciate that. So I'm open to those continued conversations. The Bill will have a long way to go this year if it gets through this Committee, and I'm committed to continuing those conversations.

Well, I supported the Bill that you had in January. It's essentially the same Bill. And I know you'll work as best you can to try to address those of the opponent, and so I trust that you will do that.

I'll do my best, sir. Thank you.

Thank you. Next, Senator Min.

Thank you. Appreciate the Bill, and I'm a co author on it. But I did want to just see if you had any response to the concerns raised by opposition. You know, I take it, you know, we did just pass a bunch of stuff. And, you know, while I support this whole framework, how would you respond to the idea that maybe we need time to digest?

Right. So thank you, Senator Min, thank you for your co authorship of the Bill, they've raised three issues, the first one being that they prefer registration over licensing, and I spoke to that just a moment ago. The second one was the issue of that they want to have time to see what existing laws, as the regulations come out, how they work.

And I spoke to that also earlier that I, that there is a lane that we're in that's different than what's been established, that the process that the Department goes through to issue these regulations means that when the regulations are finalized over chair Limon's Bill, as an example, there'll be years between that and the final regulations if this Bill were to be implemented. So I think there's a lot of time for that.

And finally, the third issue was the concern about the requirement that they revealed to the consumer the lowest cost of financing they've ever provided, and we eliminated that obligation. So we took care of that issue.

Well, I appreciate it, and I know you're going to continue to work hard on making the Bill tighter because that is what you do. And I just want to step back and point out that the problem you're trying to address, the same problem that Senator Limon and I were trying to address last year, is the rise in complex and often predatory lending practices and products targeted to small businesses.

And I just want to point out that that is still a problem we hear a lot about, I believe, across the state. It's a problem targeted at often minority owned businesses, businesses that are owned by people who don't necessarily speak English proficiently, who maybe are not sophisticated.

Right. Thank you.

Thank you. Next, Senator Bradford.

Thank you, Madam Chair. My question was along the same lines as the Vice Chair, Niello, as to why licensing over registration, which is a far cheaper matter, but I think you pretty much stated reason.

I'm sensitive to it, Senator Bradford, and I'll continue to deliberate with opponents about that and supporters about whether we're striking the right balance. I appreciate you raising that.

And Senator Portantino.

Thank you, Madam Chair. Thank you to the author. As it's been said, this is an important issue. We want to make sure that small businesses in particular, at a time when we rely so heavily on the small business economy, is a fall victim to predatory practices. And I appreciate the fact that you're willing to continue to have an ongoing conversation with both the proponents and the opponents, because obviously, the more we talk to each other, the better the final product will be.

And I know that your commitment to continue to do that is something that I know you're going to keep. I do have one sort of question. The FPI has certain authorities already to do some of this. Is it sort of the contention that they're just not going to do it in a timely manner or that we need to put more since they can do some of this. Is it that they're not willing to do it or they're not timely or? What's the thinking there through the chair?

I think the thinking is, number one, that to make some additional requirements to help protect small businesses more than what's in law and under regulation reviewed today. So that's one level. And, you know, a licensure, and this goes back to this question of registration or licensure is a higher standard of obligation and review. And we think that at the moment, that's the proper course to go through.

We are working with a broad coalition of responsible small business lenders that are working in this area as well and feel like that they want to support the good practices and try to make sure that there's proper enforcement of the bad practices. And I think the consensus at the moment, and it's reflected in the Bill that you see before you, is that we're trying to find a balance that includes a little bit more active enforcement and some new provisions that will help.

And that's what you have before you. Thank you.

All right. And I just want to thank you. You've been working on this issue for at least five years. And so this is a five year policy love project, and you know you're doing it for the right reasons. And I just thank you for working really closely with the Committee, but also I know he'll continue working with the opposition. Would you like to close?

Thank you, chair. And I thank you and your staff who have worked so diligently with us over a long period of time. I would simply might close. Want to apologize to Heidi. I talked about coming in here, and we're a little overwhelmed with our day to day, and I didn't look up to see her and read my script incorrectly. So my apologies to you and thank you to the Committee for your consideration today. Respectfully. ask for an aye vote.

Thank you. All right. This Bill is Senate Bill 1482. The recommendation is do pass and refer to the Committee on Judiciary. And I don't know if we have a motion. Senator Min moves the Bill and we will go ahead and call the roll.

Motion is do passed. Committee on Judiciary [Roll Call]

That Bill has six votes, and it is out. We have all Committee Members here, so we'll close the roll on that one. Thank you.

And thank you, Senator Glazer. And next, we have our final bills. Senator Min. And while he is going, I think we're good at the end. Okay, so Senator Min is going to present Senate Bill 1286. Thank you. And Senator Min, you may begin when you're ready.

Thank you, Chair Limon and Committee Members, before we start, just want to thank the Committee staff for their hard work on this Bill. And note that we will be accepting the Committee's proposed amendments. SB 1286 would extend protections under the Rosenthal Fair Debt Collections Act to individuals who personally signed for their business debt in order to try to protect small business owners and proprietors from unfair, deceptive, and abusive debt collection practices.

We know that capital has been difficult for businesses to come by in recent years, particularly during the COVID crisis and the aftermath of that. And many were forced to turn to alternative forms of lending in order to keep their businesses afloat. And as a result, we saw a steep rise in alternative products coming from a variety of different sources, including commercial financing and fintech companies.

This was especially true for minority owned businesses, which often have, unfortunately still today, lower loan approval rates than white owned businesses, even when they have similar revenues, credit scores and debt levels. Of course, we saw a lot of these same types of noxious, predatory loans and lending practices during the run up to the 2008 financial crisis. And that was kind of where I cut my teeth earlier in my career as someone who was a hill staffer at the time.

And I think we still haven't learned the lessons of that crisis, where we have seen that many of these products are not designed to be sustainable, are very much usurious in form, and often they take the form of products that are not necessarily structured as loans. And we've seen a rise in non traditional lending that where they're structured as different types of securities so that they can get around prohibitions on loans.

And so what this Bill is trying to do is to extend the protections that exist under California law to this situation for small businesses where you have a signatory who is a person who cosigns, and this would, I think, open the door to providing protections against these types of abusive debt collection practices here. And so these practices include threats, contacting borrowers at inconvenient hours, using false statements, or adding unauthorized interest or fees to the amounts owed.

And so under SB 1286, borrowers would still be responsible for paying their debts. But when the debts were tried to be collected, subjected to unfair, deceptive or abusive collection practices, they would fall under the protections of the Rosenthal Act. So here to testify in support of the Bill, I have Desiree Nguyen Orth with the East Bay Community Law Center and Heidi Pickman with the California Association for Microenterprise Opportunity.

Good afternoon. Chair, Vice Chair and Committee I am Desiree Nguyen Orth, Director of the Consumer Justice Practice at East Bay Community Law center, lecturer at UC Berkeley Law, and I sit on the board of the DFPI Debt Collection Advisory board. Prior to my current role in public interest, I owned a law firm that focused on working with small businesses. SB 1286 is an important measure that will require long accepted practices of decency in debt collection to be applied to debt collection for small business owners.

As of 2023, 98.8% of California businesses are small businesses. That amounts to 4.1 million small businesses. 3.35 million of these small businesses do not have employees. That's 3.35 million people doing the advertising, the marketing, the accounting, the web design on top of the service or product that they're trying to sell. That's 3.35 million people who do not have a detached, faceless accounting Department. SB 1286 seeks to ensure that personal guarantees from these 4.1 million businesses are collected fairly without deceit or harassment.

SB 1286 is narrowly tailored to apply to debt collection on individuals who personally incur the business debt. It is consistent with the basic legislative findings of Rosenthal 1788.1A states unfair, deceptive collection practices undermine public confidence, which is essential to the continued functioning of the banking and credit system. While SB 1286 will do a lot to protect an overlooked community, here's what SB 1286 does not do. It does not change the fact that original creditors and debt collectors are already subject to the RFT CPA.

It does not modify the long held responsibilities or requirements under the RFT CPA and it does not add to the Debt collector Licensing act requirements. I'd like to thank Senator Min for prioritizing small businesses, which are a largely underrepresented community that comprises a vast portion of the economic fabric of California. Thank you for your consideration. I respectfully urge an aye vote.

Hi again. Good afternoon to the Committee. And just for the record, I am Heidi Pickman from the CAMEO Network. Our 400 plus business service providers and community lenders serve about 200,000 of these very smallest businesses. My colleague mentioned they give coaching, responsible capital and other business support to these small businesses. I'd like to read three real life examples of business owners experiencing debt collection abuse for their business debt names have been changed for privacy.

Like so many, James took out a merchant cash advance that snowballed into four MCAs due to the predatory business model of MCAs that you might have heard about earlier. As he tried to manage his business debts, James experienced some family trouble and didn't like to bring his work problems home with him. However, during the debt collection process, the lender sent people to his house, not his office, to have a chat about his business debt. That was scary for him and his family.

I would agree with James and hope you would too when he stated sending people to my house is out of line. Tom, another victim of the merchant cash advance scheme, experienced what he calls a ton of psychological warfare. He received late night calls to lecture him on his business while being offered more predatory loans. Finally, Dave, a successful trainer for nearly 30 years, put all his savings into opening a gym. He took out financing to make improvements to the space.

Then he broke his femur in an accident and was unable to work for a time. But he still needed to pay his 6000 a month in commercial rent. And he kept up with payments until COVID hit. And we all know what happened when COVID hit. Most of the gyms closed. Soon Dave's revenue was insufficient to make the required payments for his financing and the financing company engaged in the following abusive practices.

Left threatening message on his wife's phone, tracked down the information of his customers telling them about his debt and the financing companies sent emails to his clients that the company would pursue them to get the money they were owed. The effect on the gym was, of course devastating. SB 1286 simply asked that owners of small businesses be treated without deceit, harassment or intimidation in the collection of their business debt and that debt collectors play nice when trying to collect their debts. Thank you for consideration.

I respectfully request an aye vote on SB 1286.

Great, thank you. Any other witnesses in support of the Bill please just come forward. Name, organization and position.

Good afternoon, Madam Chair Members. Robert Herrell, Executive Director for the Consumer Federation of California. We are pleased to be a co sponsor with our small business allies on this Bill. Thank you.

Good afternoon, chair Members. Brian Augusta, on behalf of the California Coalition for Community Investment and Housing and Economic Rights Advocates in support.

Thank you.

Dani Kandoh-Kaiser, on behalf of the California Low Income Consumer Coalition in support.

Thank you. All right, now we'll move to witnesses in opposition. Lead witnesses may come up here to the dais and we can make room. If there's room, maybe just there's only. Okay. So we'll have two. I don't know. Who wants to, who wants to begin?

I can go ahead. Good afternoon, Madam Chair Members. Melanie Cuevas with the California Bankers Association sincerely appreciate the work over the past week of the Committee, as well as the author's willingness to accept those Committee amendments.

If it is the will of this Committee to incorporate small business debts into the Rosenthal Act, an act that is specifically designed to address individual consumer debts, then these amendments represent steps towards improving the measure. However, we have to remain opposed because there are significant issues that remain that deserve similar thoughtful contemplation and solutions. For example, the measure still presents issues when a family Member is an employee of the company or where actions can be filed. In a consumer context, these restrictions within Rosenthal make sense.

Individual consumers should not have to go to a faraway court of which they have no affiliation. However, in a commercial context, actions are often required to be brought where the collateral is located, not where the borrower is located. And these issues really illustrate the crux of our opposition. Consumer debt and commercial debt are apples to oranges. Rosenthal is modeled after the Fair Debt Collection Practices Act, and these acts contemplate circumstances associated with consumers. They do not contemplate the nuances associated with commercial debts and with businesses.

It's also worthwhile to note that the author's statement in the Committee analysis indicates that non traditional lenders are not acting under the same regulations as traditional lenders. So, Members, I ask you whether SB 1286's method is a practical solution to the heart of the author stated issue. The author's statement also focuses on micro businesses, and we believe that the thresholds in the measure do not accurately reflect that population. So we would respectfully ask for additional reconsideration there.

In the traditional lending space, commercial lending goes through more rigorous underwriting than a consumer lending, excuse me, and small business borrowers are entrusted with higher lines of credit, in part due to the sophistication that is needed to access commercial purpose loans. If the goal is to look at ways to support small business borrowers, we would certainly recommend or welcome a dialogue, and we would be happy to provide feedback on alternative methods to accomplish that goal.

So in closing, we urge the Committee to seriously consider whether this approach, and especially the rust nature of such a massive change to existing law, is the appropriate method and respectfully request a no vote today. Thank you.

Thank you, Madam Chair Cliff Berg, on behalf of the California Association of Collectors. First off, I do want to thank the staff of the Committee for working closely with stakeholders and the analysis. Certainly reflects, I think, a number of the concerns and the amendments are moving in the right direction. But I mean, fundamentally, this Bill presents a significant challenge to the business community. It tries to jam into a law that is designed specifically for protecting individual consumers, businesses.

We have repeatedly suggested to the author that the approach should be changed to create a standalone act aimed at the deceptive practices that he articulated to the Committee. Certainly the collection industry, which I represent, does not support deceptive practices and would not conduct, my members would not do that. But this Bill goes way beyond dealing with deceptive practices.

The Rosenthal Act contains very detailed provisions regarding individual consumer rights relating to how to contact them, when to contact them, who you can contact, who you can leave messages with. And it just does not fit. The Rosenthal Act does not fit for a business model. The way to approach this problem would be to look at the Rosenthal Act, take out of those acts those provisions that relate to deceptive practices.

And certainly I think the author could work with stakeholders to come up with a Bill that provides good protection for small businesses. Threshold problems, who does this act even cover and who's it going to cover and how is the creditor going to know who they're dealing with when they deal with it? The Bill, as it's currently drafted and it's proposed to be amendment, simply does not belong in the Rosenthal Act, which is tailored for individual consumers.

Therefore, as long as the Bill continues in as its present form, we have to oppose this measure.

Thank you. Any other witnesses in opposition, please come forward. State your name, organization and position.

Oh, sorry about that. Hi. Rodney Meeks, Credit Consulting Services, Salinas, California.

So sorry, this is just name, position and argument. Okay, thank you.

Shawn Deluna, Collection Bureau of America. Oppose.

Maryrose Diaz with Grant Mercantile, opposed.

Indira Mcdonald here, on behalf of the California Mortgage Bankers Association. Respectfully opposed, unless amended. We would align our comments with those of the California Bankers Association.

Thank you.

Tim Lynch, on behalf of the Receivables Management Association, thanking the Committee for their Hard work on the Bill and align. Our comments with the CAC.

Lindsay Gullahorn with Capital Advocacy on behalf of the California Community Banking Network, also respectfully opposed, unless amended. Thanks.

Shawn Suhr with Continental Credit Control, opposed.

Stephen Ernst, owner of the E&A Group, and opposed. Thank you,

Madam Chair and Senators. Cliff Costa, on behalf of the California Creditors Bar Association and respectful. Opposed and unless amended position. Miss Cuevas raised our issues. Thank you.

Good afternoon, chair and Members. Robert Wilson, California Credit Union League, here in opposed unless amended position. Thank you.

Good afternoon, Madam Chair and Members. Angie Minetti here as a tweener, I represent Cox Automotive, who has Nextgear Capital as a subsidiary. We've been in discussions with the Senator's office and his staff to clarify our unique lending scenarios and credit scenarios that we provide for car floor plan lending. Thank you. We look forward to conversations.

Members will take it back for discussion or questions. We'll start with Vice Chair Niello.

Thank you, Madam Chair. Senator Min. I really do appreciate what it is you're trying to do. And I think we have business lending and we have business lending. You mentioned small businesses, particularly in disadvantaged areas, some with English as a second language, and I do believe there is a difference. But to impose Rosenthal, frankly, I think even partially to a business lending situation, is kind of like an oval peg in a round hole.

And I use that analogy because it's similar, as opposed to a square peg. An oval peg is similar to the round peg, but it's not the same. And it would seem to me that to pursue this approach would be to take a new approach, perhaps, as was suggested with regard to taking pieces out of Rosenthal, but really maybe creating a separate circumstance of regulation for a particular class of business. With apologies for the mixed metaphor, I think to apply Rosenthal is just a bridge too far.

I take it that was a statement, not a question, or was that a question? And they used apples and oranges, so there you go. I would just note again that, again, I want to thank the Committee for their hard work here. We recognize that there are differences, but that is one of the reasons we took the comprehensive amendments that specifically bar companies from being included here.

This is personal individuals who are co signers, and I think that that addresses the issues that were raised in the initial amendments and opposition letters, maybe not perfectly. I'm sure they'd rather just see this bill just go away. But I think it addresses a lot of those concerns.

And of course, we are willing to work on the concerns raised, in particular by the bankers Association and any others that are worth trying to address, because I think this is important to get it right and understanding the original purposes of the Rosenthal Act, we are trying to apply something. But of course, if we were to try to create a brand new framework, that would be a monumental undertaking. And of course, I'm sure many of these people would be in opposition to that as well.

But with that, maybe I'd open it up to my witness. If she has any response.

I'd like. To respectfully point out that the narrative that the RFD CPA is intended solely for consumers is a little bit of a misnomer. It's intended to protect people, and people should be treated with decency when they're having their bills collected. That's what this Bill does. We sever the tie between the business organization itself and the business owner. This Bill applies to the business owner.

So when a business owner signs a contract for debt, and if that debt happens to be for business purposes, they would be subject to the Rosenthal act and the same protections that are currently in place under the law right now. We are not expanding the scope of the protections. We're not changing the laws around the protections. Some of the confusion that could possibly be raised or has been raised by the opposition, it questions parts of the law that are currently happening.

So for example, under 178812 I believe it's D or C, the part talking about contacting a family Member. Right. Let's say a family member works for that small business. Nothing changes the fact that that could be happening right now. Maybe an employee is employed by their father and they're being collected on for their personal debt. That's subject to the RFD CPA. There's no difference.

We haven't changed any part of the RFD CPA requirements, only including a subset of people who are really falling in a gray area right now.

All right, thank you. Next. Senator Caballero.

Thank you very much, Madam Chair. So I'm, you know, I've listened to the arguments, and I guess the amendments are fairly significant. And my guess, Senator Min, is that you took these amendments in deference to some of the opposition that was raised and in trying to fit this kind of credit into an existing framework that already exists, that everybody understands how it operates. Right.

I mean, I'm assuming that's the, and so the argument that there are, there are problems with the way that the Rosenthal acts, Rosenthal Act acts in regards to business loans, loans to individuals that own small businesses. What's your response to that? Because I want to make sure we're being fair in terms of how this operates. My reading of it when I read was that the amendments took care of most of the issues that had been raised.

But I think that that was my read as well. And so the issues that are being raised here are at least to me as the principal level. Maybe they were raised to my staff, but they were not brought to my attention prior to just now. So we are happy to continue working to try to address discrete concerns where there might be inappropriate fits.

But I think that, look, at the end of the day, we're talking about unfair and deceptive, not just deceptive practices, but also unfair ones, harassing ones where individuals are being, we're talking about individual people here are being, you know, just harassed, harried, you know, all the things that, you know, the most unscrupulous might be doing to try to collect debts. And we're trying to provide a framework that already exists for protecting people from those types of unfair practices.

And again, we're happy to try to make the Bill better. We're happy to work with opposition and all stakeholders on particular scenarios. But we think the overall framework makes sense here, and it is addressing a problem that is very clearly happening en masse. So this is not a problem, a solution in search of a problem. It is a problem we're trying to address, and we are willing to tailor it as needed.

Well, I appreciate your comment about continuing to work, and I'll support your Bill today, but want to see what success you've had by the time it hits the floor, if it gets there.

Thank you.

Thank you.

All right, see, no other questions. I just want to comment just a little bit on what I've heard. So one, just clarify that the amendments taken today, and they're extensive, they're on page seven, and eight of our analysis, are to the original concerns of opposition that were brought up. Additional concerns have been brought up. And, you know, when I was thinking about this, one of the questions that I asked is, you know, the value in creating a separate new law versus folding this into existing law.

And what was pointed out to me was just the overlap in the same type of things that we're trying to accomplish for individuals and also for business debt. So individual debt versus kind of business debt. But also what happens is when we do kind of fold it in, we are going to be kind of learning about, okay, well, this was fixed and hold on. As opposed to creating a separate law. Right. And exempting section by section by section.

So I'm not sure either process is easy, but I just want to recognize that I think a little bit of what's happening in this discussion is a function of the method that has been chosen of taking an existing law that has a lot of overlap with similar desired outcomes and folding in a new type of debt into that law. So I want to recognize that.

And there are some substantial amendments, and I'm glad to hear that you will continue to work with the opposition on new issues raised in today's hearing. I think that that will be helpful for the success of the Bill and the implementation. So with that, you're welcome to close.

I thank you for your thoughtful comments, and I respectfully ask for your. I vote.

Thank you. So this Bill does have a do pass to judiciary, and so do pass and refer to Judiciary Committee. So we'll go ahead and call the roll as amended. No, thank you. So the amendments need to be taken in judiciary because of the timing, which is the Committee hearings tomorrow, next week. So there you go. But we don't have a motion. So we have a motion by Senator Cavallero.

And so this will again do pass and re refer to the Committee on Judiciary, where amendments will be taken and the amendments out are outlined in page 8 and 9 of the analysis. We'll call the roll.

Motion is do pass to Committee on Judiciary. [Roll Call]

All right, that Bill has four votes in support and two in opposition. That Bill does move out of Committee. All right, Members, so that was our final Bill. We will now lift the calls and open the roll, and we will go through each motion. So we're going to go ahead and start with consent. Consent items were Senate Bill 1146 and Senate Bill 1521.

[Roll Call]

All right, so that is 5-2. So that Bill moves out of Committee. And so with that, we will go ahead and adjourn.