Banking committee advances bill to apply consumer debt-settlement rules to small businesses

The Senate Committee on Banking and Financial Institutions on Oct. not specified advanced Assembly Bill 1166, a measure by Assemblymember Valencia that would expand the Fair Debt Settlement Practices Act to cover commercial financing. The committee voted to “do pass, but first amend and re-refer to Judiciary,” then moved the bill out of committee by a recorded majority.

AB 1166 would apply the same guardrails created by AB 1405 in 2021 — including prohibitions on collecting upfront payments and a consumer’s right to cancel certain contracts without penalty — to debt settlement services offered to businesses, the author said. “AB 1166 expands the Fair Debt Settlement Practices Act to cover commercial financing, ensuring that debt settlement providers must follow the same rules for business customers as they do for individual customers,” Assemblymember Valencia said.

Why it matters: Supporters said small business owners often confront complex, nonbank financing and can be vulnerable to deceptive marketing or costly contracts. “Many business owners navigate a highly complex and quickly evolving lending market that falsely assumes borrowers fully comprehend all its complexity,” Valencia said. Backers at the hearing included representatives of the California Low-Income Consumer Coalition and the National Consumer Law Center, and Forward Financing.

Opponents and concerns: Margaret Gladstein of Capital Advocacy, speaking for clients including the Association for Consumer Debt Relief and RISE Alliance, said some consumer-focused rules do not match commercial realities and urged a separate statutory structure for business debt settlement. Gladstein said stakeholders want flexibility on time frames, permission for reasonable transparent fees that support early intervention, and safeguards to ensure funders do not control which advisers or restructuring partners businesses may use.

Sen. Nilo pressed the author on whether consumer-style settlement rules are appropriate for businesses. “Consumers and businesses are just not the same thing,” Sen. Nilo said, adding that principal reduction can be “a dangerous thing” for businesses because of effects on credit and because business restructurings commonly rely on different approaches. Valencia responded that small, family-run businesses can lack sophisticated financial advice and pointed to the pandemic and other economic shocks as examples of why protection may be needed.

Committee action and related measures: The committee also adopted a consent calendar of four other bills — AB 665 (Chen), AB 886 (Ortega), AB 1180 (Valencia) and AB 1507 (Committee on Banking and Finance) — by voice and roll call. The committee then completed its consideration of AB 1166 and referred it to the Senate Judiciary Committee with instructions to amend.

Votes at a glance: - AB 1166 (Valencia): Motion — “do pass, but first amend and re-refer to Judiciary.” Mover recorded as Sen. Hurtado; second not specified on the record. Tally reported in committee: 5 yes votes; roll-call entries in the record include Sen. Grayson (aye), Sen. Cervantes (aye), Sen. Hurtado (aye), Sen. Richardson (aye) and Sen. Lamone (aye). Outcome: advanced and re-referred to Senate Judiciary. - Consent calendar (AB 665, AB 886, AB 1180, AB 1507): Motion moved by Vice Chair Sen. Nilo. Roll-call yielded at least seven recorded ayes (Grayson, Nilo, Cervantes, Hurtado, Lamone, Richardson, Strickland). Outcome: consent calendar adopted.

What the transcript shows and does not: The hearing record includes stakeholder testimony urging both protections for small businesses and changes to make commercial rules fit business restructuring practices. The committee approved the bill for amendment and referral; the transcript does not record final amended text or details of the amendments, nor does it show a committee vote listing every member as present for every roll call. The bill’s next step is committee on judiciary, where amendments and further debate may be taken up.

The committee adjourned after completing its business.