Pursuant to California Finance Lenders Law, a finance lender is defined as “any person who is engaged in the business of making consumer loans or making commercial loans.”

In general, and unless exempt, any person engaging in business as a finance lender or finance broker is required to obtain a California Finance Lenders license.

Since many Equipment Leasing and Finance companies (ELFC) doing business in California engage in some transactions that may not be true leases, many ELFCs applied and obtained a California Finance Lenders Law License from the Department of Business Oversight (DBO).

After your company obtains a California Finance Lenders Law license, it will then need to comply with the California Finance Lenders Law. (CFLL)

CFLL does not contain specific financial code sections and regulations to regulate ELFCs. However, CFLL regulates consumer and commercial loans. Accordingly, ELFCs licensed under the CFLL will need to comply with the financial code sections and regulations that apply to commercial loans, assuming that the ELFCs provide financings that are each bona fide $5,000 or more in principal amount and for commercial purposes.

A consumer loan is defined by the California Finance Lenders law as “a loan, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for personal, family, or household purposes.”

A commercial loan is defined by the California Finance Lenders law as “a loan of a principal amount of five thousand dollars ($5,000) or more, or any loan under an open-end credit program, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes.”

Equipment finance leases or non-true leases are typically given to business entities (as opposed to individual consumers) for commercial purposes and not for “personal, family, or household purposes.” Therefore, these transactions fall under the commercial loan definition, in case the bona fide principal amount is $5,000 or more.

The ELFC contract you use when financing equipment in other states is likely not in compliance with CFLL. CFLL regulation includes without limitation, (either directly or by incorporation of other California and federal laws) the rates and charges, marketing and advertising, disclosures, contractual provisions, electronic transactions, collections, credit applications, default and repossession, brokers and finders, and general operations of main and branch offices. In short, the CFLL compliance is in addition to the Uniform Commercial Code (UCC) compliance. UCC is adopted in California under its Commercial Code. When raising capital, lenders and leasing companies also must comply with applicable state and federal securities laws and regulations.

The CFLL license application requires an ELFC’s principal (corporate officer or LLC manager) to acknowledge on behalf of the ELFC, that it read the contents of and is familiar with the CFLL, and that it agrees to comply with the CFLL.

Lack of compliance can be brought to the attention of the DBO’s enforcement officials as a result of either a customer or competitor complaint, a DBO audit, through the annual report that must be filed by CFLL licensees by March 15 of each year, by special reports that are specifically requested from licensees from DBO or by other means.

It is important not only to obtain the CFLL license, but also to comply with the CFLL and other applicable California and federal financial laws to keep the license.

The DBO routinely conducts inspections of licensees and may revoke or suspend licenses for non-compliance. In case of an accusation for revocation of a finance lenders license or a desist and refrain order is filed against the licensee, the licensee should request a hearing, so it can defend itself before the administrative law judge and/or attempt to obtain a settlement with the DBO. The administrative hearing takes place at the Office of Administrative Hearings and its procedural rules are substantially similar (with some differences) to a California Superior Court’s bench trial (non-jury trial).

If the final decision issued by the administrative law judge is not favorable to the licensee, he or she can then appeal (in timely manner) the decision to the applicable California County’s Superior Court through a Writ of Mandamus proceeding (otherwise also referred to as Writ of Mandate or Administrative Mandamus).

The DBO publishes on its website enforcement actions, such as desist and refrain orders and accusations. A CFLL licensee has a right to request an administrative hearing to defend itself and present its case. Unfortunately, although the legality of this practice by the DBO is questionable, DBO publishes online pre-hearing non-final (and also final) administrative enforcement actions such as desist and refrain orders (“D&Rs”) and accusations. (Publishing of final administrative orders is specifically authorized by the Financial Code but not non-final orders). Potential customers and competitors who review non-final D&Rs are under the mistaken belief that the D&R is a final order and may therefore refuse to conduct business with the licensee.

ELFCs who are either CFLL licensees or potential licensees should familiarize themselves with the CFLL to avoid administrative enforcement actions, court actions, loss of business and other adverse repercussions.

The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area or be construed as legal advice. The legal principles discussed herein were reviewed at the time this article was authored but are subject to change. Please consult an attorney before making a decision using the information provided in this article.