What is the State of California Up To? Proposed Amendments Harmful to Business
by Andrew K. Alper May/June 2018
One of the purposes of the California Financial Law is to ensure an adequate supply of credit to borrowers in the state, but Andrew Alper argues the law — and proposed amendments — are harmful to business. He dissects newly-introduced legislation, which could significantly affect lenders and brokers.
The California Financing Law contained in Division 9 of the California Financial Code, commencing with §22000, requires licensing and regulation of finance lenders and brokers making and brokering consumer and commercial loans, except as specified. It prohibits misrepresentations, fraudulent and deceptive acts in connection with the making and brokering of loans and provides administrative, civil (injunction and ancillary relief) and criminal remedies for violations of the law.
As of October 4, 2017, “California Finance Lenders Law” changed its name to “California Financing Law.” Additional regulations under the California Financing Law are contained in Chapter 3, Title 10 of the California Code of Regulations Commencing with §1404.1
Finance lenders and brokers, by number of license fees and dollars of loans originated, are the largest group of financial service providers regulated by California’s Department of Business Oversight (DBO). A finance lender is defined as “any person who is engaged in the business of making consumer loans or making commercial loans.”
A finance lender’s license contains an exemption from the usury provisions of the California Constitution. For many years, 10% was the legal lending limit in California to avoid usury issues. Many non-loan transactions, such as bona fide leases, automobile sales finance contracts2 and retail installment sales3 are not subject to provisions of the California Financing Law.
In addition to its lending authority, the California Financing Law provides limited brokering authority. A broker is defined as “any person engaged in the business of negotiating or performing any act as a broker in connection with the loans made by a finance lender.” Brokers licensed under this law may only broker loans to lenders who hold a California Finance Lenders License. The requirements for a license are set forth in §22100 of the California Financial Code.
The law requires applicants to have and maintain a minimum net worth of at least $25,000 and to obtain and maintain a $25,000 surety bond. Principals of a finance lender or broker may not have a criminal history or a history of non-compliance with regulatory requirements.
Lenders and brokers doing business in California find it hard to imagine the California Financial Law is intended to be liberally construed and applied to promote its underlying purposes and policies, which are:
To ensure an adequate supply of credit to borrowers in this state
To simplify, clarify and modernize the law governing loans made by finance lenders
To foster competition among finance lenders
To protect borrowers against unfair practices by some lenders, with little regard for the interest of legitimate and scrupulous lenders
To permit and encourage development of fair and economically sound lending practices
To encourage and foster a sound economic climate in this state
Many lenders, brokers and their counsel find it hard to believe that the California Finance Law was enacted for these purposes since the law does anything but promote lending and brokering of loans in California. Instead, it effectively prohibits lenders and brokers from doing business in California. Many lenders and brokers will not do business in California because of the stringent requirements to obtain a license and the ongoing reporting requirements, which can be cumbersome thanks to the aggressive enforcement by the DBO.
To top it off, in recent months, the California legislature has introduced California Assembly Bills 2500 and 3207 and California Senate Bill 1235, legislation seemingly more protective of borrowers and less friendly to lenders and brokers.
California Assembly Bill 2500
If enacted by the state assembly, California Assembly Bill 2500 would:
Delete the current exception for fees paid to a licensee for privilege of participating in an open-end credit program;
Increase the current threshold from $2,500 to $10,000 or more authorized to contract for and receive charges at a maximum rate not exceeding specified sums on the unpaid principal balance per month, ranging from 2.5% to 1% based on the loan amount;
Increase the threshold from $2,500 to $10,000 or more for the alternative to the described rate charges for loan amounts, to instead contract for and receive charges at the greater of a rate not exceeding 1.6% per month on the unpaid principal balance, or a rate not exceeding five-sixths of 1% per month plus a specified percentage per month as established by the Federal Reserve Bank of San Francisco, according to the specifications outlined in this legislation;
Existing law prohibits a loan contract providing for a scheduled repayment of principal over more than the maximum terms set forth in relation to the respective size of the loan. This provision prohibits a loan of $3,000, but less than $5,000, from exceeding a maximum term of 60 months and 15 days. Bill 2500 would increase the maximum principal loan amount under the above schedule to $10,000 rather than $5,000;
The California Financial Law defines charges as not including monies paid to, and commissions and benefits received by, a licensee for the sale of goods, services and insurance, as described. This bill would revise the provision as specified and it applies to insurance other than credit insurance as defined.
Although these changes may have a limited effect on many lenders and brokers, micro- and mini-ticket lenders loaning to borrowers who cannot obtain loans elsewhere at lower rates will be significantly affected. This law would hurt small businesses because it may dissuade lenders from making mini- or micro-ticket loans.
California Senate Bill 1235
Recently introduced California Senate Bill 1235 would make lenders disclose interest rates and other aspects of a loan. The bill as originally introduced was amended on April 9, 2018 and now stipulates commercial lenders provide a written statement showing clear and distinct terms-specified information regarding the transaction, including total fees, the amount provided, the APR related and policies regarding repayment or pre-payment applying to the transaction to the prospective borrower.
This legislation essentially puts the state in charge of writing a contract. The bill declares, “Any person who engages in the business of commercial financing shall … provide to the prospective borrower a written statement showing in clear and distinct terms all of the following with respect to that transaction,” and the statement “shall in be in writing, display the information required in the exact order of priority listed in subdivision (a), in at least 10-point type, in the same language principally used in any oral discussions or negotiations leading to the execution of the commercial financing, and shall not be vague, unclear or misleading.”
This bill would create unnecessary disclosure requirements in commercial transactions, modeled after necessary requirements of consumer transactions under Regulation Z and various state laws.
This proposed bill remarkably eliminates the statutory purpose of the California Financial Law set forth in §22001, clearly signifying a change in philosophy of the legislature as to the purpose of the law.
A loan provider would be subject to this law if it consummates or arranges more than five commercial financing transactions during a calendar year, but a depository institution would be exempt from these provisions. This law would apply to any commercial financing of $2,500 or more either by way of loan or open-ended credit plan. It appears to only apply to those recipients provided with a commercial financing offer by a provider that is equal to or less than $500,000.
California Assembly Bill 3207
California Assembly Bill 3207 seeks to expand the definition of a broker to include anyone who receives compensation for providing a referral or a lead if the referral or lead conveys confidential information, participates in any loan negotiation between a finance lender and prospective borrower, participates in the preparation of loan documents, communicates a lending decision or inquiries to a borrower or charges any fees to a prospective borrower or applicant for any services related to an application for a loan from finance lenders.
Last year, California Senate Bill 297 was introduced and would have expanded the licensure and regulation of finance lenders and brokers to include finders, also referred to in that bill as lead generators, engaged by licensees to facilitate a loan by performing activities such as collecting non-public personal identification information including a social security number or introducing the matching borrowers and lenders.
The Equipment Leasing and Finance Association was at the forefront of opposing certain provisions of Senate Bill 297, and that bill did not gain traction. Now, Assembly Bill 3207 is once again attempting to expand the definition of a broker.
The California legislature doesn’t get it. The legislature and the DBO continue making it more difficult for lenders and brokers to do business in California, which only hurts the business environment. When businesses cannot obtain loans because lenders do not want to lend in California because of the restrictive lending environment and administrative burdens imposed on lenders and brokers, the net effect is damaging to business.
Remember, the purpose of Financial Code §22001 is to promote an adequate supply of credit to borrowers, foster competition among finance lenders and encourage and foster a sound economic climate in the state. If Senate Bill 1235 passes, even the stated purpose of the California Financing Law will be history as will small business loans. Is this really what the California legislature wants?
10 C.C.R. §1404 et seq.
Under the Rees-Levering Motor Vehicle Sales Finance Act
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