You Finally Have Your CFL License: Now What?

Getting your California Finance Lenders License is just the beginning. In the latest edition of The Greene Room, Ken Greene breaks down the ongoing filings, fees and compliance traps you must manage to keep it and stay in business.

You have waited months and spent more money than you wanted to get the coveted California Finance Lenders License. Now you can rest easily, expand your geographical transaction reach, and let the money roll in.

If only it were that simple.

Numerous obligations arise after the issuance of CFL licenses for lenders and brokers alike. If you fail to timely meet these obligations, you may find yourself in a world of hurt. This article provides a guideline to help keep you in compliance.

1. Annual report: Perhaps the most cumbersome, and to some, annoying, of these is the annual report. It is a mandatory filing detailing the financial operations, loan data and compliance with state regulations for all licensees operating under the California Financing Law (CFL). It entails providing financial statements, details on loans made or brokered, and information on activities conducted under the CFL license. You file it online via the DFPI DocQNet portal by March 15^th of every year. Failure to timely file your report could result in summary revocation of your license for a long period of time, often a year, as well as daily monetary penalties.
2. Annual assessment: This goes hand in hand with the annual report. It is based on the income earned on your loan transactions, whether originated or brokered and calculated as a minimum fee (currently, $250) plus a pro rata share of all costs and expenses of the administration of the CFL law. In other words, your assessment, at least in part, funds the payroll and other expenses of the Department of Financial Protection and Innovation (DFPI), which oversees the CFL.
3. Surety bond: CFL licensees who make or broker commercial, non-residential loans must maintain a $25,000 surety bond, which must be renewed annually.
4. Net worth: Similarly, CFL licensees who make or broker commercial, non-residential loans must maintain a $25,000 net worth.
5. Recordkeeping: There is no single rule for record retention but, as a general matter, loan transaction records must be kept for three years. That includes the loan application, disclosure statement, promissory note, security agreement, and payment records. Other laws may apply to personnel records and other types of records.
6. Business Plan: Every CFL applicant must file a business plan with specified information. If there is a material change in the business plan, an amended business plan must be filed.
7. Change of location: A licensee who intends to change locations must provide notice to the DFPI at least ten days prior to moving. You will also need an updated surety bond reflecting the new location.
8. Adding a Branch Office: A licensee who wishes to open a branch office must file an MU3 via the Nationwide Multistate Licensing System (NMLS). You will have to designate a branch manager who will need to file an MU2 (including the branch manager’s personal information).
9. Change of Owners, Officers, Directors or Managers: This also requires timely amendments files through the NMLS, typically via an Advance Change Notice (ACN) on forms MU1, MU2, and/or MU3.
10. California Statement of Information: You must register your company in California to qualify for a CFL license. Once you have registered, you must file a Statement of Information (SOI). Corporations must file every year, and LLCs must file every two years. This is a relatively simple process and can be done online via the Secretary of State website.
11. California Franchise Tax Board: Similar to the CFL annual assessment, an annual assessment must be paid to the Franchise Tax Board (“FTB”). There is a minimum assessment fee of $800. Entities with income over $250,000 are subject to an additional fee. Failure to pay the fee may result in suspension of your right to do business in California, with potential repercussions on your CFL license and beyond.
12. Commercial Financing Disclosures: All CFL licensees must comply with the California Commercial Financing Disclosure laws, a subject far too broad to address in this article.
13. Audits: CFL licensees are subject to regular regulatory examinations by the DFPI at least once every four years, and “on-demand” audits (at any time, without notice). You must provide free access to your financial records. The licensee is responsible for the cost of the audit.
14. Mortgage Call Reports: The NMLS may generate a notice to a licensee that a Mortgage Call Report (“MCR”) is due. According to the DFPI, if you receive a message from the NMLS to submit an MCR, but you are not engaged in the business of residential mortgage loan lending, you do not need to take any action.

Clearly, successful completion of the CFL application process is not the only hurdle to clear in order to make or broker loans in California. It is critical to calendar as many of the dates as possible (annual report deadlines, SOI deadlines, etc.) to minimize any disruption to your business.

Ken Greene is an attorney at his SoCal firm, the Law Office of Kenneth Charles Greene. The Law Offices of Kenneth Charles Greene present this article. In his regular column, The Greene Room, he brings clarity to complex, high-stakes issues that matter to our readers, exploring the ever-evolving intersection of finance and law. Stay tuned to Monitor for more ongoing, timely insights from Greene.     

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