Dennis Brown 2016-03-12 07:22:29
California Lenders License Law Update
ELFA HAS CONDUCTED A SERIES OF MEETINGS in Sacramento to advocate on behalf of our industry concerning implementation of California Finance Lenders License legislation, Senate Bill 197. Meetings were held with the Sacramento offices of ELFA members, engaging government policymakers, allied stakeholders from other industries, the Legislature and the Department of Business Oversight (DBO). Information gained from these discussions is summarized below.
Conversations with policymakers and information they distributed to clarify the intent of Senate Bill 197 explain that the restrictions against payment of referral fees to unlicensed entities by licensed lenders is intended to protect borrowers.
Proponents wish to eliminate predatory lending by unlicensed entities that offer loans with unfavorable terms based on the compensation generated rather than the loan making sense for the borrower being referred. They regard the new law as clarifying when referral fees may be paid to unlicensed entities upon consummation of a loan by requiring adherence to specified best practices for business lending (verify the commercial status of the borrower, minimum loan term of one year, maximum APR of 36% and rigorous underwriting).
Multiple industries join ELFA in viewing the new law as potentially expanding the reach of who must obtain a lenders license beyond a finance broker while establishing restrictions applicable to licensees. The restricted exemption allowed for referrals by an unlicensed broker—such as the broker not gathering loan documentation from the borrower or delivering the documentation—are deemed untenable in the marketplace. ELFA voiced this opinion while Senate Bill 197 was in the Legislature and again after it was signed into law.
ELFA was asked to submit concerns in writing and a workgroup of industry attorneys drafted questions that addressed the potential impact on out-of-state finance sources, dealers, vendors and bank affiliates, subsidiaries or within holding companies of banks that are exempt from gaining a license. ELFA also reached out to allied organizations and stakeholders. The final work product was a request for an interpretive opinion with questions about implementation of the new law submitted to the DBO.
Questions posed to ELFA during appointments in Sacramento were not always relevant to the role of the association. As example, asking if all ELFA members have obtained a lenders license and are following what California requires when accepting referrals from unlicensed brokers. This gained a response that the association advises industry to follow applicable laws but does not offer legal advice pertaining to how they impact operations of a specific company nor monitor compliance, which, in any event, California has made especially difficult to determine.
A consistent message from private and public entities in Sacramento was not to expect the DBO to issue responses to questions posed by ELFA for several more months, at the very least. There is no timeline for release of this guidance relating to compliance with the new law that became effective Jan. 1, 2016.
A process to draft regulations implementing the new law has not been initiated but this does not mean regulations may not be deemed necessary. For now, although the DBO contends that the law has always been the same, ELFA asserted that the law differs from what was previously in the California Code of Regulations and that significant changes were made by Senate Bill 197.
A process to draft regulations implementing the new law has not been initiated but this does not mean regulations may not be deemed necessary.
Background
It was explained that issues leading to drafting of this legislation were first raised during an informational hearing on small dollar loans in testimony by nonprofit lenders the Opportunity Fund and the California Association for Micro Enterprise Opportunity or CAMEO, a group of over 170 organizations, agencies and individuals dedicated to furthering micro-business development in California. These organizations testified they were facing barriers to paying referral fees that were not placed upon their unlicensed competitors.
Unlicensed merchant advance companies were viewed by these licensees as gaining an advantage as they may compensate those providing referrals even if a licensee provided better terms. A merchant advance company is not viewed by the DBO as engaged in commercial lending and therefore is not required to obtain a lenders license. Merchant advance companies may pay fees for referrals without a license because they assume the full risk of nonpayment of the future receipts or accounts receivable.
The non-profit lenders assisted in drafting the initial bill to remedy what they viewed as this uneven playing field. Although the intent to expand allowed brokering activities may have been an early motivation, concern arose that unscrupulous actors may use the bill in circumventing long-standing policy requiring licensing, which led to revisions in the bill that are now raising concerns.
For more information, please contact Dennis Brown, Vice President of State Government Relations, at dbrown@elfaonline.org.
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