Amended in Assembly August 31, 2015

Amended in Assembly August 20, 2015

Amended in Assembly June 25, 2015

Amended in Assembly June 8, 2015

Amended in Senate April 15, 2015

Senate Bill No. 197

Introduced by Senator Block

February 10, 2015

An act to add Sections 22602, 22603, and 22604 to the Financial Code, relating to finance lenders.

LEGISLATIVE COUNSEL’S DIGEST

SB 197, as amended, Block. Finance lenders: commercial loan: referral.

Existing law, the California Finance Lenders Law, provides for the licensure and regulation of finance lenders by the Commissioner of Business Oversight. Existing law makes a willful violation of the law by any person a crime. Existing law defines a finance lender as any person who is engaged in the business of making consumer loans or commercial loans. Existing law defines a commercial loan as a loan of a principal amount of $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 purposes other than personal, family, or household.

This bill would authorize a licensed finance lender to compensate an unlicensed person in connection with the referral, as defined, of one or more prospective borrowers to the licensee for a commercial loan if certain requirements are met. These requirements would include, among other things, that the referral leads to the consummation of a commercial loan, the loan contract provides for an annual percentage rate that does not exceed a certain percentage, the licensed finance lender obtains documentation from the prospective borrower documenting the borrower’s commercial status, begin delete as specified, end delete and that the licensee maintains records of compensation paid to an unlicensed person, as specified. The bill would make a licensee begin insert paying compensation to an unlicensed person in connection with a referral end insert liable for any misrepresentation made to a borrower in connection with begin delete a end delete begin insert that end insert loan made to that borrower by that licensee. The bill would authorize the commissioner to adopt regulations imposing conditions on this referral activity, as specified. The bill would also require a licensed finance lender who receives an application for a commercial loan from a prospective borrower who has been referred by an unlicensed person to provide a specified statement to the borrower regarding the referral arrangement. The bill would prohibit any person receiving compensation in connection with a referral that leads to the consummation of a commercial loan from engaging in specified acts and would authorize the commissioner to order this person to desist and refrain from engaging in the business or further violating those provisions governing such referral.

By creating new requirements, the willful violation of which would be a crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: yes.

The people of the State of California do enact as follows:

SECTION 1.  

Section 22602 is added to the Financial Code, to
read:

22602.  

(a) A licensee that is a finance lender may pay
compensation to a person that is not licensed pursuant to this
division in connection with the referral of one or more prospective
borrowers to the licensee, when all of the following conditions are
met:

(1) The referral by the unlicensed person leads to the
consummation of a commercial loan, as defined in Section 22502,
between the licensee and the prospective borrower referred by the
unlicensed person.

(2) The loan contract provides for an annual percentage rate
that does not exceed 36 percent.

(3) Before approving the loan, the licensee does both of the
following:

(A) Obtains documentation from the prospective borrower
documenting the borrower’s commercial status. Examples of
acceptable forms of documentation include, but are not limited to,
a seller’s permit, business license, articles of incorporation, income
tax returns showing business income, or bank account statements
showing business income.

(B) Performs underwriting and obtains documentation to ensure
that the prospective borrower will have sufficient monthly gross
revenue with which to repay the loan pursuant to the loan terms,
and does not make a loan if it determines through its underwriting
that the prospective borrower’s total monthly expenses, including
debt service payments on the loan for which the prospective
borrower is being considered, will exceed the prospective
borrower’s monthly gross revenue. Examples of acceptable forms
of documentation for verifying current and projected gross monthly
revenue and monthly expenses include, but are not limited to, tax
returns, bank statements, merchant financial statements, business
plans, business history, and industry-specific knowledge and
experience. If the prospective borrower is a sole proprietor or a
corporation and the loan will be secured by a personal guarantee
provided by the owner of the corporation, a credit report from at
least one consumer credit reporting agency that compiles and
maintains files on consumers on a nationwide basis shall also be
considered.

(4) The licensee maintains records of all compensation paid to
unlicensed persons in connection with the referral of borrowers
for a period of at least four years.

(5) The licensee annually submits information requested by the
commissioner regarding the payment of compensation in the report
required pursuant to Section 22159.

begin delete

(b) A licensee shall be liable for any misrepresentation made
to a borrower in connection with a loan made to that borrower by
that licensee.

end delete begin insert

(b) A licensee that pays compensation to a person that is not
licensed pursuant to this division in connection with a referral for
a commercial loan made by that licensee to a borrower shall be
liable for any misrepresentation made to that borrower in
connection with that loan.

end insert

(c)  begin delete For purposes of this section, “referral” means either the
introduction of the borrower and the finance lender or the delivery
to the finance lender of the borrower’s contact information. end delete The
following activities by an unlicensed person are not authorized by
this begin delete section, unless the unlicensed person is exempt from licensure
under this division, is exempt from federal income taxes under
Section 501(c)(3) of the Internal Revenue Code, is a business
assistance organization recognized by the United States Small
Business Administration, or the person engages in one or more of
the following activities in connection with five or fewer
commercial loans in a 12-month period made by persons licensed
under this division: end delete begin insert section: end insert

(1) Participating in any loan negotiation.

(2) Counseling or advising the borrower about a loan.

(3) Participating in the preparation of any loan documents,
including credit applications.

(4) Contacting the licensee on behalf of the borrower other than
to refer the borrower.

(5) Gathering loan documentation from the borrower or
delivering the documentation to the licensee.

(6) Communicating lending decisions or inquiries to the
borrower.

(7) Participating in establishing any sales literature or marketing
materials.

(8) Obtaining the borrower’s signature on documents.

begin insert

(d) The prohibitions in subdivision (c) do not apply if the
unlicensed person meets one or more of the following criteria:

end insert begin insert

(1) Is exempt from licensure under this division.

end insert begin insert

(2) Is exempt from federal income taxes under Section 501(c)(3)
of the Internal Revenue Code.

end insert begin insert

(3) Is a business assistance organization recognized by the
United States Small Business Administration.

end insert begin insert

(4) Is engaged in one or more of the activities described in
paragraphs (1) to (8), inclusive, of subdivision (c) in connection
with five or fewer commercial loans in a 12-month period made
by persons licensed under this division.

end insert begin delete

(d)

end delete

begin insert (e) end insert  The commissioner may adopt regulations under this section
to impose conditions on the referral activity authorized under this
section. The commissioner may classify persons, loans, loan terms,
referral methods, and other matters within his or her jurisdiction,
and may prescribe different requirements for different classes of
loans.

begin delete

(e)

end delete

begin insert (f) end insert  Nothing in this section shall authorize the payment of a
referral fee to an unlicensed person for a residential mortgage loan,
nor the payment of a referral fee to a person required to be licensed
under Section 10131 or 10131.1 of the Business and Professions
Code, unless such person is licensed by the Bureau of Real Estate
pursuant to Division 4 (commencing with Section 10000) of the
Business and Professions Code.

begin insert

(g) For the purposes of this section, “referral” means either
the introduction of the borrower and the finance lender or the
delivery to the finance lender of the borrower’s contact
information.

end insert

SEC. 2.  

Section 22603 is added to the Financial Code, to read:

22603.  

A licensee that is a finance lender shall provide a
prospective borrower who has been referred by an unlicensed
person the following written statement, in 10-point font or larger,
at the time the licensee receives an application for a commercial
loan, and shall require the prospective borrower to acknowledge
receipt of the statement in writing:

“You have been referred to us by [Name of Unlicensed Person].
If you are approved for the loan, we may pay a fee to [Name of
Unlicensed Person] for the successful referral. [Licensee], and not
[Name of Unlicensed Person] is the sole party authorized to offer
a loan to you. You should ensure that you understand any loan
offer we may extend to you before agreeing to the loan terms. If
you wish to report a complaint about this loan transaction, you
may contact the Department of Business Oversight at
1-866-ASK-CORP (1-866-275-2677), or file your complaint online
at www.dbo.ca.gov.”

SEC. 3.  

Section 22604 is added to the Financial Code, to read:

22604.  

(a) Any person that receives compensation in
connection with a referral, as described in Section 22602, that
leads to the consummation of a commercial loan under this division
may not do any of the following:

(1) Make a materially false or misleading statement or
representation to a prospective borrower about the terms or
conditions of a prospective loan.

(2) Advertise, print, display, publish, distribute, or broadcast
any statement or representation with regard to the conditions for
making or negotiating a loan that is false, misleading, or deceptive,
or that omits material information that is necessary to make the
statements made not false, misleading, or deceptive.

(3) Engage in any act in violation of Section 17200 of the
Business and Professions Code.

(4) Commit an act that constitutes fraud or dishonest dealings.

(5) Fail to safeguard a prospective borrower’s personally
identifiable information.

(b) For purposes of this section, “personally identifiable
information” means information that is not publicly available, that
a prospective borrower provides for the purpose of obtaining a
loan or other financial product. Personally identifiable information
includes information a prospective borrower provides on an
application to obtain a loan, credit card, or other financial product
or service.

(c) Whenever, in the opinion of the commissioner, any person
is engaged in the business of soliciting borrowers for a loan to be
made by a licensee under this division, and the person is not in
compliance with this section, Section 22602, Section 22603, or
any other provision of this division authorizing such activity or
exempting the person from this division, the commissioner may
order the person to desist and to refrain from engaging in the
business or further violating this division.

SEC. 4.  

No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of
the Government Code, or changes the definition of a crime within
the meaning of Section 6 of Article XIII B of the California
Constitution.