BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Block, Chair
2015 - 2016 Regular
Bill No: SB 197 Hearing Date: April 29,
2015
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|Author: |Block |
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|Version: |April 15, 2015 | | |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant: |Eileen Newhall |
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Subject: Finance lenders: commercial loan: referral.
SUMMARY Authorizes California Finance Lenders Law licensees making
commercial loans to compensate unlicensed persons and companies
in connection with the referral borrowers to the licensees, as
specified.
DESCRIPTION
1. Provides that a licensee under the California Finance
Lenders Law (CFLL) may pay compensation to an unlicensed
person or company in connection with the referral of one or
more prospective borrowers to the licensee, when all of the
following conditions are met:
a. The referral by the unlicensed person leads to the
consummation of a commercial loan between the licensee
and the borrower;
b. The annual percentage rate of that loan does not
exceed 36%;
c. Before approving the loan, the licensee obtains
documentation from the prospective borrower documenting
the borrower's commercial status; and 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
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terms.
i. Examples of documents acceptable for
verifying a borrower's commercial status 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.
ii. Examples of documents acceptable for
verifying a borrower's current and projected gross
monthly revenue and expenses include, but are not
limited to, tax returns, bank statements, merchant
financial statements, business plan, business
history, industry-specific knowledge and experience,
and (if the loan will be secured by a personal
guarantee) a credit report.
d. The licensee annually submits information requested
by the Commissioner of Business Oversight (commissioner)
regarding the payment of referral fees.
2. Requires a CFLL licensee that receives an application for a
commercial loan from a prospective borrower who has been
referred to that licensee by an unlicensed person or company
to provide the following written statement to the borrower,
in no smaller than 10-point type, and ask the 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 or Company] for the successful referral.
If you wish to report a complaint about this loan
transaction, you may contact the Department of Business
Oversight, Division of Corporations at 1-866-ASK-CORP
(1-866-275-2677), or file your complaint online at
www.dbo.ca.gov.
EXISTING LAW
1. Pursuant to the CFLL, defines a commercial loan as a loan
with 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
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which are intended by the borrower for use primarily for
other than personal, family, or household purposes. For
purposes of determining whether a loan is a commercial loan,
the lender may rely on any written statement of intended
purposes signed by the borrower. The lender is not required
to ascertain that the proceeds of the loan are used in
accordance with the statement of intended purposes
(Financial Code Section 22502).
EXISTING REGULATION
1. Prohibits a licensed finance lender from paying any
compensation to an unlicensed person or company for
soliciting or accepting applications for loans, except for
an employee regularly employed at a licensed place of
business of the finance lender, or if the payment is made to
a person or company licensed as a real estate broker, a
bank, savings and loan association, or any other financial
institution exempted from the California Finance Lenders Law
(California Code of Regulations Title 10, Chapter 3,
Subchapter 6, Article 4, Section 1451)..
COMMENTS
1. Purpose: This bill is co-sponsored by Opportunity Fund and
the California Association for Micro Enterprise Opportunity
(CAMEO) to remove a competitive disadvantage that applies to
CFLL licensees making commercial loans. In doing so, the
co-sponsors wish to improve the ability of microlenders to
identify underserved small businesses, and help them access
credit.
2. Background: Existing CFLL prohibit CFLL licensees from
paying any compensation to any person or company that is
unlicensed, in exchange for the referral of business. This
places CFLL licensees that make commercial loans at a
competitive disadvantage relative to their direct
competitors, which are not required to hold CFLL licenses.
As described in more detail below, two types of direct
competitors that are not required to hold CFLL licenses
include merchant advance companies (not required to be
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licensed under the CFLL, because they are advancing, rather
than lending money) and companies that partner with banks
(not required to be licensed under the CFLL, because the
loans are made under the banks' charters). CFLL licensees
may offer better loan terms to businesses than competitors
that lack CFLL licenses, but often lose customers to those
competitors, because the competitors can compensate those
from whom they receive referrals, while the CFLL licensees
are prohibited from doing so.
According to small business lending experts, referrals are the
single most efficient way for commercial lenders to acquire
small business customers. Because general purpose
advertising is not targeted, it is very inefficient at
reaching customers. Word of mouth is by far the most
efficient use of marketing dollars, but is an avenue that is
closed off to CFLL licensees by California's regulations.
3. What Are Merchant Advance Companies?: Merchant advance
companies that serve small businesses represent the most
common form of direct competition to commercial lenders
licensed under the CFLL. Unlike commercial lenders,
merchant advance companies do not offer loans. Instead,
they offer a variety of non-loan financing options, which
include cash advance, purchase order finance, accounts
receivable finance, or a combination of these. Generally
speaking, business arrangements between advance companies
and the firms they fund involve the following: The advance
company advances a certain amount of money to a business.
In return, the business agrees to remit a certain percentage
of its future revenue (typically sales receipts) to the
advance company until the advance is paid back. Some
merchant advance firms purchase future revenue at a
discount; others purchase future sales revenue on a dollar
for dollar basis, but charge the business a fee for the
transaction. Some contracts require that money be repaid on
a daily basis; others require different repayment schedules.
There is considerable variety in the ways in which advance
transactions are set up; the one thing that remains constant
is their being structured in ways that do not require a
California lending license.
4. How Does the Rent-A-Charter Model Work? Companies that
offer loans in partnership with banks represent another type
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of competition to CFLL licensees. Companies that partner
with banks to offer loans can often avoid having to become
licensed in the states in which the companies operate,
because the loans are technically being made by the bank.
This so-called rent-a-charter model has several different
variations, but often involves a company that lacks a
lending license acquiring customers and underwriting
prospective borrowers, referring qualified borrowers to a
bank, allowing the bank to lend to those qualified
borrowers, then purchasing the consummated loans from the
bank. Because the bank is technically the lender, the
company which partners with it is not required to hold a
lending license. As such, it is not restricted in its
ability to compensate third parties for the referral of
business.
5. Levelling the Playing Field: SB 197 would allow CFLL
licensees making commercial loans to pay fees for the
successful referral of business, thus eliminating their
competitive disadvantage in customer acquisition relative to
other entities that extend credit to small businesses in
California. According to this bill's co-sponsors, companies
that are not subject to the CFLL often offer less favorable
terms to small businesses than CFLL licensees, but small
business borrowers never learn about these more favorable
loans, because the CFLL lenders cannot compensate entities
to refer business to them.
California's existing prohibition against payment of
referral fees by licensed lenders is intended to protect
borrowers, by ensuring that they are not steered to loans
with unfavorable terms by unlicensed individuals whose
referrals are based entirely on the compensation they
generate, and not on the extent to which the loan makes
sense for the borrower being referred. SB 197 is designed
to eliminate the possibility that referral fees paid to
unlicensed individuals will result in predatory lending.
The bill allows the payment of referral fees only upon
consummation of a loan, and requires all loans for which
referral fees are paid to adhere to specified best practices
for business lending (verify the commercial status of the
borrower, maximum APR of 36%, and rigorous underwriting).
6. Summary of Arguments in Support:
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a. This bill is co-sponsored by the California
Association for Micro Enterprise Opportunity (CAMEO), a
network of 85 nonprofit micro-business development
organizations that serve very small businesses with
training, business technical assistance, and microloans,
and Opportunity Fund, California's largest non-profit
microlender. These organizations write, "This bill is
crucial to California small and microbusinesses,
especially underbanked ones, as they may not be learning
about and receiving the most appropriate financing
available. Word-of-mouth is a key marketing strategy for
reaching underbanked immigrant and minority communities;
referral fees for successful loans encourage
work-of-mouth...Because of [the] uneven playing field,
California businesses may not receive the best financing
available. This bill will help responsible lending
products be more competitive with other financing such as
merchant cash advances."
b. Similar arguments in support were submitted by two
dozen other organizations, including CDC Small Business
Finance (the largest Small Business Association
non-profit lender in the nation), Small Business
California, the National Federation of Independent
Business, Small Business Majority, Nehemiah Community
Reinvestment Fund, California Black Chamber of Commerce,
California Asian Pacific Chamber of Commerce, and others.
7. Summary of Arguments in Opposition: None received.
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LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Association for Micro Enterprise Opportunity
(co-sponsor)
Opportunity Fund (co-sponsor)
3CORE, Inc.
Academies for Social Entrepreneurship
Accion San Diego
California Asian Pacific Chamber of Commerce
California Black Chamber of Commerce
California Disabled Veteran Business Alliance
California Metals Coalition
Capital Impact Partners
CDC Small Business Finance
Community Advancement Initiatives, Inc.
El Pajaro Community Development Corporation
Genesis LA
MicroEnterprise Collaborative of Inland Southern California
Mission Asset Fund
National Federation of Independent Business
Nehemia Community Reinvestment Fund
Northern California Community Loan Fund
Pacific Community Ventures
Small Business California
Small Business Majority
TriTech Small Business Development Center
Valley Economic Development Center
West Company
Women's Economic Ventures
Opposition
None received
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