BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 197| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 197 Author: Block (D) Amended: 4/15/15 Vote: 21 SENATE BANKING & F.I. COMMITTEE: 6-0, 4/29/15 AYES: Block, Galgiani, Hall, Hueso, Lara, Morrell NO VOTE RECORDED: Vidak SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8 SUBJECT: Finance lenders: commercial loan: referral SOURCE: California Association for Micro Enterprise Opportunity Opportunity FundDIGEST: This bill authorizes California Finance Lenders Law (CFLL) licensees making commercial loans to compensate unlicensed persons and companies in connection with the referral borrowers to the licensees, as specified. ANALYSIS: Existing law: 1)Defines a commercial loan, pursuant to the CFLL, 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 SB 197 Page 2 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). 2)Prohibits, through regulation, 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). This bill: 1)Allows a CFLL licensee to 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 terms. SB 197 Page 3 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 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. Background Existing CFLL regulations 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. Two types of direct competitors that are not required to hold CFLL licenses include merchant advance companies (not required to be licensed under the CFLL, because they are advancing, rather than lending money) and SB 197 Page 4 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. Comments SB 197 allows 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. This 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). FISCAL EFFECT: Appropriation: No Fiscal SB 197 Page 5 Com.:YesLocal: Yes SUPPORT: (Verified5/8/15) California Association for Micro Enterprise Opportunity (co-source) Opportunity Fund (co-source) 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 Liberty Capital Group MicroEnterprise Collaborative of Inland Southern California Mission Asset Fund National Federation of Independent Business Nehemiah 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: (Verified5/8/15) None received ARGUMENTS IN SUPPORT: This bill is co-sponsored by the California Association for Micro Enterprise Opportunity, a network of 85 nonprofit micro-business development organizations SB 197 Page 6 that serve very small businesses with training, business technical assistance, and microloans, and Opportunity Fund, California's largest non-profit microlender. These organizations and this bill's other supporters 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." Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102 5/13/15 16:55:56 **** END ****