BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 197|
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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 Fund
DIGEST: 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
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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).
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.
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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
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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
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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
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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
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