BILL ANALYSIS                                                                                                                                                                                                    






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          |SENATE RULES COMMITTEE            |                        SB 197|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
          |327-4478                          |                              |
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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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