BILL ANALYSIS Ó
SB 197
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Date of Hearing: June 22, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
SB
197 (Block) - As Amended June 8, 2015
SENATE VOTE: 36-0
SUBJECT: Finance lenders: commercial loan: referral.
SUMMARY: Allows a licensee under the California Finance Lenders
Law (CFLL) to pay compensation to an unlicensed person or
company in connection with the referral of one or more
prospective borrowers to the licensee. Specifically, this bill:
1)Permits compensation to be paid, 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 loan contract provides for an annual percentage rate
(APR) that does not exceed 36%; and,
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c) Before approving the loan, the licensee does both of the
following:
i) Obtains documentation from the prospective borrower
documenting the borrower's commercial status. (Examples
of acceptable forms of documentation include, but 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); and,
ii) 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
plan, business history, and industry specific knowledge
and experience. Permits a credit report if the
prospective borrower is a sole proprietor or a
corporation and the loan will be secured by a personal
guarantee.
2)Requires the licensee to maintain records of all compensation
for a period of at least 4 years.
3)Requires the licensee to annually submit information requested
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by the Commissioner of Business Oversight (Commissioner) in a
report.
4)Requires a 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)Defines, pursuant to the CFLL, 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
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)
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2)Requires each finance lender and broker licensee to file an
annual report with the commissioner, on or before the 15th day
of March, giving the relevant information that the
commissioner reasonably requires concerning the business and
operations conducted by the licensee within the state during
the preceding calendar year for each licensed place of
business. The individual annual reports filed pursuant to this
section shall be made available to the public for inspection
except, upon request in the annual report to the commissioner,
the balance sheet contained in the annual report of a sole
proprietor or any other nonpublicly traded persons. A
licensee shall make other special reports that may be required
by the commissioner. (Financial Code, Section 22159)
EXISTING REGULATION 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 CFLL. (California Code of Regulations Title 10, Chapter
3, Subchapter 6, Article 4, Section 1451)
FISCAL EFFECT: Unknown
COMMENTS:
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Need for the bill:
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.
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.
Background:
The existing CFLL prohibits CFLL licensees from paying any
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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, whom 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 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.
Non-CFLL Entities:
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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 merchant
advance companies and the firms they fund involve the following:
The merchant 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 merchant 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; with most being structured in ways that
do not require a California lending license.
Rent-A-Charter: Companies that offer loans in partnership with
banks represent another type 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, and 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
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restricted in its ability to compensate third parties for the
referral of business.
Consumer Protections:
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 underwriting).
Recommended Amendments:
1)On page 3, line 12, delete, "plan" and insert "plans"
2)On page 3, line 21, delete " prospective commercial"
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3)On page 3, delete lines 28-33 and insert:
"A licensee that is a finance lender shall provide a prospective
borrower, who has been referred by an unlicensed person or
company, the following written statement, in 10 point font or
larger, at the time the licensee receives an application for a
commercial loan, and shall request the prospective borrower to
acknowledge receipt of the statement in writing:"
REGISTERED SUPPORT / OPPOSITION:
Support
California Association for Micro Enterprise Opportunity (CAMEO)
- Co-Sponsor
Opportunity Fund - Co-Sponsor
3CORE, Inc.
Academies for Social Entrepreneurship
Accion San Diego
California Asian Pacific Chamber of Commerce
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California Black Chamber of Commerce
California Disabled Veteran Business Alliance
California Metals Coalition (CMC)
Capitol Impact Partners
CDC Small Business Finance
El Pajaro Community Development Corporation
Genesis LA
Liberty Capital Group
Microenterprise Collaborative Inland Southern California
Mission Asset Fund
National Federation of Independent Business (NFIB)
Nehemiah Community Reinvestment Fund
Northern California Community Loan Fund
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Pacific Community Ventures
Small Business California (SB-Cal)
Small Business Majority
TriTech Small Business Development Center
Valley Economic Development Center (VEDC)
West Company
Woman's Economic Ventures (WEV)
2 Individuals
Opposition
None on file.
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)
319-3081
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