BILL ANALYSIS Ó
SB 197
Page 1
SENATE THIRD READING
SB
197 (Block)
As Amended August 31, 2015
Majority vote
SENATE VOTE: 36-0
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Banking |12-0 |Dababneh, Travis | |
| | |Allen, Achadjian, | |
| | |Brown, Chau, Gatto, | |
| | |Hadley, Kim, Low, | |
| | |Perea, Ridley-Thomas, | |
| | |Mark Stone | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Appropriations |16-0 |Gomez, Bigelow, | |
| | |Bloom, Bonta, | |
| | |Calderon, Chang, | |
| | |Daly, Eggman, | |
| | |Gallagher, | |
| | | | |
| | | | |
| | |Eduardo Garcia, | |
| | |Jones, Quirk, Rendon, | |
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| | |Wagner, Weber, Wood | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Banking |10-0 |Dababneh, Achadjian, | |
| | |Brown, Chau, Gatto, | |
| | |Hadley, Kim, Perea, | |
| | |Ridley-Thomas, | |
| | | | |
| | | | |
| | |Mark Stone | |
| | | | |
| | | | |
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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,
c) Before approving the loan, the licensee does both of the
following:
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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 four years.
3)Requires the licensee to annually submit information requested
by the Commissioner of Business Oversight (Commissioner) in a
report.
4)Provides that a licensee shall be liable for any
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misrepresentations made to a borrower in connection with a
commercial loan made to that borrower by that licensee.
5)Defines "referral" as the introduction of the borrower and
finance lender or the delivery to the finance lender of the
borrower's contact information.
6)Provides that an unlicensed person may not engage in the
following activities in performing commercial loan referral
service:
a) Participate in loan negotiation;
b) Counseling or advising the borrower about a loan;
c) Participate in the preparation of any loan documents,
including credit applications;
d) Contacting the licensee on behalf of the borrower other
than to refer the borrower;
e) Gather loan documentation from the borrower or deliver
the documentation to the license;
f) Communicate lending decisions or inquires to the
borrower;
g) Participate in establishing any sales literature or
marketing materials; or
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h) Obtaining the borrower's signature on documents.
7)Exempts from the prohibitions above, an entity recognized as a
501(c)(3) by the Internal Revenue Code, a business assistance
organization recognized by the Small Business Administration
or a person that engages the activities above in connection
with five or fewer commercial loans in a 12-month period.
8)Allows the commissioner to adopt regulations to impose
conditions of referral activity.
9)Prohibits the payment of a referral fee to an unlicensed
person for a residential mortgage loan or payment to a person
required to be licensed under the Real Estate Law.
10)Provides that any person that receives compensation in
connection with a referral that leads to a consummated
commercial loan may not do the following:
a) Make a material false or misleading statement or
representation to a prospective borrower about the terms
and conditions of a prospective loan;
b) Engage in false, misleading or deceptive marketing;
c) Omit material information;
d) Engage in an act that constitutes fraud or dishonest
dealings; or,
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e) Fail to safeguard a prospective borrower's personally
identifiable information.
11)Gives the commissioner authority to issue desist and refrain
orders to persons engaged in the business of soliciting
borrowers and not in compliance with sections authorizing
referral activity.
12)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] for the successful referral. [Licensee],
and not [Name of Unlicensed Person] is the sole party
authorized to offer a loan to you. You should ensure that you
understand any loan offer we may extend to you before agreeing
to the loan terms. If you wish to report a complaint about
this loan transaction, you may contact the Department of
Business Oversight (DBO), 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
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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)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. This bill is keyed non-fiscal by the
Legislative Counsel.
COMMENTS:
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Need for this 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.
This bill 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
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
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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:
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
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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
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. This bill 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 underwriting).
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Analysis Prepared by:
Mark Farouk / B. & F. / (916) 319-3081 FN:
0001604