BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: SB 197 Hearing Date: September
8, 2015
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|Author: |Block |
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|Version: |August 31, 2015 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: Finance lenders: commercial loan: referral.
SB 197 is being re-heard by this Committee pursuant to Senate
Rule 29.10. Substantive changes made to the bill since its last
hearing by this Committee are shown in bold type.
SUMMARY Authorizes California Finance Lenders Law (CFLL) licensees
making commercial loans to compensate unlicensed persons for
borrower referrals, as specified.
DESCRIPTION
1. Provides that a CFLL licensee may pay compensation to an
unlicensed person in connection with the referral of one or
more prospective borrowers to that 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 loan contract provides for an annual percentage
rate that 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
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revenue with which to repay the loan pursuant to the loan
terms, as specified.
d. The licensee maintains records of all compensation
paid to unlicensed persons in connection with the
referral of borrowers for at least four years.
e. The licensee annually submits information requested
by the Commissioner of Business Oversight (commissioner)
regarding the payment of referral fees.
2. Defines referral for purposes of the bill as either the
introduction of the borrower and the licensee or the
delivery of the borrower's contact information to the
licensee.
3. 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 to provide
the following written statement to the borrower, in no
smaller than 10-point type, and requires 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, Division of Corporations
at 1-866-ASK-CORP (1-866-275-2677), or file your complaint
online at www.dbo.ca.gov."
4. Provides that when a licensee pays a referral fee to an
unlicensed person in connection with a commercial loan, that
licensee is liable for any misrepresentation made to the
borrower in connection with that loan.
5. Provides that if one or more of the following eight
activities is performed by an unlicensed person in
connection with a commercial loan, that unlicensed person is
ineligible to be paid a referral fee in connection with that
loan:
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a. Participating in any loan negotiation.
b. Counseling or advising the borrower about a loan.
c. Participating 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. Gathering loan documentation from the borrower or
delivering the documentation to the licensee.
f. Communicating lending decisions or inquiries to the
borrower.
g. Participating in establishing any sales literature
or marketing materials.
h. Obtaining the borrower's signature on documents.
6. Notwithstanding the list of prohibitions immediately above,
allows persons meeting any of the following criteria to
engage in one or more of those eight activities, without
rendering themselves ineligible to receive a referral fee:
a. Exempt from licensure under the CFLL.
b. Exempt from federal income taxes pursuant to Section
501(c)(3) of the Internal Revenue Code.
c. Is a business assistance organization recognized by
the United States Small Business Administration.
d. Engages in one or more of the eight activities
listed immediately above in connection with five or fewer
commercial loans made by CFLL licensees in a 12-month
period.
7. Prohibits a person who receives compensation in connection
with a referral pursuant to the provisions of the bill from
doing any of the following:
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a. Making a materially false or misleading statement or
representation to a prospective borrower about the terms
or conditions of a prospective loan.
b. Advertising, printing, displaying, publishing,
distributing, or broadcasting any statement or
representation with regard to the conditions for making
or negotiating a loan that is false, misleading, or
deceptive or that omits material information that is
necessary to make the statements made not false,
misleading, or deceptive.
c. Engaging in any act in violation of Business and
Professions Code Section 17200.
d. Committing an act that constitutes fraud or
dishonest dealings.
e. Failing to safeguard a prospective borrower's
personally identifiable information.
8. Authorizes the commissioner to adopt regulations to impose
conditions on the referral activity authorized by the bill.
9. Authorizes the commissioner to issue a desist and refrain
order to any person who, in the commissioner's opinion, is
engaged in the business of soliciting borrowers for a loan
to be made by a CFLL licensee, and is not in compliance with
the provisions of the bill or with any other provision of
the CFLL.
EXISTING LAW
1. Pursuant to the CFLL, defines 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
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accordance with the statement of intended purposes
(Financial Code Section 22502).
EXISTING REGULATION
1. Prohibits a CFLL licensee from paying any compensation to
an unlicensed person for soliciting or accepting
applications for loans, except when the compensation is paid
to an employee regularly employed at a licensed place of
business of the licensee, or to a person or company that is
exempt from the CFLL (California Code of Regulations Title
10, Chapter 3, Subchapter 6, Article 4, Section 1451)..
COMMENTS
1. Purpose: 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, this
bill is intended to improve the ability of microlenders to
identify underserved small businesses, and help them access
credit.
2. Amendments Leading To Senate Rule 29.10 Referral: In July,
2015, after SB 197 had passed both the Senate Banking and
Financial Institutions Committee and the Assembly Banking
and Finance Committee, the Department of Business Oversight
(DBO) requested extensive amendments to the bill. DBO's
amendments are intended to minimize the likelihood that
commercial loans on which referral fees are paid will be
marketed in a misleading or unscrupulous manner and to
expressly prohibit persons who are required to be licensed
as loan brokers from using SB 197 to evade those licensing
requirements. Because the bill, as amended per DBO's
request, contains a significant number of conditions that
were not present when the bill passed either policy
committee, SB 197 was re-referred to the Assembly Banking
and Finance Committee pursuant to Assembly Rule 77.2 and,
after passing that Committee and the Assembly Floor, has
been re-referred to the Senate Banking and Financial
Institutions Committee pursuant to Rule 29.10(d).
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3. 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 who make commercial
loans at a competitive disadvantage relative to their direct
competitors, who are not required to hold CFLL licenses and
are thus not subject to the same restriction.
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.
As described in more detail below, two types of direct
competitors who 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
who 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.
4. What Are 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 advance companies
and the firms they fund involve the following: The 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
advance company until the advance is paid back. Some
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merchant advance firms purchase future sales 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; the one thing that remains constant
is their being structured in ways that do not require a
California lending license.
5. How Does the Rent-A-Charter/ Bank Affiliate Model Work?
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 or bank
affiliate 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, 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.
6. Levelling the Playing Field: 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.
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
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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 rigorous underwriting).
7. Summary of Arguments in Support:
a. This bill is co-sponsored by the California
Association for Micro Enterprise Opportunity (CAMEO), a
network of 85 nonprofit micro-business development
organizations that serve very small businesses with
training, business technical assistance, and microloans,
and Opportunity Fund, California's largest non-profit
microlender. These organizations 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."
b. Similar arguments in support were submitted by two
dozen other organizations, including CDC Small Business
Finance (the largest Small Business Association
non-profit lender in the nation), Small Business
California, the National Federation of Independent
Business, Small Business Majority, Nehemiah Community
Reinvestment Fund, California Black Chamber of Commerce,
California Asian Pacific Chamber of Commerce, and others.
8. Summary of Arguments in Opposition: None received.
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LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Association for Micro Enterprise Opportunity
(co-sponsor)
Opportunity Fund (co-sponsor)
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
MicroEnterprise Collaborative of Inland Southern California
Mission Asset Fund
National Federation of Independent Business
Nehemia 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
None received
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