BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 197|
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UNFINISHED BUSINESS
Bill No: SB 197
Author: Block (D)
Amended: 8/31/15
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
SENATE FLOOR: 36-0, 5/18/15
AYES: Allen, Anderson, Bates, Beall, Block, Cannella, De León,
Fuller, Gaines, Galgiani, Hancock, Hernandez, Hertzberg, Hill,
Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire,
Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen,
Nielsen, Pan, Roth, Runner, Stone, Vidak, Wieckowski, Wolk
NO VOTE RECORDED: Berryhill, Hall, Pavley
SENATE BANKING & F.I. COMMITTEE: 7-0, 9/8/15 (pursuant to
Senate Rule 29.10)
AYES: Block, Galgiani, Hall, Hueso, Lara, Morrell, Vidak
ASSEMBLY FLOOR: 78-0, 9/2/15 - See last page for vote
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 for borrower referrals, as specified.
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Page 2
Assembly Amendments define referral for purposes of this bill;
list eight specific activities, generally associated with loan
brokerage activity, which, if performed by an unlicensed person
in connection with a commercial loan, render that person
ineligible to be paid a referral fee in connection with that
loan, as specified; list five activities, which are prohibited
by any person who receives a referral fee pursuant to the
provisions of this bill; impose liability on CFLL licensees who
pay referral fees to unlicensed persons in connection with
commercial loans for misrepresentations made to borrowers in
connection with those loans; revise the disclosure that CFLL
licensees are required to provide to prospective borrowers
referred to them by a third party; require prospective borrowers
to acknowledge receipt of the aforementioned disclosure in
writing; require CFLL licensees to use a credit report to
underwrite a commercial loan that will be secured by a personal
guarantee; authorize the Commissioner of Business Oversight
(commissioner) to adopt regulations imposing additional
conditions on the referral activity authorized by this bill;
authorize the commissioner to issue a desist and refrain order
to any person who violates this bill; and clarify that this bill
does not authorize the payment of a referral fee to an
unlicensed person for a residential mortgage loan, nor to a
person who requires licensure under the Real Estate Law.
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
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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Page 3
2)Prohibits a CFLL licensee from paying any compensation to an
unlicensed person or company 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 exempt
from the CFLL (California Code of Regulations Title 10,
Chapter 3, Subchapter 6, Article 4, Section 1451).
This bill:
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 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 regarding the payment of referral fees.
2)Defines referral for purposes of this 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
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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 loan, that licensee is
liable for any misrepresentation made to the borrower in
connection with that loan.
5)Lists eight activities which, if performed by an unlicensed
person in connection with a commercial loan, render that
unlicensed person ineligible to be paid a referral fee in
connection with that loan. Those eight activities include:
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.
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g) Participating in establishing any sales literature or
marketing materials.
h) Obtaining the borrower's signature on documents.
6)Allows, notwithstanding the list of prohibitions listed
immediately above, 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 any 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 this bill from
doing any of the following:
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.
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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 this 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 this bill or with any other provision of the
CFLL.
Background
This bill is co-sponsored by Opportunity Fund and the California
Association for Micro Enterprise Opportunity 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.
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 this
restriction. 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).
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.
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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 licensees cannot compensate entities to refer
business to them.
California's existing prohibition against payment of referral
fees by CFLL licensees 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
Com.:YesLocal: Yes
According to the Assembly Appropriations Committee, this bill
will result in minor General Fund administrative costs to the
Department of Business Oversight, in the range of $20,000-30,000
annually, to examine loans for compliance, and in minor and
absorbable enforcement costs.
SUPPORT: (Verified9/2/15)
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Page 8
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
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: (Verified9/2/15)
None received
ARGUMENTS IN SUPPORT: According to this bill's co-sponsors,
"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
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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."
ASSEMBLY FLOOR: 78-0, 9/2/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chang, Chau,
Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly,
Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina
Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,
Gordon, Gray, Grove, Hadley, Roger Hernández, Holden, Irwin,
Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low,
Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin,
Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea,
Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago,
Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber,
Wilk, Williams, Wood, Atkins
NO VOTE RECORDED: Brough, Harper
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
9/9/15 10:32:23
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