California Department of Business Oversight Issues Interpretive Guidance on SB 197

Commercial Lending Licensing

On April 27, the California Department of Business Oversight (Department) responded to a December 2, 2015 letter from the Equipment Leasing and Finance Association (ELFA) requesting interpretive guidance regarding the implementation of SB 197 (an Act to amend the California Finance Lender Law (CFLL) by adding Sections 22602, 22603, and 22604 to the California Financial Code). SB 197 authorizes licensed finance lenders to compensate unlicensed persons in connection with the referral of one or more prospective borrowers to the licensee for commercial loans if certain conditions are met such as interest rate limitations and ability to repay requirements. SB 197 expressly prohibits certain acts by an unlicensed person receiving compensation from a licensed lender in connection with commercial loans.

The Department’s April 27 letter sets forth the following guidance regarding SB 197 and the administration of the CFLL:

• Scope of SB 197: The Department advised that a licensed lender compensating a licensed broker for referrals is not an activity subject to SB 197. Furthermore, the Department confirmed that SB 197 does not apply to unlicensed brokers or other unlicensed persons who are not compensated for the referral of borrowers to a licensed finance lender. The Department, however, left open the possibility that there may exist circumstances where “lender referral fees or brokerage commissions are being included in the sale of equipment,” which would bring such compensation within the scope of SB 197.
• Jurisdiction/Scope of Licensing: ELFA asked several questions regarding the licensing of certain entities under the CFLL based on different scenarios. Although the Department declined to determine whether the hypothetical scenarios triggered licensure, the Department advised:

Lending to California citizens, or brokering loans on behalf of California citizens, are facts suggesting the lending or brokering activity is occurring in this state. We would look at other factors, such as whether a lender or broker solicits borrowers in California (directly or indirectly), and whether brokering on behalf of California borrowers is of a continuous nature. If the lender or broker's business activity has sufficient contact with California, then licensure would be required.

• Brokers and Exempt Lenders: The Department also advised that if a broker is not brokering loans made by a CFLL licensed lender, then the CFLL does not apply. In other words, if the lender is subject to CFLL licensure, then the broker would also be subject to the CFLL. Conversely, if the lender is exempt from the CFLL, such as a bank, then the lender would not be making CFLL loans and the broker would not be subject to the CFLL or need a CFLL license. This means, as noted above, SB 197 would not apply to referral arrangements utilized by either a lender or broker that is not subject to the CFLL. In determining whether a broker is required to be licensed, the Department noted that while a CFLL licensee is responsible for ensuring it is in compliance with the CFLL, a licensee may nonetheless rely on the broker’s written representations with respect to meeting certain exemptions (g., brokering five or fewer commercial loans in a 12-month period) from licensure because the Department recognized that the CFLL licensee may not have any practical means of verifying this information.

While the Department focused on ELFA’s questions regarding SB 197, which related to the commercial equipment lease finance sector, it appears the Department’s guidance may be broadly applied to all lenders engaging in business in California, including CFLL licensees, exempt entities, and unlicensed persons.