New Exemption from California Finance Lenders Law

photo-commercial-lender-law-300x200Those not used to reading statutes will probably find them really boring and might be surprised by the sometimes long and in depth sections on definitions of terms. You might assume that if a word is in a statute it should have whatever common meaning you would find in the dictionary. That’s not the case and whether a business or industry falls into the definition of a term or not could mean all the difference between heavy regulation or profitable opportunities.

The California Finance Lenders Law (CFFL) states that “finance lender” as it’s used in the statute is anyone who is “engaged in the business” of making consumer loans or making commercial loans.  Cal. Fin. Code § 22009.  That definition is important because the state imposes a license requirement on any party “engaged in the business” of a finance lender. Cal. Fin. Code § 22100(a). But the law, as it was written, didn’t define “engaged in the business.” The legal line between a party who might occasionally makes a loan and a party who’s main business is making loans could be difficult to determine.

Like many laws the CFFL has undergone changes over time,

  • It didn’t cover those who made no more than one loan in a 12-month period as long as the loan was a commercial loan, as defined by the law, from 1998 from 2014.
  • The state legislature apparently wanted to open up this exemption in 2013 so it increased the number of loans to no more than five but added a limitation. The loans needed to be incidental to the business of the person relying on the exemption. Fin. Code § 22050(e).
  • This resulted in limiting, not expanding, the exemption as intended. A business entity formed to make a single commercial loan would not be eligible for the exemption because the loan would not be “incidental” to its business.

Earlier this year this conflicted situation was remedied when Governor Jerry Brown signed SB 777 into law in September.  This bill was born as an amendment to California’s Gambling Control Act but was gutted of its language and found new life in early August in order to make an exemption for any entity that makes one commercial loan in a 12-month period.  Cal. Fin. Code § 22050.5.  This new law takes effect at the start of 2017 and, unless its lifespan ends early or is extended, will be in effect through the end of 2021.

The new exemption isn’t the same as the old exemption covering those making one loan. “(N)o more than” was eliminated, which, according to the Senate Committee on Banking and Financial Institutions Committee analysis, was a mistake and the difference created unwanted confusion.

  • SB 777 was intended to help the community development corporation TELACU to facilitate New Markets Tax Credit financings which are supposed to help low-income communities who have suffered a lack of investment by attracting private investment which could aid struggling, local economies.
  • Because this financing structure involves creating of an entity just to disburse loan proceeds, this proviso in Section 22050(e) has been a problem.

If you have any questions about making or accepting a commercial loan or problems have come up and you think you may need legal help related to a commercial loan, contact our office so we can discuss the situation and your best options for protecting your interests.