CFL Annual Report Form Presents A Subterranean Problem For DOC

Every person who was licensed under the California Finance Lenders Law as of December 31, 2011 must file an annual report with the Department of Corporations.  The report is due on or before March 15, 2012.  Cal. Fin. Code § 22159(a).  The Department uses the report to determine each licensee’s annual assessment.   The Department also uses the report for compliance purposes and to gather information for its annual report on CFL lenders.

Failure to file can have draconian consequences.  Pursuant to Financial Code Section 22715, the Commissioner may summarily suspend or revoke the license if a licensee fails to file the report within 10 days after notice from the Commissioner that the notice is due.  The Commissioner also takes the position (citing Government Code Section 11522) that a person whose license has been revoked must wait at least one year before applying for a new license.

The Department’s annual report form raises a significant issue under the California Administrative Procedure Act.   The rule-making provisions of the APA apply to all regulations unless the legislature has made an express exception.  A form constitutes a regulation when an agency adds any language that satisfies the definition of “regulation” to the existing legal requirements.  Govt. Code § 11340.9(c).  This means that an agency can’t write extra-statutory requirements into a form and avoid the rule-making procedures of the APA.  An agency may not utilize, enforce, or attempt to enforce a regulation unless the agency has adopted the regulation in accordance with the APA.  Govt. Code § 11340.5(a).  Regulations adopted outside of the APA process are commonly referred to as “underground regulations”.

The Department has not adopted the annual report form as a regulation in compliance with the APA.  Thus, the only question is whether the Department has added to the existing legal requirements.  It is manifestly evident (even after a cursory review) that the form imposes many more requirements than the applicable statute (Fin. Code § 22159).  The Department should, therefore, raise its annual report form from the netherworld by following the notice and comment procedures mandated by the APA.

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