The California Finance Lenders Law generally requires that persons ”engaged in the business of making consumer loans or making commercial loans” be licensed, unless exempt. Cal. Fin. Code §§ 22100(a) and 22009. The business of making consumer loans or commercial loans may include lending money and taking, in the name of the lender, or in any other name, in whole or in part, as security for a loan, any contract or obligation involving the forfeiture of rights in or to personal property, the use and possession of which property is retained by other than the mortgagee or lender, or any lien on, assignment of, or power of attorney relative to wages, salary, earnings, income, or commission. Cal. Fin. Code § 22009. This presents the question of whether a sale and leaseback transaction constitutes a loan subject to the CFL.
In Release No. 56-FS, the Commissioner identified the following seven factors, the presence of one or more of which could indicate that a sale-leaseback transaction is a loan transaction:
- The borrower seeks money and not the use of goods or property;
- The borrower receives money, followed by a “sale” of the borrower’s property to the lender, with a provision for repayment in the form of rent or payments to the lender;
- The borrower is in possession of the goods or property before obtaining money from the lender;
- The borrower gives up title to goods or property as security in exchange for receiving money;
- There is no risk to the lender of losing capital, other than the insolvency of the borrower;
- The lender has the power to accelerate the principal payment of the “loan” upon default; and
- The transaction includes agreements with provisions of title reversions and “repurchase” within specified periods.
The problem with this “guidance” is that it is really too vague and uncertain to be helpful. The problem of how to distinguish a “true lease” from a “financing lease” is not new. Perhaps greater clarity could be obtained if the Department of Corporations focused on the economics as does the California Uniform Commercial Code when distinguishing a lease from a security interest. Cal. Comm. Code § 1201.
