Last month, Commissioner of Business Oversight Jan Owen issued an invitation for comment on two proposed rules that would subject non-depository operating subsidiaries, affiliates and agents of federal banks and other financial institutions to licensing under the California Finance Lenders Law or the Residential Mortgage Lending Act. I found this proposal to be particularly interesting because as Commissioner of Corporations I had issued two specific rulings concluding that these types of subsidiaries were not subject to licensure by virtue of Section 22050(a) of the Financial Code. 1996 Cal. Sec. LEXIS 6 (Oct. 22, 1996) and 1996 Cal. Sec. LEXIS 9 (Nov. 9, 1996). That statute provides that the CFL does not apply to “any person doing business under any law of any state or of the United States relating to banks, trust companies, savings and loan associations, insurance premium finance agencies, credit unions, small business investment companies, community advantage lenders, California business and industrial development corporations when acting under federal law or other state authority”.
Thereafter, the Office of the Comptroller of the Currency and the former of Office of Thrift Supervision issued regulations preempting state authority over bank and savings association subsidiaries. This seemed to further foreclose any state regulation. The wheel turned, however, in 2010 with the enactment of the Dodd-Frank Act which eliminated federal preemption with respect to state incorporated, non-bank operating subsidiaries, affiliates, and agents of banks and savings associations.
By opening the door to state regulation, the Dodd-Frank Act revived the older question of statutory interpretation that was addressed in the specific rulings that I and other Commissioners had issued. The current Commissioner is now proposing to abrogate those interpretations by adoption of regulations. The Commissioner isn’t arguing that the rulings were, or are, incorrect. Rather, she is arguing that changed circumstances warrant a changed interpretation.
I’m not sure that the invitation for comment makes a strong case, particularly with respect to commercial loans. The current CFL imposes virtually no substantive requirements on commercial loans or lending practices. Thus, imposing a licensing requirement would do little in the way of borrower protection.
Comments are due by May 7, 2014 and can be submitted electronically to firstname.lastname@example.org.