The California Finance Lenders Law defines a “finance lender” as anyone that is engaged in the business of making consumer loans or making commercial loans. Cal. Fin. Code § 22009. Knowing the definition of “finance lender” is important because California imposes a license requirement on anyone engaged in the business of a finance lender. Cal. Fin. Code § 22100(a). Because the CFLL doesn’t define the phrase “engaged in the business”, the line between someone who occasionally makes loans and someone that is engaged in the business can often be difficult to discern.
From 1998 until 2014, the CFLL did not apply to persons that made no more than one loan in a 12-month period as long as the loan was a commercial loan, as defined. In 2013, the Legislature in an apparent attempt to liberalize this de minimis exemption increased the number of loans to no more than five. However, it added a proviso. The loans had to be incidental to the business of the person relying on the exemption. Cal. Fin. Code § 22050(e). For many, this proviso had the effect of limiting, rather than expanding, the exemption. In particular, a special purpose entity formed to make a single commercial loan is arguably ineligible on the basis that the loan is not “incidental” to its business.
This highly unsatisfactory state of affairs was partially remedied last week when Governor Jerry Brown signed SB 777 (Lara) into law. This bill started life as an amendment to California’s Gambling Control Act. In early August, the bill was gutted and amended to create an exemption for any person that makes one loan in a 12-month period if that loan is a commercial loan. Cal. Fin. Code § 22050.5. This new exemption takes effect on January 1, 2017 and will remain in effect until January 1, 2022.
Careful readers will notice that the new de minimis exemption isn’t exactly the same as the former exemption. Three words were dropped – “no more than”. According to the Senate Committee on Banking and Financial Institutions Committee analysis, this omission was inadvertent. However, the difference may create some unwanted confusion.
SB 777 was sponsored by TELACU, a community development corporation, in order to facilitate New Markets Tax Credit financings. Because this financing structure involves the creation of an entity specifically to for the purpose of disbursing loan proceeds, the proviso in Section 22050(e) has been problematical.