Lenders and Licensing and Exemptions: The World According to the California Finance Lenders Law

By: Jack Easterbrook

Many of our clients, at one time or another, get involved in private loan activities in California as a lender. It may be to help finance a business, purchase or improve real estate around San Jose, Silicon Valley or elsewhere in California, or just to provide funds for a family member. Although most lending has been and continues to be done by regulated financial institutions, opportunities abound for private lenders and many people are attracted to the market, whether for economic gain, to participate in a start-up idea or to just help out family or friends. The purpose of this article is to alert private lenders that California has established licensing rules to govern this lending activity, and to protect them from the risk of fines or even criminal charges for failing to follow these rules.

The California Finance Lenders Law (CFLL) is the name commonly given to the body of statutes imbedded in the California Finance Code addressing most lending activity in California. The CFLL governs the activities of both brokers and lenders engaged in the business of negotiating or making “commercial loans” or “consumer loans,” which broadly covers most lending activity in the state. Essentially, the CFLL requires any person participating as a lender or broker of commercial or consumer loans in California to obtain a license from the California Commissioner of Business Oversight unless the person qualifies for an exemption. Getting the license can easily take over six months to complete and involves a number of requirements, such as making numerous disclosures, paying fees, obtaining a surety bond and demonstrating financial wherewithal. Violations may result in fines of up to $10,000 and possibly imprisonment.

The CFLL, as mentioned, contains numerous exemptions to the licensing requirement and these can become very important to persons or entities involved in lending activity. Banks, credit unions and most institutional lenders qualify for an exemption. Exemptions exist, as well, for many other persons and entities involved in certain kinds of loans. A few of the most significant exemptions are: (a) loans by persons or entities making no more than five commercial loans in a twelve month period so long as such loans are “incidental” to the primary business of the person seeking the exemption; (b) loans made or arranged by licensed real estate brokers when the loan is secured by a lien on real property; and (c) commercial bridge loans made by venture capital companies to an operating company. Numerous other unique exemptions also exist.

The situation can be complicated by the use of intermediaries or separate business entities as the actual lender. The lending entity itself must qualify for the exemption. For example, a loan may be an incidental activity for an individual but not for an LLC actually making the loan.

If you are entering into a transaction in California in which you will be lending money, whether to an entity or a person, one item of due diligence not to overlook is whether you, or the affiliated entity in which you have an interest (if it is going to act as the lender) qualify for an exemption under the California Lender Finance Law. If you identify early the fact that the lender is not licensed and the proposed loan may not qualify for an exemption, it may be possible to develop a way of accomplishing your business objectives by revising some aspect of the proposed deal. Alternatively, the licensing requirement can be included in the checklist and factored into the timeline for making the loan. In any event, a private lender will want to handle the matter in a fashion that eliminates the risk of fines or worse.