California Amends Finance Lenders Law and Residential Mortgage Lending Act

The California legislature amended  the California Finance Lenders Law (CFLL) allowing persons to make one commercial loan in a 12-month period without obtaining a license. This change effectively reenacts a de minimis exemption that was repealed in 2014, and is effective January 1, 2017 through January 1, 2022.

Effective September 28, 2016, the implementing regulations to the CFLL and California Residential Mortgage Lending Act (CRMLA) were amended such that subsidiaries and affiliates of exempt institutions are no longer exempt, by nature of this association, from the licensing requirements with respect to consumer and residential mortgage loans. The Department of Business Oversight filed the action to reverse through regulation previous Commissioner opinions that interpreted licensing exemptions under the CFLL and CRMLA to apply broadly to include subsidiaries of exempt financial institutions. Read more…

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State Regulatory Registry Proposes Policy Change Related to NMLS Public Comment Procedures

On August 30, the State Regulatory Registry LLC (SRR), a subsidiary of the Conference of State Bank Supervisors (CSBS) and the entity that operates the Nationwide Multistate Licensing System and Registry (NMLS), requested public comment on a proposal to adopt a formal policy that would govern procedures and processes for requesting comments on NMLS-related updates that impact outside parties. Proposed matters warranting public comment would include (i) major NMLS functionality updates; (ii) call report updates; (iii) impacts to NMLS usability; (iv) Uniform Form changes; and (v) fee changes. SRR proposes that the comment period for NMLS-related updates last for at least 60 days but no longer than 180 days unless, as determined by the SRR Senior Vice President of Policy, there is good cause for extending the comment period. Comments on SRR’s proposed policy change, which defines the roles and responsibilities of various persons and working groups that would be involved in considering proposed NMLS updates, are due by October 31, 2016.

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NYDFS Issues Virtual Currency License to XRP II, LLC

On June 13, the NYDFS announced that it approved XRP II, LLC’s application for a virtual currency license. Before approving the company’s August 2015 application, NYDFS conducted a “rigorous review” of the company’s anti-money laundering, capitalization, consumer protection, and cybersecurity standards. To date, NYDFS has received 26 BitLicense applications; two companies, including this one, have been approved for BitLicenses and two have received state trust charters. NYDFS further noted that it recently denied two applications for a virtual currency license; the companies in receipt of the denial letters were ordered to stop any New York operations.

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CSBS Names Charles Cooper Chairman of Board of Directors; Calls for Regulatory Collaboration

On May 24, the Conference of State Bank Supervisors (CSBS) announced several new officers, including Charles G. Cooper, Commissioner of the Texas Department of Banking, who will serve as the chairman of the CSBS Board of Directors. In his new role, Cooper delivered remarks at the State-Federal Supervisors Forum on May 26, addressing the following current issues facing the banking industry: (i) community banking; (ii) cybersecurity; and (iii) financial services provided by non-depository institutions, commenting on the expansion of the Nationwide Multistate Licensing System & Registry to include check cashers, debt collectors, and money service businesses. Cooper emphasized the significance of community banks, stating, “[t]heir role in providing credit and banking services is just as important as that of the largest financial intuitions.” Observing the decline in the number of community banks, Cooper called on Congress to implement “right-size regulation through legislation,” and stressed that regulators “need to continue to right-size [their] regulatory and supervisory processes.” Regarding cybersecurity, Cooper mentioned the CSBS Executive Leadership on Cyber Security (ELOC) program, which is intended to “bring [the] cyber issue out of the backroom and into the Board room.” Finally, Cooper concluded by calling on state and federal regulators, including the newer CFPB and FinCEN agencies, to “commit to working better together.”

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California Department of Business Oversight Issues Interpretive Guidance on SB 197

On April 27, the California Department of Business Oversight (Department) responded to a December 2, 2015 letter from the Equipment Leasing and Finance Association (ELFA) requesting interpretive guidance regarding the implementation of SB 197 (an Act to amend the California Finance Lender Law (CFLL) by adding Sections 22602, 22603, and 22604 to the California Financial Code). SB 197 authorizes licensed finance lenders to compensate unlicensed persons in connection with the referral of one or more prospective borrowers to the licensee for commercial loans if certain conditions are met such as interest rate limitations and ability to repay requirements. SB 197 expressly prohibits certain acts by an unlicensed person receiving compensation from a licensed lender in connection with commercial loans.

The Department’s April 27 letter sets forth the following guidance regarding SB 197 and the administration of the CFLL:

  • Scope of SB 197: The Department advised that a licensed lender compensating a licensed broker for referrals is not an activity subject to SB 197. Furthermore, the Department confirmed that SB 197 does not apply to unlicensed brokers or other unlicensed persons who are not compensated for the referral of borrowers to a licensed finance lender. The Department, however, left open the possibility that there may exist circumstances where “lender referral fees or brokerage commissions are being included in the sale of equipment,” which would bring such compensation within the scope of SB 197.
  • Jurisdiction/Scope of Licensing: ELFA asked several questions regarding the licensing of certain entities under the CFLL based on different scenarios. Although the Department declined to determine whether the hypothetical scenarios triggered licensure, the Department advised:

Lending to California citizens, or brokering loans on behalf of California citizens, are facts suggesting the lending or brokering activity is occurring in this state. We would look at other factors, such as whether a lender or broker solicits borrowers in California (directly or indirectly), and whether brokering on behalf of California borrowers is of a continuous nature. If the lender or broker’s business activity has sufficient contact with California, then licensure would be required.

  • Brokers and Exempt Lenders: The Department also advised that if a broker is not brokering loans made by a CFLL licensed lender, then the CFLL does not apply. In other words, if the lender is subject to CFLL licensure, then the broker would also be subject to the CFLL. Conversely, if the lender is exempt from the CFLL, such as a bank, then the lender would not be making CFLL loans and the broker would not be subject to the CFLL or need a CFLL license. This means, as noted above, SB 197 would not apply to referral arrangements utilized by either a lender or broker that is not subject to the CFLL. In determining whether a broker is required to be licensed, the Department noted that while a CFLL licensee is responsible for ensuring it is in compliance with the CFLL, a licensee may nonetheless rely on the broker’s written representations with respect to meeting certain exemptions (g., brokering five or fewer commercial loans in a 12-month period) from licensure because the Department recognized that the CFLL licensee may not have any practical means of verifying this information.

While the Department focused on ELFA’s questions regarding SB 197, which related to the commercial equipment lease finance sector, it appears the Department’s guidance may be broadly applied to all lenders engaging in business in California, including CFLL licensees, exempt entities, and unlicensed persons.

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