Article 3. Loan Regulations of California Financial Code >> Division 9. >> Chapter 3. >> Article 3.
(a) A licensee may sell promissory notes evidencing the
obligation to repay loans made by the licensee pursuant to this
division or evidencing the obligation to repay loans purchased from
and made by another licensee pursuant to this division to
institutional investors, and may make agreements with institutional
investors for the collection of payments or the performance of
services with respect to those notes.
(b) For the purposes of this section, "institutional investor"
means the following:
(1) The United States or any state, district, territory, or
commonwealth thereof, or any city, county, city and county, public
district, public authority, public corporation, public entity, or
political subdivision of a state, district, territory, or
commonwealth of the United States, or any agency or other
instrumentality of any one or more of the foregoing.
(2) Any bank, trust company, savings bank or savings and loan
association, credit union, industrial bank or industrial loan
company, finance lender, or insurance company doing business under
the authority of and in accordance with a license, certificate, or
charter issued by the United States or any state, district,
territory, or commonwealth of the United States.
(3) Trustees of pension, profit sharing, or welfare funds, if the
pension, profit sharing, or welfare fund has a net worth of not less
than fifteen million dollars ($15,000,000), except pension, profit
sharing, or welfare funds of a licensee or its affiliate,
self-employed individual retirement plans, or individual retirement
(4) Any corporation with outstanding securities registered under
Section 12 of the Securities Exchange Act of 1934 or any wholly owned
subsidiary of that corporation; provided, however, that the
purchaser represents that it is purchasing for its own account for
investment and not with a view to or for sale in connection with any
distribution of the promissory note.
(5) Any syndication or other combination of any of the foregoing
that is organized to purchase the promissory note.
(6) A trust or other business entity established by an
institutional investor for the purpose of issuing or facilitating the
issuance of undivided interests in, the right to receive payments
from, or that are payable primarily from, a pool of financial assets
held by the trust or business entity if all of the following apply:
(A) The business entity is not a sole proprietorship.
(B) The pool of assets consists of one or more of the following:
(i) Interest bearing obligations.
(ii) Other contractual obligations representing the right to
receive payments from the assets.
(iii) Surety bonds, insurance policies, letters of credit, or
other instruments providing credit enhancements for these assets.
(C) The interests will be either of the following:
(i) Rated investment grade by Standard & Poor's Corporation or
Moody's Investors Service, Inc. "Investment grade" means that the
securities will be rated by Standard & Poor's Corporation as AAA, AA,
A, or BBB, or by Moody's Investor Service, Inc., as Aaa, Aa, A, or
Baa, including a rating with a "+" or "-" designation or other
variations that occur within these ratings.
(ii) Sold to an institutional investor as otherwise defined in
(D) The offer and sale of the securities is qualified under the
Corporate Securities Law of 1968 (Division 1 (commencing with Section
25000) of Title 4 of the Corporations Code) or is registered under
federal securities laws, or is exempt from qualification or
(c) In the absence of agreement to the contrary by the licensee
and the institutional investor, all payments received from the
collection of payments shall be deposited and maintained in a trust
account, and shall be disbursed from the trust account only in
accordance with the instructions of the owner of the promissory note.
(a) A licensee that is a finance lender may sell to (1) an
institutional lender, or (2) an institutional investor described in
paragraph (6) of subdivision (b) of Section 22600, promissory notes
evidencing the obligation to repay real estate secured business
purpose loans, as defined in Section 3500.5 of Title 24 of the Code
of Federal Regulations, purchased from and made by an institutional
lender, and may make agreements for the collection of payments and
performance of services with respect to those notes. For purposes of
this section, "institutional lender" means any bank, trust company,
savings bank or savings and loan association, credit union, or
industrial loan company doing business under the authority of and in
accordance with a license, certificate or charter issued by the
United States or this state.
(b) In the absence of agreement to the contrary by the licensee
and the institutional investor or institutional lender, all payments
received from the collection of payments shall be deposited and
maintained in a trust account, and shall be disbursed from the trust
account only in accordance with the instructions of the owner of the
With respect to a loan under this division, a fee not to
exceed fifteen dollars ($15) for the return by a depository
institution of a dishonored check, negotiable order of withdrawal, or
share draft may be charged and collected by the licensee. The fee is
not included in charges as defined in this division.
(a) A licensee that is a finance lender may pay compensation
to a person that is not licensed pursuant to this division in
connection with the referral of one or more prospective borrowers to
the licensee, when all of the following conditions are met:
(1) The referral by the unlicensed person leads to the
consummation of a commercial loan, as defined in Section 22502,
between the licensee and the prospective borrower referred by the
(2) The loan contract provides for an annual percentage rate that
does not exceed 36 percent.
(3) Before approving the loan, the licensee does both of the
(A) Obtains documentation from the prospective borrower
documenting the borrower's commercial status. Examples of acceptable
forms of documentation include, but are not limited to, a seller's
permit, business license, articles of incorporation, income tax
returns showing business income, or bank account statements showing
(B) Performs underwriting and obtains documentation to ensure that
the prospective borrower will have sufficient monthly gross revenue
with which to repay the loan pursuant to the loan terms, and does not
make a loan if it determines through its underwriting that the
prospective borrower's total monthly expenses, including debt service
payments on the loan for which the prospective borrower is being
considered, will exceed the prospective borrower's monthly gross
revenue. Examples of acceptable forms of documentation for verifying
current and projected gross monthly revenue and monthly expenses
include, but are not limited to, tax returns, bank statements,
merchant financial statements, business plans, business history, and
industry-specific knowledge and experience. If the prospective
borrower is a sole proprietor or a corporation and the loan will be
secured by a personal guarantee provided by the owner of the
corporation, a credit report from at least one consumer credit
reporting agency that compiles and maintains files on consumers on a
nationwide basis shall also be considered.
(4) The licensee maintains records of all compensation paid to
unlicensed persons in connection with the referral of borrowers for a
period of at least four years.
(5) The licensee annually submits information requested by the
commissioner regarding the payment of compensation in the report
required pursuant to Section 22159.
(b) A licensee that pays compensation to a person that is not
licensed pursuant to this division in connection with a referral for
a commercial loan made by that licensee to a borrower shall be liable
for any misrepresentation made to that borrower in connection with
(c) The following activities by an unlicensed person are not
authorized by this section:
(1) Participating in any loan negotiation.
(2) Counseling or advising the borrower about a loan.
(3) Participating in the preparation of any loan documents,
including credit applications.
(4) Contacting the licensee on behalf of the borrower other than
to refer the borrower.
(5) Gathering loan documentation from the borrower or delivering
the documentation to the licensee.
(6) Communicating lending decisions or inquiries to the borrower.
(7) Participating in establishing any sales literature or
(8) Obtaining the borrower's signature on documents.
(d) The prohibitions in subdivision (c) do not apply if the
unlicensed person meets one or more of the following criteria:
(1) Is exempt from licensure under this division.
(2) Is exempt from federal income taxes under Section 501(c)(3) of
the Internal Revenue Code.
(3) Is a business assistance organization recognized by the United
States Small Business Administration.
(4) Is engaged in one or more of the activities described in
paragraphs (1) to (8), inclusive, of subdivision (c) in connection
with five or fewer commercial loans in a 12-month period made by
persons licensed under this division.
(e) The commissioner may adopt regulations under this section to
impose conditions on the referral activity authorized under this
section. The commissioner may classify persons, loans, loan terms,
referral methods, and other matters within his or her jurisdiction,
and may prescribe different requirements for different classes of
(f) Nothing in this section shall authorize the payment of a
referral fee to an unlicensed person for a residential mortgage loan,
nor the payment of a referral fee to a person required to be
licensed under Section 10131 or 10131.1 of the Business and
Professions Code, unless such person is licensed by the Bureau of
Real Estate pursuant to Division 4 (commencing with Section 10000) of
the Business and Professions Code.
(g) For the purposes of this section, "referral" means either the
introduction of the borrower and the finance lender or the delivery
to the finance lender of the borrower's contact information.
A licensee that is a finance lender shall provide a
prospective borrower who has been referred by an unlicensed person
the following written statement, in 10-point font or larger, at the
time the licensee receives an application for a commercial loan, and
shall require the prospective borrower to acknowledge receipt of the
statement in writing:
"You have been referred to us by [Name of Unlicensed Person]. If
you are approved for the loan, we may pay a fee to [Name of
Unlicensed Person] for the successful referral. [Licensee], and not
[Name of Unlicensed Person] is the sole party authorized to offer a
loan to you. You should ensure that you understand any loan offer we
may extend to you before agreeing to the loan terms. If you wish to
report a complaint about this loan transaction, you may contact the
Department of Business Oversight at 1-866-ASK-CORP (1-866-275-2677),
or file your complaint online at www.dbo.ca.gov."
(a) Any person that receives compensation in connection with
a referral, as described in Section 22602, that leads to the
consummation of a commercial loan under this division may not do any
of the following:
(1) Make a materially false or misleading statement or
representation to a prospective borrower about the terms or
conditions of a prospective loan.
(2) Advertise, print, display, publish, distribute, or broadcast
any statement or representation with regard to the conditions for
making or negotiating a loan that is false, misleading, or deceptive,
or that omits material information that is necessary to make the
statements made not false, misleading, or deceptive.
(3) Engage in any act in violation of Section 17200 of the
Business and Professions Code.
(4) Commit an act that constitutes fraud or dishonest dealings.
(5) Fail to safeguard a prospective borrower's personally
(b) For purposes of this section, "personally identifiable
information" means information that is not publicly available, that a
prospective borrower provides for the purpose of obtaining a loan or
other financial product. Personally identifiable information
includes information a prospective borrower provides on an
application to obtain a loan, credit card, or other financial product
(c) Whenever, in the opinion of the commissioner, any person is
engaged in the business of soliciting borrowers for a loan to be made
by a licensee under this division, and the person is not in
compliance with this section, Section 22602, Section 22603, or any
other provision of this division authorizing such activity or
exempting the person from this division, the commissioner may order
the person to desist and to refrain from engaging in the business or
further violating this division.