A California bill — SB-197 — that amends the California Finance Lenders Law (CFLL) to authorize state-licensed commercial lenders to pay referral fees has been passed by the state legislature and sent to Gov. Jerry Brown.
Currently, the CFLL prohibits commercial lenders from paying a fee to any unlicensed individual or company in exchange for a referral of business. The proposed new law seeks to level the playing field for CFLL-licensed lenders since referrals are one of the most efficient ways for commercial lenders to acquire small business customers.
The bill only allows for the payment of a referral fee once a loan has been approved and requires that all loans involving the payment of a referral fee adhere to best practices for commercial lending, including:
- Verification of the borrower’s commercial status;
- The loan’s annual percentage rate (APR) does not exceed 36%;
- The loan’s minimum term is one year;
- Lender performs vigorous underwriting to ensure the borrower’s financials support the repayment of the loan;
- Lender notifies borrower of the referral arrangement.
In addition, the California Department of Business Oversight (CDBO) recently modified its proposed regulations for licensing under the CFLL and California Residential Mortgage Lending Act, making the licensing rule applicable only to consumer lenders at nonbank subsidiaries and national bank affiliates.
Previously, nonbank subsidiaries and affiliates of national banks were exempt from the CFLL licensing requirement. The CDBO proposed a reversal of this rule based on new authority granted by Dodd-Frank that permits a state to regulate a bank subsidiary in ways not previously allowed.
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