On October 10, 2015, Gov. Jerry Brown signed SB-197 into law, amending the California Finance Lenders Law (CFLL) to authorize state-licensed commercial lenders to pay referral fees. The new law goes into effect on January 1, 2016.
Previously, the CFLL had prohibited commercial lenders from paying a fee to any unlicensed individual in exchange for a referral of business. Supporters of SB-197 said that this put CFLL-licensed lenders, which may offer more advantageous rates to small businesses, at a competitive disadvantage to unlicensed lenders offering financial products like cash advances, purchase order financing, accounts receivable financing, or a combination of all of these.
The new law should 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. Supporters say that it will protect small business borrowers by ensuring they are not steered to loans with adverse terms by individuals or companies compensated by unlicensed lenders for those referrals.
The new law 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.
In addition, lenders must provide the borrower with a written statement detailing the referral arrangement as follows:
“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.”
Under the new law, unlicensed persons may not:
- Participate in loan negotiations
- Counsel or advise the borrower about a loan
- Participate in the preparation of any loan documents
- Contact the lender on behalf of the borrower beyond the initial referral
- Obtain loan documentation from the borrower or deliver that documentation to the lender
- Communicate lending decisions or inquiries to the borrower
- Participate in creating sales literature or marketing materials
- Obtain the borrower’s signature on loan documents
The new law applies to business loans, capital leases and working capital loans.
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