Glass & Goldberg | Financing, Property & Bankruptcy Law

Upon the filing of most Chapter 11 bankruptcy cases, a hearing will be held by the bankruptcy court to review and hear an array of motions filed by the debtor. These motions typically include approval to make post-petition financing arrangements and immediate payment on pre-petition debt as necessary. These motions also seek approval of the employment and payment of professionals including, but not limited to, attorneys, appraisers, and real estate brokers.

These motions are known as “first-day” motions since they are normally requested on the same day that the bankruptcy petition is filed. The first-day motions needed by particular debtors vary based on the circumstances of each individual case and typically require a complex legal analysis. First-day motions facilitate the relationships between the debtor and its employees, as well as the debtor and other parties such as vendors and suppliers involved in the affairs of the business. They may assist the debtor in managing its cash flow and procuring any necessary post-petition financing.

Thus, first-day motions typically include requests by the debtor to use cash collateral and/or obtain debtor-in-possession (DIP) financing, as well as requests to pay vendor and supplier claims, pre-petition wages and benefits, sales and other taxes, as well any customer or other third-party obligations. The bankruptcy court will grant these motions as long as evidence is presented that payment of the related claims is critical to maintaining the debtor’s continuing business operations and value as an ongoing entity.

The ensuing financing orders may significantly impact the priority scheme for recovery in the bankruptcy case. Some allowance may be necessary for lien priming and any other replacement liens. Lien priming is when a DIP lender is placed ahead or at the same level of a preexisting lien. They may also affect debt service requirements and allocations of proceeds upon sale or liquidation of collateral for certain classes of claims.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Creditors in bankruptcy cases may receive the right to payment despite the problems and issues that arise when a borrower files a bankruptcy case. These rights and remedies must be exercised in a timely fashion. Creditors must remember to take certain action, or perhaps better put, refrain from certain action in the case that any borrower that is an obligee for a debt files a bankruptcy case.

First and foremost, bankruptcy debtors must include each and every creditor on their master mailing list, which is the list of individuals and entities to which the bankruptcy court electronically transmits and mails notices of hearings and the filings of pertinent case documents.

Creditors are normally entitled to a share from the distribution of the bankruptcy estate based on the priority of the claim. Creditors may challenge the dischargeability of a particular debt and, in Chapter 11 and 13 cases, may object to a debtor’s plan of reorganization.

It is imperative to cease any and all collection action which may be pending against the bankruptcy debtor. Creditors must correctly categorize their claim, whether it is rightfully secured or unsecured, and file a proof of claim by the applicable deadline. The classification or categorization of a claim is a significant factor in establishing any priority of payment.

Creditors must understand whether a claim may be discharged in the underlying bankruptcy case. The chapter under which the debtor files is strongly determinative of whether or not many claims are dischargeable. 11 U.S.C. § 523 (Section 523 of the Bankruptcy Code) lists the debts which are not dischargeable in Chapter 7 cases.

In certain situations where a claim may normally be dischargeable, fraud or some other circumstance may negate discharge. Filing an adversary action may, therefore, be necessary to receive any recovery in the related bankruptcy case.

All important documents, especially the debtor’s schedules of assets and liabilities, as well as the statement of financial affairs must be reviewed for accuracy. Certain questions must be raised: Has an asset been concealed or fraudulently transferred? Is the debtor alleging that assets are insufficient to pay any general unsecured creditors?

Carefully and consistently monitoring the progress of the bankruptcy case is crucial if the case is not declared as a “no-asset” case by the bankruptcy trustee and some recovery is possible. Many bankruptcy cases are dismissed, some simply because the debtor failed to comply with some filing requirements or deadline. In this circumstance, creditors may proceed with state collection remedies.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The California legislature enacted SB 800, the Right to Repair Act (the “Act”), in 2003. In Elliott Homes, Inc. v. The Superior Court of Sacramento County, the Court of Appeal of the State of California, Third Appellate District, addressed a construction defect dispute which involved the application of the Right to Repair Act. The Act “applies only to new residential units where the purchase agreement with the buyer was signed by the seller on or after January 1, 2003.”

The Act provides for a cooperative procedure to remedy construction defect claims prior to seeking a judicial remedy. A homeowner serves notice to a builder who receives an opportunity within a reasonable time to inspect and remedy any defect(s). If a homeowner fails to follow this procedure and, instead, immediately files a lawsuit against the builder, the latter may stay the proceedings until the Act’s requirements for resolution prior to litigation are satisfied.

The Elliot Homes case involved this exact fact pattern; however, the court denied the builder’s motion to stay further court action. Until 2003, a homeowner could not sue a builder for a construction defect unless it caused actual damage. The homeowners alleged that because they had actual damages and were not claiming any statutory violation under the Right to Repair Act, its pre-litigation procedures were inapplicable to their claims.

The Court of Appeal found that the Act provides: “In any action seeking recovery of damages arising out of, or related to deficiencies in, the residential construction, . . . a builder . . . shall, except as specifically set forth in this title, be liable for, and the claimant’s claims or causes of action shall be limited to violation of, the following standards, except as specifically set forth in this title. Thus, the Act applies broadly to “any action seeking recovery of damages arising out of, or related to deficiencies in, the residential construction,” and in such an action, a homeowner’s “claims or causes of action shall be limited to violation of” the standards set forth in [the Act].”

Thus, the Court of Appeal decided that the Legislature intended that all claims arising out of construction defects in new residential construction are subject to the standards and requirements of the Right to Repair Act. Homeowners must give notice to the builder and follow the Act’s pre-litigation procedure prior to filing suit, regardless of the theory of liability asserted in their complaint.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

In a case heard before the U.S. District Court of Nevada in the last year, the question of whether a state had personal jurisdiction over the corporation’s directors and officers was addressed. In January of 2017, the Court found that the exercise of jurisdiction by the State of Nevada over the directors and officers named in a derivative did not offend traditional notions of fair place and substantial justice.

In Sonoro Invest, S.A. v. Miller, 2017 U.S. Dist. LEXIS 9657, 2:15-cv-02286-JAD-CWH( D. Nev. Jan. 24, 2017), a shareholder of a Nevada corporation filed a derivative suit against four of the corporation’s directors and officers. Arguing that they did not live in Nevada and that their contacts with Nevada were not so continuous and systematic that they are “essentially at home” in Nevada, three of the defendants filed motions to dismiss the action for lack of personal jurisdiction. They further argued that the court lacked specific jurisdiction over them because their actions as officers and directors were not directed at or felt in Nevada, where their entity is incorporated but conducts no business operations. The defendants also moved to transfer venue to Ohio where “nearly all aspects of the litigation have substantial contacts.”

Citing the Nevada Supreme Court’s holding in Consipio Holdings, BV v. Carlberg,282 P.3d 751 (2012), the District Court of Nevada dismissed the defendants’ motions to dismiss. As stated by Judge Dorsey:

“I find that defendants’ purposeful acts designed to harm Abakan, a Nevada corporation, for their own personal benefit, combined with the notice that NRS § 78.135(1) provides and Nevada’s director-consent statute, are sufficient to confer personal jurisdiction over defendants for Sonoro’s derivative claims here. I also find that consideration of these reasonableness factors demonstrates that requiring Goss, Takkas, and Miller to defend Abakan’s derivative claims in this jurisdiction “does not offend traditional notions of fair place and substantial justice.” Nevada has an interest in adjudicating the derivative claims of a Nevada corporation to which Nevada law applies, and Sonoro plainly has an interest in obtaining convenient and effective relief and has selected this forum.”

The Court reasoned that while an individual’s position as a Nevada corporation’s director does not automatically subject that individual to jurisdiction in Nevada, the defendants’ purposeful actions in harming a Nevada corporation established contacts with Nevada and affirmatively directed conduct toward Nevada. Based on these purposeful actions coupled with the interest of both the plaintiffs and the State of Nevada in utilizing Nevada as a forum to adjudicate claims related to a Nevada corporation, it is not unreasonable that the officers and directors defend the lawsuit in Nevada. Under the circumstances, the defendants may have reasonably anticipated being hauled into court in Nevada.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

A recent case heard in the Northern District of California resolved a priority issue between a secured lender and judgment creditor pursuant to the take-free rule of Article 9. The case involved a debtor who granted a consensual security interest in a deposit account to a secured lender and a judgment creditor who levied the same deposit account.

In Stierwalt v. Associated Third Party Administrators, 2016 U.S. Dist. LEXIS 68744, 89 UCC Rep. 2d 921 (N.D. Calif. 2016), the defendant, Associated Third Party Administrators (ATPA), received a $12 million loan from CAM, which retained a blanket security interest in all of ATPA’s assets, including “deposit accounts.”  The promissory notes held by CAM were designated as “senior in right of payment” as to “all other indebtedness of the company.”

Later, the plaintiff, Stierwalt, obtained a judgment against ATPA and filed a writ of execution that garnished ATPA’s deposit accounts in one particular bank. Before the bank, U.S. Bank released any funds to Stierwalt, CAM filed a statement which claimed a perfected security interest in the deposit account funds.

Stierwalt did not dispute that CAM’s security interest in the funds in the deposit account had attached. However, the court concluded that CAM had not perfected its security interest in the debtor’s accounts as original collateral because it had no “control” over the account under UCC §9-104. There was no such control by CAM because: (1) CAM was not the debtor’s depository bank, (2) there was no third-party control agreement, and (3) the deposit accounts were not put and listed in CAM’s name as “customer.”

CAM also made the argument that it had a security interest in all the debtor’s receivables, collected and deposited into the debtor’s bank account as “derivative proceeds.” The California court concluded that, based on contract documentation, ATPA had “contract rights” in payments from its clients that were proceeds deposited into the U.S. Bank account.

Stierwalt argued that because the service contract proceeds were commingled with other company funds in the deposit accounts, CAM’s security interest was lost because the proceeds were no longer “identifiable.” The court disagreed and found that CAM’s security interest was properly perfected.

While it could be said that both sides made convincing arguments in support of their respective positions, based on a detailed analysis of UCC § 9-332(b), the court gave priority to the judgment creditor. The California court concluded that the take-free rule contained in Article 9 gives transferees from a debtor’s deposit account priority over third parties.

UCC §9-332(b) provides:

A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.

The court mentioned the Official Comment 2 to §9-332 and the broad protection it provides to transferees who take funds from a deposit account. The court pointed to this protection for transferees as ensuring that security interests in deposit accounts do not restrict the free flow of funds. Such protection also reduces the risk that a secured party will make a claim to any property the transferee purchases with the funds. Also, concerning recovery of payments, Article 9 has traditionally highly valued the finality of transactions. Any opportunity to overturn or suspend a completed transaction should be severely limited under Article 9.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

As technology moves forward, it affects many aspects of the business world, including the ease in which parties may conduct business transactions. Doing business within a digital environment is still largely unprecedented in many markets and requires certain safeguards to “anticipate the unanticipated.” Thus, the California Assembly and Senate are tasked with enacting legislation that adapts to the needs of the 21st Century business world.

In the last month, AB 380 was introduced in the California Assembly which amends various sections of the California Civil Code and applies to electronic records and electronic signatures relating to a transaction. The exclusion of a transaction from the amendments under AB 380 would only exclude a transaction from application under any section it amends but would not prohibit the transaction from being conducted by electronic means if the transaction could be conducted electronically under another applicable law.

The Uniform Electronic Transactions Act (“UETA” or the “Act”) affects parties which transact business electronically by providing specific protections for electronic transactions covered by the Act. While UETA permits parties to contract to conduct transactions by electronic means, it also imposes specified requirements on such transactions for compliance under the act.

Currently, the law as it exists regulates conditional sale contracts and lease contracts for motor vehicles and creates an exemption for such contracts from coverage under UETA. Thus, In California, at this time, such transactions must be conducted in person and may not be conducted electronically.

In a significant move forward, AB 380 removes this exemption from UETA for conditional sale and lease contracts for motor vehicles. Pursuant to AB 380, sellers and lessors of motor vehicles would be required to offer customers the option of executing and signing contracts electronically. Certain disclosures signed at the seller’s or lessor’s place of business in a document separate from the sale or lease contract would also be required under the bill.

The election to sign electronically the sale, lease, and other ancillary agreements as part of the transaction of the vehicle must be voluntary, and the buyer must be given the right to opt-out at any time. A buyer’s signature, in writing or electronically, must be located immediately below the opt-in consent disclosure.

A seller or lessor would be prohibited from penalizing customers for choosing not to sign electronically, as well as prohibited from assessing any penalty or charge based on the decision to sign. AB 380 also requires a copy of the executed contract or lease to be furnished to the buyer or lessee at the time the contract is electronically signed.

The new law if enacted would not apply to certain transactions under the Uniform Commercial Code; laws governing the creation and execution of wills, codicils, or testamentary trusts; any law that requires that specifically identifiable text or disclosures in a record or a portion of a record be separately signed, including initialed, from the record; and any specific transaction described in § 17511.5 of the Business and Professions Code.

The applicable sections amended by AB 380 would remain in effect only until January 1, 2021, and as of that date would be repealed, unless a later statute enacted before January 1, 2021, deletes or extends coverage.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Just after New Year’s Day, the U.S. District Court for the Central District of California certified for appellate review its Order finding that a payday lender based in California violated the Consumer Financial Protection Act (CFPA) based on its apparent violations of California state law. The lender used what has become commonly known as a “rent-a-tribe” scheme in an attempt to avoid the applicability of California laws on usurious lending and interest rates.

The Court listed four questions of law that merited review at the appellate level: (1) whether an individual may be held liable for a corporation’s attempts to collect unenforceable loans, especially in cases where legal advice was proffered that applicable interest rates were legal; (2) whether the CFPB’s structure is unconstitutional, and the effect of any ruling on current enforcement actions by the CFPB; (3) whether a CFPA violation may be based on violations of state law; and (4) the appropriate test for determining the “true lender” of a loan, including whether this test allows a court to look beyond the loan contract’s express terms.

The Court pointed out that federal courts of appeals are currently divided on the issue of whether violations of federal statutory law, like the CFPA, may be based solely on violations of state law, further noting that the Ninth Circuit has yet to address this issue.

The Consumer Financial Protection Bureau (CFPB) found that the payday lending company entered into an agreement with an entity owned by a member of a Native American Indian Tribe. Under the terms of the agreement, the tribal entity offered payday loans to the public and then immediately sold the loans to a business owned and controlled by the non-tribal company.

The loans included exorbitant preliminary fees, extended repayment terms, and annual percentage rates of almost 350%. Allegedly, the non-tribal company funded and underwrote the entire portfolio of loans, while offering marketing, collection, and other customer services, as well as further indemnifying the tribal entity for any liability.

In defense of its actions, the company contended that because the tribal entity had originated the loans, it was legal for the company to operate without a state license and originate loans that failed to comply with California laws related to usury.

The California Court found in an order dated August 31, 2016, that the company was the “true lender” of the loans, and violated California law and the CFPA by originating loans with usurious interest rates and illegal up-front fees. The agreement between the company and the tribal entity contained a choice-of-law clause which required the application of tribal law. The court found it unenforceable since the tribal entity was not the true lender. Stay tuned for more on this as the trial on damages was scheduled to commence in February of 2017.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The California Senate has been busy proposing changes to the California Finance Lenders Law (CFLL) in early 2017. The CFLL provides for the licensure and regulation of finance lenders and brokers. Among its various proposed changes, SB 297 (please see the blog from March 1, 2017) identified and defined “finders” and “finance brokers” as individuals who would require licensure by the State of California.

These new proposals from the California Legislature represent significant and important changes to the regulation of the finance lender industry in California. While their purposes seem to expand already existing licensing requirement of lenders and brokers to finders, California legislators are referring to this new concept as “registration.”

Introduced in the California Senate, SB 363 would amend § 22050.5 of the Financial Code to read:

“22050.5. (a) This division does not apply to any person who makes no more than one loan in a 12-month period if that loan is a commercial loan as defined in Section 22502.”

The apparent purpose of SB 363 is to alleviate some of the effect of SB 297 on individuals who may otherwise meet the definition of a “finder” or “finance broker” under SB 297, but who are at the most, bit players in a commercial loan transaction.

A second proposed bill, SB 428, makes non-substantive changes to the provision specifying items that are not charges for purposes of the CFLL. AB 428 would amend § 22202 of the CFLL. The existing law, which expires on January 1, 2022, does not apply to any person who makes one loan in a specified period if that loan is a commercial loan.

Under the CFLL “charges” for its purposes include aggregate interest, fees, bonuses, commissions, brokerage, discounts, expenses, and other forms of costs charged, contracted for, or received by a licensee or any other person in connection with the investigating, arranging, negotiating, procuring, guaranteeing, making, servicing, collecting, and enforcing of a loan or forbearance of money, credit, goods, or things in action, or any other service rendered. The CFLL also currently delineates what are not charges, including fees paid to a licensee for the privilege of participating in an open-end-credit program, as provided.

According to the changes in SB 428, charges would not include any of the following:

a)      Commissions received as a licensed insurance agent or broker in connection with insurance written as provided in § 22313.

b)      Amounts not in excess of the amounts specified set forth in subdivision (c) of § 3068 of the Civil Code paid to holders of possessory liens, imposed pursuant to Chapter 6.5 (commencing with § 3067) of Title 14 of Part 4 of Division 3 of the Civil Code, to release motor vehicles that secure loans subject to this division.

c)       Court costs, excluding attorney’s fees, incurred in a suit and recovered against a debtor who defaults on his or her loan.

d)      Fees paid to a licensee for the privilege of participating in an open-end credit program, which fees are to cover administrative costs and are imposed upon executing the open-end loan agreement agreement, and on annual renewal dates or anniversary dates thereafter.

e)      Amounts received by a licensee from a seller, from whom the borrower obtains money, goods, labor, or services on credit, in connection with a transaction under an open-end credit program that are paid or deducted from the loan proceeds paid to the seller at the direction of the borrower and which that are an obligation of the seller to the licensee for the privilege of allowing the seller to participate in the licensee’s open-end credit program. Amounts received by a licensee from a seller pursuant to this subdivision may not exceed 6 percent of the loan proceeds paid to the seller at the direction of the borrower.

f)        Actual and necessary fees not exceeding five hundred dollars ($500) paid in connection with the repossession of a motor vehicle to repossession agencies licensed pursuant to Chapter 11 (commencing with § 7500) of Division 3 of the Business and Professions Code Code, provided that the licensee complies with §§ 22328 and 22329, and actual fees paid to a licensee in conformity with §§ 26751 and 41612 of the Government Code in an amount not exceeding the amount specified in those sections provisions of the Government Code.

g)       Moneys paid to, and commissions and benefits received by, a licensee for the sale of goods, services, or insurance, whether or not the sale is in connection with a loan, that the buyer by a separately signed authorization acknowledges is optional, if sale of the goods, services, or insurance has been authorized pursuant to § 22154.

Thus, CFLL regulation and oversight over a less significant detail related to commercial loan transactions would be curbed and, therefore, minimized under SB 428. As 2017 continues into spring, it will be interesting to see what further changes the California legislature has in mind for the CFLL and the commercial lending industry in California.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

California Senate Bill 297 seeks to expand the licensure and regulation of finance lenders and brokers to include finders.  On February 13, 2017, SB 297 was introduced that, if enacted, would now require “finders “to register in order to do business in California.

SB 297 identifies individuals as “finance brokers” and “finders”.  A “finance broker”, as opposed to a “finder”, is any person who brings a prospective borrower and a finance lender together and, who is engaged in one or both of the following activities: (1) Negotiating the price, length, or any other loan term between a licensee and a prospective borrower that may be applicable to the borrower or (2) Advising a prospective borrower as to any loan term.

A “finder “is defined as any person who helps facilitate a loan subject to § 22009 of the California Finance Lenders Law by performing one or more of the following activities:

a)       Collecting nonpublic personal identification information, such as social security number, tax identification number, bank account number, bank routing number, or other nonpublic personal identification information, from prospective borrowers in anticipation of selling or submitting the information to one or more finance lenders.

b)       Introducing or matching prospective borrowers and prospective lenders after comparing prospective borrowers’ attributes with prospective lenders’ underwriting requirements.

c)        Offering to the public a means through which the finder compiles and publishes comparison information on various loans offered by finance lenders, including services that allow consumers to contact finance lenders through links on the finder’s Internet Web site or comparable technological means.

d)       Delivering disclosures to borrowers or prospective borrowers that are required pursuant to §22009 and the California Finance Lenders Law.

e)       Providing written factual information about loan terms, conditions, or qualification requirements to a prospective borrower that has been either prepared by a finance lender or reviewed and approved in writing by that lender. A finder may discuss that information with a prospective borrower in general terms, but may not provide counseling or advice to a prospective borrower.

f)        Notifying a prospective borrower of the information needed to complete an application for a loan subject to the CFLL, without providing counseling or advice to a prospective borrower.

g)       Contacting a finance lender on behalf of a prospective borrower to determine the status of a prospective borrower’s loan application.

h)       Communicating a response that is returned by a finance lender’s automated underwriting system to a borrower or a prospective borrower.

i)         Obtaining a borrower’s signature on documents prepared by a finance lender and delivering final copies of the documents to the borrower.

Under the new legislation, a finder may not engage in any of the following activities:

a)      Provide counseling or advice to a borrower or prospective borrower.

b)      Provide loan-related marketing materials that have not previously been approved by a lender licensed under this division to a borrower or a prospective borrower.

c)       Make a materially false or misleading statement or representation to a prospective borrower about the terms or conditions of a loan for which the prospective borrower may qualify when engaging in finding activities on behalf of a licensee subject to this division.

d)      Use or disclose to any third party a prospective borrower’s nonpublic personal identification information without first obtaining the borrower’s consent.

SB 297 would also add § 22010.6 to the CFLL which provides that the following are not deemed “finance brokers” or “finders” and may engage in specified activities without a license:

a)      A person who is not engaged in the business of a broker or a finder, and whose activities in connection with the referral of loans subject to this division are performed on no more than an occasional basis, not to exceed five times in any calendar year.

b)      A person who disseminates, places, posts, or distributes advertising or promotional information or materials pertaining to loans on behalf of licensees and does not engage in the activities of a broker or a finder.

c)       A person providing financial education or information of a general nature to a prospective borrower.

Under New Finance Code 22173, a licensee may compensate a registered finder for engaging in finding activities, subject to all of the following requirements:

a)      Each licensee wishing to engage the services of a finder shall enter into a written agreement with that finder clearly describing the services to be performed.

b)      Each agreement between a licensee and a finder shall include provisions requiring the finder to do all of the following:

(1)    Register with the commissioner in accordance with this division.

(2)    Comply with applicable provisions of this division and with rules promulgated and orders issued by the commissioner to implement those provisions.

(3)    Retain and produce records of all transactions conducted with California residents on behalf of the licensee, as required by Section 22157.

c)       Each licensee shall exercise oversight over each of its finder’s compliance with the provisions of this division.

New Finance Code 22174 would read as follows:

(a) At the time a finder receives an inquiry or application from a consumer for a loan subject to this division, the finder shall provide the following statement to the consumer in no smaller than 10-point type, or electronically in a form that allows the statement to be printed:

“[Name of finder] is an independent loan matching/referral/comparison service registered with the California Department of Business Oversight. [Name of finder] may be compensated by lenders in exchange for loan referrals, for featured placement of certain sponsored products and services, or for your clicking on certain links posted on an Internet Web site. You may receive separate communications from one or more lenders based on the information we have collected from you. If you have questions about the services we perform, you may contact us at [phone at which finder may be reached] or [email address at which finder may be reached]. If you wish to report a complaint about [Name of finder], you may contact the Department of Business Oversight at 866-275-2677, or file your complaint online at www.dbo.ca.gov.”

(b) At the time a lender licensed under this division approves an application for a loan subject to this division from a borrower who has been referred to it by one or more finders, the lender shall provide the following statement to the borrower in no smaller than 10-point type, or electronically in a form that allows that statement to be printed:

“[Name of licensed lender] has approved you for a loan based on information you provided to a third party working on our behalf. The details of the loan we are prepared to extend to you are described in accompanying documents. We may compensate the third party from which we obtained your information for their services in referring you to us. If you have any questions about your loan, now or in the future, you should direct those questions to us by [insert at least two different ways in which a borrower may contact the lender]. If you wish to report a complaint regarding this loan transaction, you may contact the Department of Business Oversight at 866-275-2677, or file your complaint online at www.dbo.ca.gov.”

(c) If a loan applicant directs questions about a loan to a finder, which the loan the finder is not permitted to answer, the finder shall make a good faith effort to assist the applicant in making direct contact with the lender before the loan is consummated. This good faith effort shall, at a minimum, consist of assisting the applicant in communicating with the licensee as soon as reasonably practicable, which shall at a minimum include a two-way communication. For purposes of this section, “two-way communication” means telephone, electronic mail, or another form of communication that allows the applicant to communicate with the licensee.

Increasing licensing and registration requirements as the bill proposes would expand oversight of individuals such as “finders” who have important, yet lesser, functions in both the consumer and commercial lending industries. Performing a job such as simply providing and collecting information to prospective borrowers will require registration under SB 297. Communicating with and providing notice to borrowers will require certification, as will merely obtaining signatures from and delivering copies to a prospective borrower. Lenders will have to facilitate the training and licensing of current employees or hire licensed employees, which theoretically will increase labor costs.

The California Assembly may not take action on the bill until on or after March 16, 2017. Stay tuned.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.