In the State of California, a finance lender is an individual who is in the business of making commercial and consumer loans. The purpose of a California finance lender’s license is to allow the holder of the license an exemption from the California Constitution’s usury provisions. Some types of loan transactions, like retail installment sales finance contracts that are associated with automobile sales, for example,are not subject to California’s financing laws.
In addition to lending activities, a license is also required under California law for some types of brokerage activities. A broker is an individual who is in the business of negotiating, in connection with loans that a finance lender makes. A broker’s license, therefore, allows for the brokering of loans with licensed finance lenders – but not with others.
Businesses are not one size fits all. The skilled San Jose financing lawyers at Startup Company Counsel can review the individual circumstances of your business and determine whether you need to obtain a
California lender’s license
Who Must Obtain a Lender’s License?
Generally speaking, under the law, any individual who is engaged in the business of being a finance broker or a finance lender must obtain a lender’s license in the State of California.
The law, however, does make some exceptions for individuals and legal entities who have their licenses through other regulatory agencies. Some legal entities which are not required to be licensed under the California Finance Lenders Law (CFLL) include the following:
- Savings and loan institutions
- Mortgage lenders
- Credit unions
- Licensed pawnbrokers
- Licensed check cashers
A loan may not fall under the CFLL if real property is used to secure the loan, and the loan is made by someone who is a licensed real estate broker.
Non-Exempt Individuals and Entities
Hedge funds that make loans regularly are not exempt from the CFLL. Similarly, businesses that are in the process of making a loan to their employee may not be exempt either, and the law may consider them finance lenders. This is true unless the loan to the employee is an interest-free loan where the employer will not receive any profit or interest, whatsoever, from the loan.
Bridge loans which venture capital companies make to operating companies also fall within the ambit of the CFLL.
Safe Harbor Rule
The Safe Harbor Rule in California is only applicable to commercial loans. In the event a particular lender only makes one loan during the course of a year (i.e., during any 12 months), the lender will fall within the CFLL’s safe harbor provision. As soon as more than one loan is made during this time, the lender can then become subject to the CFLL’s regulations.
San Jose Financing Lawyer
The financing lawyers at Startup Company Counsel can help you determine whether you need a California finance lender’s license. To schedule a free consultation and case evaluation with a San Jose financing attorney, please call us at 408-441-7555 or contact us online today.