Federal Court: California Finance Lenders Law Does Not Prohibit a Licensee from Selling Loans to Non-Institutional Investors


The U.S. District Court for the Northern District of California has held that Section 22340(a) of the California Financial Code does not restrict licensed finance lenders to selling loans secured by real estate to only institutional investors.

In Skinner v. Mountain Lion Acquisitions, Inc., the plaintiff obtained a loan from a lender licensed under the California Finance Lenders Law (CFLL). The lender then sold the plaintiff's obligation to the defendant, a debt collector that was not an "institutional investor" as defined in the CFLL. When the defendant attempted to collect the debt, the plaintiff sued. The plaintiff claimed that Section 22340 of the CFLL was violated by the transfer of her debt to defendant because it was not an institutional investor and that the debt was consequently void and unenforceable.

At issue was whether a licensed finance lender can sell loans to entities other than institutional investors. Section 22340(a) of the CFLL provides that a licensee "may" sell loans that it has made or purchased from another finance lender (and certain exempt entities) to an institutional investor. "Institutional investors" are defined in Section 22340(b) to include depository institutions, insurance companies, licensed finance lenders, credit unions, and state, federal, and local governmental entities.

The plaintiff alleged that while the statute states licensed finance lenders "may" sell loans to institutional investors, it actually means that licensees "may only" sell to institutional investors. The plaintiff argued that this imposes certain limitations on a finance lender's ability to sell loans, which the lender violated, voiding the debt under Section 22750(b).

The court dismissed the plaintiff's CFLL-related claim with leave to amend, holding that the plain reading of the word "may" as used in Section 22340 is permissive and merely authorizes licensees to sell loans to institutional investors. The court relied on Section 15 of the California Financial Code, which specifies that "'[s]hall' is mandatory and 'may' is permissive."

The court explained that statute's legislative history shows Section 22340 was enacted to authorize finance lenders to sell loans secured by real estate without the need for a "costly and duplicative" real estate broker's license. "Neither the plain language of Section 22340, nor its legislative history" supports an interpretation that the statute prohibits any conduct, the court said.

The court did not address other instances in Section 22340(a) where the word "may" is used, such as regarding licensees' authorization to service loans secured by real estate. Historically, the California Department of Business Oversight, which administers the CFLL, has taken the position that such licensees can only service loans made and sold by the finance lender to an institutional investor, and that Section 22340 prohibits the servicing of other loans. Interestingly, it would appear that the court's holding does not support the regulator's interpretation of "may" as "may only."

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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