New California Laws for Financial Institutions

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

As the California legislative session wound down, Governor Jerry Brown signed multiple bills into law that will impact financial institutions.

What happened

Financial institutions in California should prepare themselves for several changes, thanks to multiple bills enacted by the State Legislature and recently signed by the Governor. Below are highlights of the new laws.

  • Senate Bill 777 tweaked the California Finance Lenders Law (CFLL) to reenact a prior de minimis exemption. The prior exemption was amended in 2014 to exempt from licensure under the CFLL persons making five or fewer commercial loans in a 12-month period if the loans are “incidental” to the business of the person relying on the exemption. Although intended to liberalize the exemption by increasing the number of loans from one to five, the “incidental” wording created uncertainty with respect to a special purpose entity making a single loan, which was covered by the prior exemption. To address this concern, SB 777 retained the current exemption for five or fewer loans if “incidental to a person’s business,” and restored the exemption for a single commercial loan in a 12-month period without the “incidental” qualifier. The change takes effect on January 1, 2017. However, the restored single-loan exemption is currently set to expire January 1, 2022.
  • Another measure, Senate Bill 657, broadened the definition of a “lender” under the California Residential Mortgage Lending Act (CRMLA). As the statute currently reads, an individual is generally prohibited from engaging in the business of making or servicing residential mortgage loans without first obtaining a license from the Department of Business Oversight (DBO), with licensees required to maintain a minimum tangible net worth of $250,000. “Lender” was previously defined as a person who is an approved lender for various agencies, including the Federal Housing Administration (FHA) and the Veterans Administration, for example, who directly makes residential mortgage loans and makes the credit decision in the loan transactions. Pursuant to the changes to the CRMLA, the DBO Commissioner is authorized to increase the minimum net worth requirement above $250,000 as long as it doesn’t exceed the net worth required of an approved lender under the FHA. In addition, the definition of a lender now encompasses “a person, other than a natural person, and a natural person who is also an independent contractor, who engages in the activities of a loan processor or underwriter for residential mortgage loans, but does not solicit loan applicants, originate mortgage loans, or fund mortgage loans.”
  • A third piece of legislation established a new regulatory regime for student lending. Assembly Bill 2251, the Student Loan Servicing Act, mandates that student loan servicers in the state—and those located elsewhere servicing student loans made to California residents—obtain a license from the DBO, comply with new regulatory requirements, and refrain from delineated prohibited activities as of July 1, 2018. The new statute exempts state and federally chartered banks, trust companies, industrial loan companies, savings and loan associations, savings banks, credit unions, and public or private postsecondary educational institutions servicing a student loan that it made. Pursuant to the law, entities must provide borrowers, free of charge on a website, with information or links to information about available repayment and loan forgiveness options; ask the borrower how an overpayment should be applied; and provide written notice with prescribed information in the event of a transfer of servicing. Prohibited by the new Act: engaging in any “unfair or deceptive” practice, misrepresenting or omitting material information (including “the amount, nature, or terms of any fee or payment”), and misapplying payments, among other activities. Licensees will be examined by the Commissioner at least once every 36 months. The DBO was invested with enforcement authority to assess civil penalties up to $2,500 for violations of the law, issue cease and desist orders, and file an enforcement action in state court.
  • Finally, while not a legislative change, financial institutions should be aware of a new regulation from the DBO amending the CFLL and CRMLA implementing regulations that eliminates the use of a licensing exemption for subsidiaries and affiliates of exempt institutions simply on the basis of the nature of their association. Prior Commissioner opinions adopted an expansive reading of the statutes to include an exemption for the subsidiaries of exempt financial institutions. To eliminate the exemption for subsidiaries and affiliates engaged in lending and/or brokering consumer loans (commercial loans are not impacted by the change), the DBO adopted the new regulation which took effect on September 28.

To read SB 777, click here.

To read SB 657, click here.

To read AB 2251, click here.

To read the amended CFLL and CRMLA regulations, click here.

Why it matters

Financial institutions with a California presence and those industries which are engaged in traditional financial activities, such as commercial lending, should take a close look at the new laws and regulations to ensure compliance with the changing requirements.

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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