Expanded Commercial Loan Exemption Under California Finance Lenders Law

As a result of the passage of Assembly Bill No. 1091 ("AB 1091"), persons1 that make only occasional commercial loans in California may be able to take advantage of an expanded licensing exemption under the California Finance Lenders Law (the "CFLL"), §§ 22000 et seq. of the California Financial Code.

FINANCE LENDER LICENSING REQUIREMENT IN CALIFORNIA

Under California law, "finance lenders" (subject to certain limited exceptions) making loans in California are required to obtain a license from the California Department of Business Oversight2 and comply with the licensing and regulatory requirements of the CFLL and the regulations thereunder. A "finance lender" is broadly defined in Cal. Fin. Code § 22009 as "any person who is engaged in the business of making consumer loans or making commercial loans."

DE MINIMIS COMMERCIAL LOAN EXEMPTION

One of the limited licensing exemptions available under the CFLL is a de minimis commercial loan3 exemption that, prior to the passage of AB 1091, exempted from licensing any person making just one commercial loan in a 12-month period. Effective January 1, 2014, the CFLL has been amended to, among other things, exempt from licensing any person making five or fewer commercial loans in a 12-month period, as long as the loans are incidental to the business of the person relying on the exemption.4 AB 1091 does not explain when a commercial loan will be deemed "incidental to the business of the person relying upon the exemption," which is a prerequisite to the use of the exemption. However, the Assembly Floor Analysis dated August 21, 2013 specifically refers to "bridge loans" as the type of commercial loans that could qualify for the exemption. In any event, the language of the exemption makes it clear that any person relying thereon cannot be engaged in the business of making loans.

GOOD NEWS FOR VENTURE CAPITAL FUNDS

The revised de minimis commercial loan exemption is a welcome change for venture capital funds which may wish to occasionally provide conventional loans to their California portfolio companies. Venture capital funds may qualify under this exemption because they are in the business of investing in equity securities (not lending), and such loans may be incidental to their primary business, as required by Cal. Fin. Code § 22050(e).

In the recent past, venture capital funds have availed themselves of a different licensing exemption, the commercial bridge loan exemption, when making certain types of...