Narrowing Of Licensing Exemption Under California Finance Lenders Law For Consumer Lenders And Brokers

The California Department of Business Oversight (the "CDBO") has issued a new regulation that will eliminate a statutory licensing exemption under the California Finance Lenders Law (the "CFLL") for nonbank operating subsidiaries and affiliates of banks (among other entities) that are engaged in lending and/or brokering consumer loans. The regulation will take effect on September 28, 2016.

Operating subsidiaries and affiliates engaged in lending and/or brokering commercial loans only will not be affected by this regulation, despite initial proposals by the CDBO to the contrary.


Section 22050(a) of the California Financial Code provides an exemption for licensing under the CFLL for:

"any person doing business under any law of any state or of the United States relating to banks, trust companies, saving and loan associations, insurance premium financing agencies, credit unions, small business investment companies, community advantage lenders, California business and industrial development corporations when acting under federal law or other state authority, or licensed pawnbrokers when acting under the authority of that license."

Under long-standing interpretations, this exemption has been construed to apply not only to banks but also to subsidiaries of banks. These interpretations were based on the rationale that such entities, albeit not banks themselves, were doing business under federal and state laws "relating to banks" (including federal and state laws regulating the activities of bank subsidiaries). In addition, based on this rationale, bank holding companies and their nonbank subsidiaries (and foreign banks regulated as bank holding companies under the International Banking Act of 1978) have been regarded as doing business under federal law—the Bank Holding Company Act—"relating to banks."

The initial version of Section 1422.3 (the "Regulation") of Title 10 of the California Code of Regulations would have eliminated the license exemption for any "non-depository operating subsidiary, affiliate, or agent" of a national bank (or of a federal savings association). A later version of the Regulation would have eliminated the license exemption for any nonbank operating subsidiaries, affiliates, and agents of state banks (among other entities). The principal intent of the proposed Regulation, based on the background provided by the CDBO,1 was to permit the CDBO, under the CFLL, to regulate bank subsidiaries that engaged in consumer...

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