California has been an early adopter of laws and regulations that impose regulatory requirements on small business and commercial financing. For example, California was the first state to enact legislation requiring certain cost-of-credit disclosures to be provided to recipients of a broad variety of commercial financing, including loans, financing leases, merchant cash advances, and factoring transactions. The California legislature and the California Department of Financial Protection and Innovation have since expanded the scope of its prohibition on unfair, deceptive, or abusive acts or practices to apply to commercial finance transactions and have also imposed specific fee limitations on providers’ commercial financing agreements. While the California Financing Law requires a license to make commercial loans, or to broker commercial loans to most nondepository lenders, California has not, to date, required a license or registration to broker non-real estate secured commercial loans to banks or depository institutions. That may change if Senate Bill 869 is enacted into law.
If enacted, Senate Bill 869 would create a new licensing requirement for any person providing “commercial brokerage” services to a borrower in connection with a commercial loan of $5,000 or more. The proposed law would expand the current commercial loan broker licensing requirement under the California Financing Law, which does not require a license to broker non-real estate secured commercial loans to banks or other exempt lenders. (If real property-secured loans are involved, the California Real Estate Law’s real estate broker licensing obligations may also be implicated). Senate Bill 869 does not contain any similar exemptions or statutory exclusions for commercial loans originated by banks, or from other lenders exempt from licensing in California.
Senate Bill 869 defines licensable “commercial broker” activities to include any of the following:
- Transmitting confidential data about a prospective borrower to a commercial lender, with the expectation of compensation in connection with making a referral.
- Making a referral to a commercial lender, under an agreement with the lender that a prospective borrower referred by the broker meets certain criteria involving confidential data.
- Participating in any loan negotiation between a commercial lender and borrower.
- Counseling, advising, or making recommendations to a prospective borrower about a loan, based on the prospective borrower’s confidential data.
- Participating in the preparation of any loan documents, including loan applications, other than providing a prospective borrower blank copies of loan documents. This does not include transmitting information—which is not confidential data—to a commercial lender at the request of a prospective borrower.
- Communicating loan approval decisions to a borrower.
- Charging a fee to a prospective borrower for any services related to a prospective borrower’s application for a loan from a commercial lender.
Senate Bill 869 also would impose a fiduciary duty on a commercial broker to exercise “the utmost honesty, absolute candor, integrity, and unselfishness toward the borrower.” Senate Bill 869 provides that, in order to meet their fiduciary duty, a broker must place the economic interest of the borrower ahead of the broker’s own economic interest, that the broker “not compete with the borrower,” and that the broker acts “at all times in the best interests of the borrower to the exclusion of all other interests.” This provision appears likely to raise significant questions about how a broker can, in practice, meet the standard for a fiduciary as set forth in Senate Bill 869.
The California Senate held a hearing on Senate Bill 869 on January 18, 2024. We will be following the progress of Senate Bill 869 and report back in subsequent issues of Licensing Link.