As of January 2019, any entity that engages in lending in California will need to be licensed. Basically, if you are a lender or a lender broker doing business in California, like we are at First American Merchant, it will be mandatory to have a finance lenders license if you plan on doing this type of business in the state.
Beginning Jan. 1, 2019, commercial financial lenders, including merchant cash advance lenders, must obtain a California Finance Lenders Law (CFL) license and adhere to stricter state disclosure requirements. The changes aim to protect potential borrowers from unfair and misleading lending practices. Since the state’s license application process is lengthy because it requires the gathering of a number of supporting documents, we have put together some tips to help ease you through the process. Keep in mind that this is simply a guide applying for a CFL. At any time, if you have concerns or questions, consult with the state’s Department of Business Oversight.
Get to Know the New Requirements
Before you apply for a CFL license, make sure what is expected of your business, as well as the deadlines and fees associated with the process. In addition to strengthening the existing CFL, the new requirements, which are based SB 1235, also expands the pool of people who are now required to get licenses in order to legally operate in the sector. Under the new requirements, anyone engaging in commercial financing in California must provide potential borrowers with clear written statements, including total fee amounts, monthly payment amounts, length of agreement, and APR information. The law defines not only defines “commercial financing’s” as commercial loans and lines of credit of credit, cash advances to businesses, and accounts receivable financing or factoring of amounts of $5,000 or more, but, it also requires disclosures from these classified entities. This means that means lenders or lender brokers cannot engage in any business without obtaining a license. Before this law was passed, the CFL defined a finance lender as a person who engages in making consumer or commercial loans, so smaller lending institutions and other organizations weren’t impacted. Under the amendments, the requirements are imposed on banks, real estate brokers, insurance companies, unlicensed lenders, and purchasers of accounts receivable. The only lending businesses that don’t need a CFL license are any physical locations of the entity not engaged in lending or brokering activities for California residents.
Supporting Documents Needed to Applying for a CFL License
In addition to filling out an application, which requires two applicant notary signatures, you will need to agree to a criminal background check and submit with many other documents to prove that you are running an upstanding, stable business. One of the main pre-requisites to apply is that an applicant must have a history absent any criminal history or history of sanctions by any regulatory agency resulting from dishonesty, fraud or deceit.
To receive a CFL license, you must submit a balance sheet that is no more than 90 days old, and you will need to have a minimum net worth of $25,000. The application requires the submission of a surety bond that lists the correct business name. If one is submitted with a name that differs from the original name on the application, you will be asked to submit another one. The surety bond must be signed by the applicant/s, the power of attorney, and the notary, and it must be notarized. Also, the power of attorney form must be attached. Also, you will need to have a plan of business consistent with the work you do as a finance lender. The plan you submit must describe in thorough detail the type of business you plan to operate if you receive a license.
The completed Statement of Identity and Questionnaire, Background Check/Fingerprinting (Request for Live Scan Service Form), the authorization for disclosure of financial records also must be notarized. In the questionnaire, applicants must submit their employment and residence histories for the last 10 years. All information must be complete and accurate. Any inaccurate or incomplete information can result in your application being denied. A Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member by any entity that owns or controls 10% or more of the applicant. If the State of Identity and Questionnaire is executed outside of California, it must be notarized. The state also requires proof of legal presences, and it should include the full name of the principal.
Additionally, you will need to submit an authorization for disclosure of your financial records, your partnership agreement, your Fictitious Business Name or LLC statement, your Social Security Number of Federal Taxpayer Identification Number, and an organization chart. An original copy of your Certificate of Good Standing must be submitted. If you don’t have the original, request a copy via the state’s Business Entities Records. The certificate must show that an applicant is authorized to conduct business in the state. The certificate cannot be more than 60 days old before the filing of the application. It is important to note that it takes four to six weeks to receive this document. There are also differences when foreign businesses that apply also must submit a Certificate of Good Standing from the Secretary of State of the state of incorporation or formation dated not more than 60 days prior to the filing of an application. If the California Secretary of State has required the use of an assumed/forced name, that name must be listed in the “Other Trade Names” section of the application. The box in the “forced” column must be checked. If your company has an assumed/forced name you will not be permitted to use any other name in California.
Finally, you must submit a statement in case of absence, which is signed by a person listed on the application who will be managing the company. In many cases, it is signed by one of the business’ key stakeholders, such as a CEO, president, or vice president. Though this letter is no listed as a mandatory document in any of the CFL’s instructions, it will be requested if it is not included with your application. This letter should be written on official company letterhead, like in this sample letter.
What You Can Expect to Pay: CFL Fees and Licensing Processes
All supporting documents and the application must be typewritten, and all required signatures must be original. Copies of signatures will not be accepted. The state requires you to attach additional sheets if you need more space to answer any of the questions. Every question must be answered and labeled with the corresponding question and exhibit letter outlined in the instructions.
In addition to your completed application and the required documents, applicants must submit a $200 non-refundable application fee, an investigation fee of $100, and fingerprint processing fees. The applicable fingerprint processing fee is $20 per individual if the individual resides in California. The charge is $86 per individual for each applicant that lives outside the state. You will not be refunded any of the fees if the license application is denied or withdrawn. All fees should be paid in the total amount by check and made payable to the Department of Business Oversight. Additionally, the application, supporting documents, and fees must be filed only in the Los Angeles office of the Department of Business Oversight, which is located at 320 West 4th Street, Suite 750, Los Angeles, California 90013. Any application that does not include all required information and exhibits or isn’t sent to the Los Angeles office will not be processed by the department.
Other Changes that Impact Lenders and Lender Brokers
In addition to licensing requirements, the state also requires disclosures include descriptions of prepayment policies and whether there are penalties if repayment is made early. The description, which must be labeled “prepayment policies,” has to include how penalties are applied by using examples relevant to the transaction that was offered, as well as any financing charges or fees that are required to be paid at the time the loan is retired or paid in full.
Additionally, the required written disclosures submitted by lenders must be signed by all parties, not contain any vague, suspicious, or confusing language. These disclosures must be created using “a specified font size, made in the same language used in discussions or negotiations related to that transaction,” according to the law. It must be written in at least a 10-point font.
Exhibits A-N (Supporting Documents)
- A – Balance Sheet (Equity must meet minimum net worth of at least $25,000)
- B – Surety Bond – (Must be Notarized)
- C – Statement of Identity and Questionnaire/ Fingerprints – Request for Live Scan Service Form – (Must be Notarized)
- D – Proof of Legal Presence
- E – Authorization for Disclosure of Financial Records
- F – Fictitious Business Name Statement OR LLC statement
- G – All Corporate Applicants Incorporated In Any State, is the stamped LLC document good enough?
- H – *Foreign Corporations ONLY
- I – Partnership Agreement
- J – ORIGINAL certificate of qualification
- K – *Foreign Business Entities ONLY
- L – Social Security Number or Federal Taxpayer Identification Number
- M – Organization Chart
- N – Statement in case of absence
Example of Exhibit N (Statement in case of absence letter) Use Official company letterhead
State of California
Department of Business Oversight
320 West 4th St. Suite 750
Los Angeles, CA 90013-2344
Re: CFL License for COMPANY XYZ
To Whom It May Concern:
I/we understand that I am/we are the sole principal/persons who is/are responsible for COMPANY XYZ
I/we will be the sole licensee and in my/our absence, there will be no CFL activities in this place of business.
Authorized Person/s (from application)
Penalties for Lenders that Fail to Comply
The state’s changes to the law aim to simplify, clarify, and update the law governing loans made by finance lenders in an effort to foster competition among the lenders, and to protect borrowers from illegitimate and fraudulent commercial financings. Any “willful” violation of the CFL is a crime and violators will be prosecuted accordingly.
A Final Word About Applying for a CFL License
Lenders and lender brokers that want to continue doing business within the state of California must get licenses and adhere to a host of other state requirements by next year. Though the 50-page application is lengthy and overwhelming, and sometimes, confusing, it is possible to navigate your way through and get an application if you follow the letter of the law.
The best road to success begins with a clear understanding of all requirements, deadlines, and fees. Then, organize and plan. After that, you need to gather all of the necessary supporting documents and follow all instructions outlined by the state. If you follow all of the state’s guidelines, submit everything they have requested, pay all of their fees, and send them to the correct office, you are setting yourself up for best chances for success.
Most importantly, give yourself enough time to ensure you thoroughly understand the law and how it impacts you. If you are unsure of any of the requirements or questions, be sure to reach out to the state Department of Business Oversight. The department can answer all questions and point you in the right direction if you are not sure what you should do. This is especially important since all required fees are non-refundable. The bottom line is to ask questions, do your homework, and provide complete and accurate information.