Until this year, many lenders relied on Section 22050.5 of the California Financing Law (CFL), which exempted persons engaging in the business of a finance lender from obtaining a lenders license from the California Department of Financial Protection and Innovation (DFPI) if they made no more than 1 commercial loan in a 12-month period. Unfortunately, this Section included a provision sunsetting the exemption as of January 1, 2022.
SB-577
California Senate Bill 577 (SB-577) was introduced in the State Legislature in February 2021 to remove the sunset provision from Section 22050.5 of the CFL, thereby extending the exemption indefinitely; however, SB-577 was not enacted and Section 22050.5 has since been repealed. SB-577 was amended by the Assembly on January 12, 2022 to permanently reinstate Section 22050.5, including an urgency clause, which would allow the bill to go into effect immediately upon enactment. We reached out to the Assembly Appropriations Committee, which informed us yesterday that although the committee does not have any hearings scheduled for the month of February, the Committee is working on expeditiously taking up SB-577.
Section 22050(e)
While the Legislature is considering SB-577, many lenders who relied on Section 22050.5 (including many of our clients who are community development entities (CDEs) in tax credit transactions) are apprehensive to make loans in California and are considering the applicability of other exemptions. For example, Section 22050(e) of the CFL exempts persons making 5 or fewer commercial loans in a 12-month period where the loans are incidental to the business of those relying on the exemption. Whether CDEs and other special purpose entities fall under this exemption is debatable depending on one’s interpretation of “incidental to the business.”
With regard to CDEs utilizing New Markets Tax Credits (NMTCs), an argument can be made that the primary purpose of these entities is to ensure the purchase of NMTCs by the investor, who injects critical equity into low-income projects so as to reduce economic inequalities in low-income communities – the opposite of typical goals of commercial lenders deriving significant interest income and/or fees from a loan, especially considering the interest earned on such loans by CDEs is de minimus. However, counsel to the DFPI has let Bergman and Allderdice know that they have yet to opine on an interpretation of Section 22050(e) and have no materials to share for guidance. They further informed us that while the public may seek an opinion, the DFPI does not anticipate providing an opinion before the Legislature makes a final decision on whether to restore Section 22050.5, as the question of whether a single loan is “incidental to the business” of lending is a variation of the broader question of how to address the loss of Section 22050.5.
So what do we do in the meantime?
Critically, counsel to the DFPI has also informed our firm that the DFPI “does not anticipate any action during this legislative session until a final decision is made by the Legislature on whether to restore the [Section 22050.5] exemption.” With this information, we are comfortable advising our clients who previously relied on Section 22050.5 that, provided the State’s usury laws are observed, they may safely elect to defer obtaining a California lenders license until the Legislature makes a final decision regarding reenacting the Section, which decision should be made by August 31, 2022.