An exemption from the California lender licensing law for a person making a single commercial-purpose loan in a rolling 12-month period is about to “sunset” in California, impacting persons who have relied upon the exemption, including when structuring transactions through special-purpose vehicles (SPVs).
What Happened
As lenders likely are aware, California has a sweeping lender licensing law called the California Financing Law (CFL) that requires any person engaged in California in the business of making consumer or commercial loans to obtain a license as a “finance lender” from the California Department of Financial Protection and Innovation, unless an exemption from licensing applies.
The CFL includes several exemptions from licensing, primarily for persons licensed under other laws, such as banks. However, an exemption not requiring other licensing that has been important for certain transactions—including commercial real estate projects and other specialty finance transactions, such as transactions employing the federal new markets tax credit program—is the exemption set forth in Section 22050.5 of the CFL, which provides that the CFL “does not apply to any person who makes no more than one loan in a twelve-month period if that loan is a commercial loan as defined in” the CFL. This exemption has been useful to many lenders, including, for example, those that set up an SPV involving a particular California-related project, and which SPV then makes a single commercial-purpose loan.
Section 22050(e) of the CFL sets forth a separate exemption for a person who makes five or fewer commercial loans in a rolling 12-month period, provided that the loans are “incidental to the business of the person relying on the exemption.” Although the larger number has been helpful to some persons, including venture capital firms and others primarily making equity investments, this exemption is not available to SPVs set up to make a single loan, since such an SPV’s only business is lending.
The “five or fewer” exemption was created by amending an existing exemption that applied to a single loan and did not have the incidental qualifier. Section 22050.5 was added to the CFL in 2017 to address what likely was the unintended elimination of the SPV exemption by those changes. Unfortunately, Section 22050.5 provides that the exemption for a person making a single commercial loan in a 12-month period “shall remain in effect only until January 1, 2022, and as of that date is repealed.” To date, Section 22050.5 has not been extended.
Why It Matters
As a result of this “sunset” provision, beginning in 2022 lenders that previously relied upon the exemption in making commercial loans in California, including in connection with SPVs set up to make a single loan, will need to consider licensing under the CFL, the possible applicability of a limited number of other exemptions to licensing, or other structures that resolve the licensing issue.
The authors of this alert are happy to discuss the impact of the elimination of the exemption on lenders, including potential alternative exemptions or structures to resolve the licensing concern, and the possibility of seeking a “legislative fix” in 2022 to restore the useful single-loan SPV exemption.