New California Finance Lender Licensing and Residential Mortgage Lending Act Regulations Effective September 28, 2016: Financial Institution Subsidiaries and Affiliates Now Subject to Licensure!
The California Finance Lenders Law exempts banks, thrifts and certain other financial institutions from its licensing requirements imposed on finance lenders and brokers.1 Similarly, the California Residential Mortgage Lending Act exempts banks, trust companies, savings and loan associations and other thrifts2 from its licensing requirements.3 Effective September 28, 2016, California’s amended regulations provide that subsidiaries and other affiliates of banks, trust companies and thrifts which had been previously exempt due to their affiliations with exempt entities will no longer be exempt from California licensing requirements, if they extend consumer credit or make or service mortgage loans in California.
Commencing September 28, 2016, a separate license under the Finance Lenders Act will be required if the subsidiary or affiliate makes consumer loans in California and in the case of mortgage originators, brokers or servicers of residential mortgages, a license under the California Residential Mortgage Lending Act. This is a material change as Commissioner Opinions previously had extended the exemptions for banks and thrifts to subsidiaries and affiliates.4 The withdrawal of this exemption is of particular concern for banks and thrifts that originate, broker or service residential mortgages and other consumer loans through their affiliates or subsidiaries that operate in California.
The new regulations, Cal. Code Regs. tit. 10, § 1422.3 and Cal. Code Regs. tit. 10, § 19184.108.40.206, provide that they do not intend to require licensing for bank and thrift affiliates and subsidiaries who lend or broker commercial credit. Rather they extend the scope of California’s licensing schemes to affiliates and subsidiaries of financial institutions that originate or broker residential mortgages and other consumer credit.
The regulatory amendment includes a new definition for a “nondepository ‘lender or broker’” that includes (i) a bank holding company or subsidiary of a bank holding company,5 (ii) a savings and loan holding company or a subsidiary of a savings and loan holding company,6 or (iii) a subsidiary of a bank, trust company, savings association or credit union. The amended regulation provides that the newly defined nondepository lender or broker that makes or brokers consumer loans is not exempt from licensure under the California Finance Lenders Law. In addition, a nondepository lender or servicer that engages in the business of mortgage lending or servicing in California is not exempt from licensure under the California Mortgage Lenders Act unless it is already exempt as a federal or state chartered thrift or credit union authorized to transact business in California — not an affiliate thereof.
The amended regulations state that they are intended to provide consistency with provisions of the 2010 Dodd-Frank Act that provide that any preemption of state law for banks and thrifts does not apply to nonbank subsidiaries and affiliates of banks and thrifts.7
Nothing contained herein is to be considered as the rendering of legal advice for specific cases or circumstances. The material herein is intended for educational and informational purposes only.
1 The Finance Lenders Law provides that “[t]his division does not apply to any person doing business under any law of this state or of the United States relating to banks, trust companies, savings and loan associations, industrial loan companies, credit unions, small business investment companies, California business and industrial development corporations, or licensed pawnbrokers.” Cal. Fin. Code § 22050(a).
2 Cal. Fin. Code § 5002(c).
3 California statutes will continue to provide some relief from duplicative regulation as a finance lender or broker licensed under the California Finance Lenders Law is exempt from licensure under the California Residential Mortgage License Act. The California Residential Mortgage License Act exempts “A California finance lender or broker licensed under Division 9 (commencing with Section 22000), when acting under the authority of that license.” Cal. Fin. Code § 50002(c)(2).
4 Commissioner’s Opinion No. 95/1 RMLA, 1995 Cal. Sec. LEXIS 3, October 11, 1995; Commissioner’s Opinion No. OP 6590 CFLL, 1996 Cal. Sec. LEXIS 6, October 22, 1996; Commissioner’s Opinion No. OP 6595 CFLL, 1996 Cal. Sec. LEXIS 9, November 5, 1996; and Commissioner’s Opinion No. OP 6738 CFLL, 1999 Cal. Sec. LEXIS 1, August 5, 1999, cited in initial Notice of Rulemaking Action re California Residential Mortgage Lending Act, December 8, 2014.
5 Defined in 12 U.S.C. § 1841, et seq.
6 Defined in 12 U.S.C. § 1467(a).
7 Sections 1044, 1045 and 1046 of the Dodd-Frank Act; 12 U.S.C.§§ 1813, 1841.