The California legislature introduced Assembly Bill No. 642 on Feb. 15, which would make sweeping changes to how both licensed and unlicensed finance lenders operate in the state.
California Financial Code, provides for the licensing and regulation of finance lenders, brokers, and administrators by the Commissioner of Business Oversight. The California Financial Code prohibits engaging in the business of a finance lender or broker without first obtaining a license.
Presently, the Financial Code defines a broker as anyone who is engaged in the business of negotiating or performing any act of a licensed broker in connection with loans made by a finance lender. AB 642 would make significant changes to this definition.
This new bill would change the definition of a broker to include anyone who is in the business of performing “specific acts” in connection with loans made by a finance lender. These specific acts include:
- Any person who is transferring confidential data about a borrower or prospective borrower to a finance lender with the expectation of receiving compensation.
- Any person making a referral of a loan prospect under an agreement with a finance lender that meets specific requirements with the expectation of compensation contingent on whether the finance lender enters into an agreement with the borrower.
- Any person who participates in the preparation of loan documents, counseling prospective borrowers, advising, making recommendations about a specific loan product based on the borrower’s private data, communicating lending decisions or inquiries to a borrower, or charging a fee to any borrower in relation to taking an application for a loan from a finance lender.
Collecting Application Data
The bill would also prohibit a licensed broker from performing any specific act that falls within the new definition of a broker, without the express consent of the borrower. This rule is likely to include transmitting what is considered confidential data, such as finances, credit reports, bank statements, and other personal information to a financial lender for the purpose of obtaining a loan. Again, these new rules should be especially concerning for those preparing or gathering loan documents.
The bill provides exemptions for persons performing these specified acts five or fewer times in a calendar year, and those performing administrative or clerical tasks in support of a licensed lender or broker.
The amount of information regulated under the new bill is quite substantial. Section 22337.5 defines “confidential data” as meaning the following:
- Bank account number
- Bank statement
- Credit or debit card number
- Credit score or report
- Social security number (including partial number)
- Personal or business financial information
- Government issued ID numbers
- Personal employment data or history
- Date of birth
- Mother’s maiden name
- Medical information
- Health insurance information
- Insurance policy number
- Taxpayer ID
The term “confidential data” does not include name, phone number, address, email address, desired loan amount, stated purpose of the loan, borrower’s self-reported estimated credit score or income, and other information that is knowingly made publicly available by a prospective borrower.
Compensation
While existing law prohibits a finance lender, broker, or mortgage loan originator licensee from paying any fee or other compensation to an individual for undertaking an activity related to a loan that requires a license, the new law expands that prohibition.
The new bill would now prohibit a finance lender from compensating a person for any of the acts listed above unless the compensation is in connection to a referral of a borrower when specific conditions are met. Namely, the law would prohibit an unlicensed person who receives compensation from collecting a prospective borrower’s private information, unless that person first obtains express consent, and would require that person to provide written disclosure information to a prospective borrower before making a referral. The disclosure must show the method of compensation to the licensed broker, even if it is presented by an unlicensed affiliate.
Of more concern, is that the bill would require any broker who compensates an unlicensed individual to create, maintain, and implement policies and procedures to ensure that individual does not engage in activity which violates the California Financial Code, had those acts been committed by a licensee. These responsibilities partially include:
- The licensee is responsible for ensuring an unlicensed person does not collect confidential data from a prospective borrower unless specified disclosure is provided and the unlicensed person obtains the borrower’s express consent.
- The licensee is required to post the policy and procedures in specified locations.
- Prohibits a licensee from engaging in business with a person who demonstrates repeated, uncorrected failures to adhere to the policies and procedures.
- Requires a licensee who compensates an unlicensed person for referrals to maintain books and records documenting the identities of all persons that the broker compensates and all unlicensed persons that the broker severs a relationship with due to that individual’s failure to adhere to the broker’s policies and procedures.
It does provide an exemption of sorts, in that a licensed broker will not be considered in violation of the California Financial Code solely based on working with an unlicensed person who the broker compensated, wherein that person commits isolated acts in violation of the California Financial Code.
Providing Disclosures
The bill clarifies existing disclosure law to include requiring a licensed finance lender to obtain a signed statement from the borrower of a consumer loan, which details specified information relating to the arrangement in a “clear and conspicuous manner,” including information about fees, rates, and any prepayment penalties or policies.
The bill would require a licensed broker, before making a referral to a finance lender in connection with a consumer loan, to provide the prospective borrower a statement that includes information as to the arrangements between the broker and finance lender, in a clear and conspicuous manner, and then obtain the borrower’s express consent with regards to those acts.
Compliance
Existing law authorizes the commissioner to examine specified records of every person engaged in the business of being a finance lender, broker, or program administrator of consumer finance, for the purposes of violations of the California Financial Code or securing information otherwise required in the administration and enforcement of the California Financial Code.
AB 642 requires the commissioner to examine the affairs of each finance lender licensee for compliance with California Financial Code and related regulations once every 48 months. The bill authorizes the commissioner to conduct the examination under oath.
By expanding the crime of perjury, the new law would impose a state-mandated local program for violators. The law requires the commissioner to provide a written statement of the findings of the examination, to issue a copy of that statement to the licensee’s principals, officers, or directors, and to take appropriate steps to ensure correction of any violations.
The commissioner also may subject an affiliate of a licensee to examination on the same terms as the licensee, but only when reports from an examination of a licensee provides documented evidence of unlawful activity between a licensee and the affiliate benefitting or affecting the licensee, or arising from any other activities regulated by the California Financial Code.
