California Finance Lenders Law: Consumer Loan, Commercial Loan or Neither?
The California Finance Lenders Law imposes a licensing requirement on persons engaged in the business of a finance lender. Cal. Fin. Code § 22100(a). Chapter 2 of the CFLL imposes a host of requirements on “consumer loans” and Chapter 3 imposes a few requirements on “commercial loans”. Thus, it is important for a finance lender to be able to distinguish between consumer and commercial loans. Section 22203 defines a “consumer loan” as:
a loan, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for personal, family, or household purposes.
Section 22502 defines a “commercial loan” as:
a loan of a principal amount of five thousand dollars ($5,000) or more, or any loan under an open-end credit program, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes.
The principle distinguishing characteristic under these two statutes is the borrower’s intended use. A loan primarily intended for personal, family, or household purposes can never be a “commercial loan”. The opposite, however, is not necessarily true. A borrower may not intend to use the proceeds primarily for personal, family, or household purposes and yet the loan will not be a “commercial loan”. The reason is that Section 22502 imposes a $5,000 threshold for commercial loans. Thus, loans of less than that amount that the borrower does not intend to use for personal, family, or household purposes are neither “consumer loans” nor “commercial loans”. Awareness of this troisième voie is important because certain provisions of the CFLL do not apply to commercial loans or lenders in connection with commercial loans. Cal. Fin. Code § 22550. These provisions are therefore applicable to consumer loans and these “third way” loans: Sections 22152 (single place of business); 22154 (conduct of other business); 22155 (transacting business under another name); 22163 (full and clear statement of rates); and 22164 (advertising of rates, charges or cost of loans). Cal. Fin. Code § 22550. A similar exemption can be found in the Commissioner of Business Oversight’s rules. 10 CCR § 1570.
The statute and the Commissioner’s rules are not entirely consistent, however, with the definition of “commercial loan”. Both Section 22550 and the rule repeat the $5,000 dollar threshold. These references may be surplusages because the loan amount threshold is already baked into the definition of “commercial loan”. However, both also add bona fide. Section 22551 even lays down the rules for determining the bona fide principal amount of a loan. Does this mean that there is a fourth category – loans not primarily for personal, household or family purposes but not having a bona fide principal amount of $5,000 or more?
Finally, note that the definition of “commercial loan” addresses the ambiguity concerning the use of “or” that I discussed yesterday. The statute makes it clear that “or” is to be used in its inclusive sense (i.e., A or B, or both), not its exclusive sense (i.e., A or B, but not both).