Banks and financial institutions that are lenders or have lending arms issuing loans sometimes gain a loan customer by way of a referral from another business or institution. These entities, or sometimes brokers, are directing their clients or customers to a particular institution for a commercial loan to help grow its business. These clients can be individuals seeking a personal loan, individuals running a business, small businesses, or other types of businesses. This is similar to the way in which a realtor refers a potential homebuyer to a particular bank for a mortgage in some states. Sometimes the referring entity or person will receive a fee from the lender as compensation for making the referral. As to these commercial or personal loan referral fees, the federal government and different states all regulate them differently, such as requiring there be other services besides the simple referral just to receive the fee. Different jurisdictions also regulate who may receive the fee, such as requiring that the referring person or entity be licensed to broker commercial loans. This has been the case in California.
Current Law in California
In general, California law mandates that financial lenders, who makes loans specifically for consumer or commercial purposes, must be licensed to make such loans. Doing so without a license is not just a civil or regulatory violation, but could be a crime. The relevant statutes are found under the California Finance Lenders Law, and the regulations are administered by the California Department of Business Oversight.
Proposed State Bill Would Loosen Regulation
Earlier this month, a California state senator introduced Senate Bill 197, which would loosen the restrictions on collecting referral fees for referring parties to an institution for a commercial loan. The bill would effectively eliminate the need for a party making a referral to a licensed financial lender to be licensed in order to receive the fee from the lender. So long as the entity making the loan is licensed; the end result is in fact a commercial loan as defined under state law; the loan term is equal to a year or more; and the annual percentage interest rate on the loan is no greater than 36%; and the borrower can adequately document their commercial status to the lender presumably to verify that the loan is in fact for commercial use and not personal use or otherwise, then the referring party could be compensated without having been licensed to broker or refer commercial loans. Furthermore, the bill, if passed by the state legislature and signed into law by the governor, would require that a lender in receipt of a commercial loan application referred to it by a non-licensed broker, entity or individual would have to specifically notify the prospective borrower of the possible referral arrangement.
It is important to note that while the law does not mandate that referrals be paid in certain situations for commercial loans, it does nevertheless permit them, and this bill would not deviate from that. It would pointedly make it easier for referrals to be made to those who are unlicensed brokers, entities or individuals in certain circumstances.