California Financial Lender Act: Consumer Loan, Business Loan, or Neither?


The California Financial Lenders Act imposes a license obligation on persons exercising the activity of financial lender. Cal. Fin. Code § 22100 (a). Chapter 2 of the CFLL imposes a multitude of requirements on “consumer loans” and Chapter 3 imposes some requirements on “commercial loans”. Thus, it is important for a financial lender to be able to distinguish between consumer loans and commercial loans. Section 22203 defines a “consumer loan” as:

a loan, whether secured by real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower to be used primarily for personal, family or household purposes.

Section 22502 defines a “business loan” as:

a loan in the principal amount of five thousand dollars ($ 5,000) or more, or any loan under an open-ended credit program, whether secured by real or personal property, or two, or unsecured, the proceeds of which are intended for the borrower for use primarily for purposes other than personal, family or household purposes.

The main distinguishing feature of these two laws is the intended use by the borrower. A loan intended primarily for personal, family or household purposes can never be a “business loan”. The reverse, 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 “business loan”. This is because section 22502 imposes a threshold of $ 5,000 for commercial loans. Thus, loans below this amount that the borrower does not intend to use for personal, family or household purposes are neither “consumer loans” nor “business loans”. Awareness of this third way is important because certain provisions of the CFLL do not apply to commercial loans or to lenders linked to commercial loans. Cal. Fin. Code § 22550. These provisions are therefore applicable to consumer credits and to these “third-way” credits: articles 22152 (single establishment); 22154 (conduct of other business); 22155 (dealing with cases under another name); 22163 (complete and clear statement of prices); and 22164 (publication of rates, charges or cost of loans). Cal. Fin. Code § 22550. A similar exemption can be found in the rules of the Commissioner for Business Supervision. 10 CCR § 1570.

However, the law and the Commissioner’s rules are not entirely compatible with the definition of “commercial loan”. Section 22550 and the rule repeat the threshold of $ 5,000. These references may be overages because the loan amount threshold is already included in the definition of “business loan”. However, both also add authentic. Article 22551 even sets out the rules for determining the good faith capital of a loan. Does this mean that there is a fourth category – loans that are not primarily for personal, household or family purposes but have no authentic capital of $ 5,000 or more?

Finally, note that the definition of “business loan” addresses the ambiguity regarding the use of “or” that I spoke about yesterday. The law clearly states that “or” should be used in its inclusive sense (that is to say, A or B, or both), not its exclusive meaning (that is to say, A or B, but not both).

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP Revue nationale de droit, volume VII, number 75

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