State licensing that reaches non-bank commercial lenders

Most state lending licences are built for consumer credit and stop at the business-purpose line. A few do not. Where a state licenses commercial lending, you gain something a disclosure law does not give you: a regulator with an existing supervisory relationship with your funder.

California

The California Financing Law requires any person engaging in the business of a finance lender or finance broker in California to obtain a licence from the Department of Financial Protection and Innovation.

The definition does the work. A finance lender includes any person engaged in the business of making consumer loans or making commercial loans. There is no business-purpose exclusion. A finance broker is any person engaged in the business of negotiating or performing any act as broker in connection with loans made by a finance lender.

The law contains exemptions for persons licensed by other regulatory agencies, and it excludes certain non-loan transactions — bona fide leases, automobile sales finance contracts, retail installment sales. Whether a particular receivables purchase is a loan for these purposes is exactly the kind of question that gets litigated, and it is not one to settle from an article.

Note that this is separate from California's commercial financing disclosure regime. A funder can be caught by the disclosure rules, the licensing rules, both or neither, depending on the structure.

Vermont

Vermont is unusually explicit. Its Department of Financial Regulation runs a commercial lender licence for any company or person engaging solely in the business of making commercial loans of money, credit, goods or things in action and charging interest, a finance charge, a discount or consideration.

The reach is deliberate: the requirement applies regardless of where the lender sits, so anyone soliciting or making commercial loans to Vermont businesses by mail, telephone or electronic means needs the licence. Licensing sits under Title 8 V.S.A. chapters 72 and 73.

The exemptions are instructive. Depository institutions, insurance companies, sellers financing their own goods or services, makers of unsecured commercial loans expressly subordinated to senior debt, and — the one that matters most — lenders making loans of $1,000,000 or more. Applications go through the Nationwide Multistate Licensing System, with an initial application cost of $1,100 covering licensing, investigation and NMLS fees.

The pattern to expect elsewhere

Across states, the tests that determine whether a non-bank funder needs a licence tend to be some combination of:

• What the product is. A loan, a purchase of receivables, a lease and an installment sale are different legal animals, and licensing statutes usually name loans.
• Who the borrower is. Many statutes cover consumer credit only. Commercial-purpose lending falls outside them by design.
• How big the deal is. Large-transaction exemptions are common, as Vermont's $1 million threshold shows.
• Whether the lender is a bank. Depository institutions are supervised elsewhere and are exempt nearly everywhere.
• Where the borrower is. Solicitation into the state, not the lender's own address, is what usually triggers the requirement.

How to use this as a buyer

Ask the funder directly: are you licensed or registered in my state for this activity, and under what number and with which agency? Then verify with the agency rather than with the funder. Both California's DFPI and Vermont's DFR maintain public licensee information.

Three cautions on what the answer means.

A licence is not an endorsement. It says the entity met entry requirements and is subject to examination. It says nothing about the price of your deal.

A funder can be lawfully unlicensed. Exemptions are real and numerous, and "we are exempt" may be entirely accurate. Ask which exemption.

And a licence in one state does not travel. Licensing is state by state, and a funder licensed in California has not thereby satisfied Vermont.

Verifying the answer

Three steps, none of which takes long.

1. Get the legal entity name, not the brand. The funder marketing to you, the entity on the contract and the licensed entity are frequently three different names. Ask which entity will be the counterparty on your agreement, and check that one.
2. Search the regulator's own licensee list. Both the DFPI and Vermont's DFR publish licensee information, and many state agencies also expose licence records through the Nationwide Multistate Licensing System's public lookup. Search the entity name and the licence number together.
3. Check the status and the date. A licence that exists is not the same as a licence in good standing, and surrendered or expired licences still appear in records. Read the status field, not just the entry.

What a regulator can and cannot do for you

A supervisory relationship gives you somewhere to complain that a disclosure statute does not. State financial regulators generally accept complaints against their own licensees, look for patterns across them, and can act on a licence.

What they will typically not do is resolve your individual contract dispute, order a refund, or stop a debit. Those are court remedies. A complaint is worth making because it creates a record and because examination findings move a supervisor. It is not a substitute for a lawyer when money is leaving your account this week.

The structure that complicates the question

Ask one more question before you accept "we are licensed" as the end of it: which entity is lending, and is anyone else involved in the transaction.

Some non-bank funders originate through a partner depository institution, which is supervised elsewhere and exempt from state licensing nearly everywhere. Others use one licensed entity for loans and a separate unlicensed affiliate for receivables purchases, on the view that a purchase is not a loan. Neither arrangement is automatically improper. Both mean the licence you verified may not be held by the party you are contracting with.

The contract names the counterparty. Read it before relying on a licence number quoted on a call.

What licensing does not do

It does not cap rates in most cases. It does not force disclosure — that is a separate body of law covered by the state disclosure regimes. And it does not decide whether a particular clause in your agreement is enforceable, which is a question for a court and, before that, for a lawyer reading your contract.

Licensing statutes, thresholds and fees change. Confirm the current position with the DFPI or the Vermont Department of Financial Regulation before relying on anything here.

This is general information and not legal advice for your situation.