California Finance Lenders License

California Requirements for Hedge Funds and Private Equity Funds Engaged in Lending Businesses

Investment advisers, private equity managers, private fund managers, and other businesses that are engaged in making loans should be aware of whether their activities fall under the purview of the lending laws of any state such that they would be required to obtain a license and comply with certain ongoing regulatory requirements.

Under California law, finance lenders (defined as “any persons who are engaged in the business of making consumer loans or making commercial loans”) and finance brokers (defined as “any persons engaged in the business of negotiating or performing any act as brokers in connection with loans made by a finance lender”) are required to obtain a California Finance Lenders License. Private investment funds, such as hedge funds and private equity funds, that engage in such activities are no exception.

Notwithstanding the foregoing, the California Finance Lenders Law (“CFLL”) exempts certain transactions from its licensing requirements. Lenders relying on these exemptions will be able to avoid a lengthy application process with the California Department of Business Oversight and its associated requirements and costs.

New and Existing Exemptions under the California Finance Lenders Law

Effective January 1, 2014, section 22050(e) of the California Financial Code was amended to exempt persons who make five or fewer commercial loans in a 12-month period, provided that the loans are incidental to the business of the person relying upon the exemption. This amendment expanded the previous de minimis exemption for any person making just one commercial loan in a 12-month period. As such, investment advisers, private fund managers, and other members of the investment management industry that occasionally provide commercial loans may take advantage of this expanded safe harbor as long as such loans are incidental to their primary business.

A full list of exemptions is set forth under Sections 22050 – 22065 of the California Financial Code, providing relief from CFLL regulation for other types of transactions and specific entities licensed by other regulatory agencies. Among those exempt are the following:

• Banks, trust companies, savings and loan associations, insurance premium finance agencies, credit unions, small business investment companies, community advantage lenders, California business and industrial development corporations, or licensed pawnbrokers;

• Loans made or arranged by persons licensed as a real estate broker by the state and secured by a lien on real property, or to any licensed real estate broker when making such loan;

• Commercial bridge loans made by a venture capital company to an operating company, subject to certain requirements.

If you are engaged in lending transactions, we encourage you to contact your legal counsel to determine if you are eligible for one of the exemptions under the CFLL.

Licensing and Regulation under the California Finance Lenders Law

Finance lenders unable to avail themselves of an exemption from CFLL regulation will need to submit an application to the California Department of Business Oversight. Currently, the application must include the following attached items:

• Balance sheet

• Surety bond in the amount of $25,000

• Proof of Legal Presence (for sole proprietor applicants)

• California Customer Authorization for Disclosure of Financial Records Form

• Fictitious Business Name Statement (if applicable)

• Certificate of Status or Good Standing in the applicant’s state of formation and in CA

• Partnership Agreement (for general partnership applicants)

• Federal Taxpayer Identification Number or Social Security Number (for sole proprietors)

• Organization Chart for the Applicant

In addition, each individual responsible for the applicant’s lending activities must complete a “Statement of Identity and Questionnaire” and provide fingerprints. The application fee is currently $200 (nonrefundable), plus an investigation fee of $100 and fingerprint processing fees ($20 per California resident; $80 per non-California resident).

It should be noted that the licensing process for residential mortgage providers (mortgage lenders and brokers) is a separate application, filed through the Nationwide Mortgage Licensing System.

Once approved, licensees are subject to periodic regulatory examinations for which they must pay; pay an annual assessment each year; file an Annual Report by March 15 of each year; are subject to statutory books and record requirements; and must maintain a $25,000 surety bond at all times.

If you are subject to licensing would like our assistance with obtaining a California Finance Lenders License, please contact us.


Cole-Frieman & Mallon LLP provides legal services to hedge fund and private equity funds.  Bart Mallon can be reached directly at 415-868-5345.

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