Complete Guide to Obtaining a California Lending License

One of the trickiest (and most expensive) obstacles founders face when starting a lending fintech business is state licenses. Not only are there 50 different state licenses, but 50 sets of requirements and compliance rules, too. 

In this blog, we’ll be breaking down the California lending license in detail. 

What Is a Lending License?

To legally lend to consumers or businesses, a business must obtain a lending license which encompasses all federal or state licenses required. When a business obtains a state lending license, it is permitted to provide lending services to consumers or businesses located within the state’s boundaries.

The California Finance Lenders Law Explained

In California, brokers and lenders engaged in making or negotiating commercial or consumer loans are governed by the California Finance Lenders Law. Commercial loans refer to both secured and unsecured loans with amounts exceeding $5,000, intended for non-personal purposes. In contrast, consumer loans typically involve borrowing for personal, family, or household purposes. To operate in California, all brokers and lenders must be licensed by the California Commissioner of Business Oversight, including out-of-state entities that offer loans to California residents.

Obtaining a license can take six months to a year, and failure to comply with the law can result in fines of up to $10,000, imprisonment for one year, or both.

Exemptions to the Finance Lenders Law

Although a license is required to operate as a lender or broker in California, there are exemptions under the California Finance Lenders Law. These exemptions apply to certain individuals, transactions, and entities, including licensed check cashers, savings and loan associations, banks, credit unions, pawnbrokers, certain SBA-approved lenders, and securities broker-dealers licensed under California law, among others.

Other exemptions include agricultural cooperatives, universities and colleges making student loans, licensed residential mortgage lenders, cemetery brokers, and some public entities. Additionally, individuals or entities who make fewer than five commercial loans within a year and whose loans are incidental to their main business may be exempt.

Certain commercial loans and investments made by specific tax-exempt organizations, franchise loans made by a franchisor to a franchise, and commercial bridge loans made by venture capital companies to operating companies may also be exempt from licensing requirements. Finally, loans arranged or made by California-licensed real estate brokers and secured by a lien on real property may also be exempt.

Limitations of Exemptions

While there are some exemptions from licensing requirements under the California Finance Lenders Law, many lenders do not qualify for these exemptions. For example, a crowdfunding enterprise may claim an exemption if it makes fewer than five commercial loans in a year, as long as lending is incidental to its primary business and not related to real estate.

Without an exemption, any person or entity engaging in lending activities without a license risks imprisonment and/or fines. To avoid these consequences, many lenders seek to obtain a license either under the California Real Estate Regulations or the Finance Lenders Law. Each statute has an exemption for licenses under the other, making this a common solution for those who wish to conduct lending activities legally.

California Finance Lenders License Application Requirements

To obtain a license under the California Finance Lenders Law, an applicant must file an application with the Department of Business Oversight that includes eleven multi-part questions and thirteen exhibits requesting information about the applicant. Additionally, the applicant must make thirty-three declarations in the “Execution Section” under penalty of perjury. The application fee for the license is $300, which is non-refundable.

Upon submission of the application, the Commissioner of Business Oversight will investigate whether any directors, officers, or individuals who own/control more than 10% of the applicant have been involved in fraud or crimes within the past decade. If an entity controls more than 10% of the applicant, additional questionnaires and fingerprints must be submitted for every general partner, director, officer, or managing member of the entity, unless the Commissioner waives the requirement.

Applicants must also file a surety bond of $25,000 with the Commissioner of Business Oversight along with their application materials. If the license operates from multiple locations, the applicant must apply for an additional branch office license for each location, but one surety bond will cover all locations.

Limitations on Lenders Licenses in California

Obtaining a lender’s license does not give fintechs carte blanche to give loans and other services. A license permits lenders to make commercial or consumer loans, while brokers are permitted to perform and negotiate other services related to loans made by different finance lenders.

However, a finance lender’s license does not entitle the licensee to perform broker services for the majority of regulated financial institutions. Additionally, the licensee cannot perform broker services for unregulated borrowers, lenders, or affiliated entities who do not possess a finance lender’s license.

Moreover, licensed finance lenders cannot sell promissory notes that feature loans made or purchased from another licensee, except for certain “institutional investors” such as regulated insurance companies, banks, and government agencies.

How to Get a California Lenders License Through NMLS

Here are the general steps for obtaining a California commercial lending license through the Nationwide Multistate Licensing System (NMLS):

1. Create an account with the NMLS and complete the MU1 form, which is the “Application for Company Form.”
2. Obtain a unique identifier for the company by filing a Form MU2 for each control person and each individual who will serve as an executive officer or director of the company.
3. Submit fingerprints for each control person, executive officer, and director of the company via the NMLS.
4. Complete the MU4 form for each individual that will act as a qualified individual (QI) for the company.
5. Pay the necessary fees through the NMLS.
6. Provide supporting documentation for the company, including business and financial statements, and other requested information.
7. Once the application is complete, authorize a credit report and criminal background check for the company and each individual.
8. Obtain a surety bond in the amount of $25,000 for the company and submit proof of the bond to the NMLS.
9. Pass the California commercial lending exam.
10. After the license is approved, maintain the license by keeping the NMLS up-to-date with any changes to the company or individual information and paying the necessary fees.

Note that these steps are general, and specific requirements may vary depending on the situation. It is important to carefully review the California Finance Lenders Law and regulations, as well as the NMLS application process and requirements.

READ MORE: Complete Guide to the Nationwide Multistate Licensing System (NMLS)

California Finance Lenders License and Fintech

Fintech companies are required to obtain licenses and comply with the law before offering services. To operate legally, they must obtain multiple state licenses, including a California Finance Lender license due to the state’s size and the breadth of activities covered. While the licensing process may take several months or more, it is mandatory for businesses offering financial services.

Final Thoughts

Having a California state lending license is necessary if you want to offer lending services in California. Make sure to apply for one so you can operate legally. We hope this article has offered you all the necessary information on obtaining this license.

California Finance Lenders License FAQ

Here are some questions you may still have about lending licenses:

What is a California Finance Lenders Law (CFLL) license, and who needs it?

A CFLL license is a license that permits a business to engage in lending activities in California. Any individual or company that wants to lend money in California must obtain a CFLL license unless they are exempt from licensing requirements.

How long does it take to obtain a California commercial lending license?

The licensing process can take anywhere from a few months to a year, depending on the complexity of the application and the timeliness of required documentation.

What are the requirements for obtaining a California commercial lending license?

The requirements for obtaining a CFLL license include submitting an application through the Nationwide Multistate Licensing System (NMLS), providing fingerprints and background checks, obtaining a surety bond, passing a licensing exam, and paying necessary fees.

How much does it cost to obtain a California commercial lending license?

The application fee for a CFLL license is $300, and the NMLS charges additional fees for filing the application, obtaining fingerprints and credit reports, and other services. The surety bond amount is $25,000, and the licensing exam fee is $125.

What are the consequences of operating without a California commercial lending license?

Operating without a CFLL license is illegal and can result in fines, penalties, and legal action. Additionally, unlicensed lenders may be unable to enforce loan agreements or collect interest on loans.

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.

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