The California Department of Business Oversight (DBO) has formally issued a proposed rule affirming the licensing and regulation of bank subsidiaries that engage in lending activities. The proposal would exempt commercial lending activities conducted by subsidiaries of national banks and federal savings associations from regulation, but otherwise affirms that lending subsidiaries, affiliates, and agents of banks must comply with the California Finance Lenders Law and the California Residential Mortgage Lending Act, as applicable.

Specifically, subsidiaries, affiliates and agents of all state banks that provide consumer or commercial loans are subject to regulation. Affiliates and agents of national banks are also subject to regulation under these laws; again, only commercial lending activities of national bank and federal savings association subsidiaries are exempt. The proposed rule would reverse numerous agency opinions that had exempted bank subsidiaries and affiliates from CFLL and CRMLA licensing and regulation on the grounds that they operated under laws related to banking. CBA filed comments with the DBO arguing that its prior opinions had correctly interpreted the statutory exemptions. By virtue of their corporate relationship with banks, these subsidiaries and affiliates were subject to the kind of regulatory standards and scrutiny not present with other lenders. In particular, we argued that while some bank subsidiaries and affiliates making consumer loans choose to operate under the CFLL license, there is no good rationale for regulating commercial lending. If your bank may be affected by the proposal or if you have any questions, please contact CBA General Counsel Leland Chan at lchan@calbankers.com.