California Enacts Commercial Financing Licensing Requirement

California Gov. Gavin Newsom on September 30, 2026, signed Assembly Bill 2116 (the Act), which amends the California Financing Law (CFL).¹ The most significant feature of the Act is its inclusion of a licensing requirement, operative on July 1, 2028,² for parties designated as commercial financing providers and commercial financing brokers (respectively, CFPs and CFBs, and collectively, Covered Persons) who provide or help arrange various types of commercial financing to "small business" recipients in amounts of $500,000 or less (Covered Financing).

In addition, the Act:

• extends to Covered Persons virtually all of the CFL's finance lender/broker licensing-related requirements, including requirements and qualifications to obtain the requisite license from the California Department of Financial Protection and Innovation (DFPI) and maintain that license in good standing thereafter
• gives to the DFPI virtually the same powers of enforcement against Covered Persons that it has with respect to finance lenders/brokers
• adds a new Chapter 3.1 to the CFL, which:
• defines commercial financing to include commercial loans and commercial open-end credit plans (together, Commercial Loans), accounts receivable purchase transactions (including factoring), asset-based lending transactions (aka merchant cash advances) and lease financing³
• broadly defines a CFB as a person that engages in any one of several specified brokerage activities in connection with a Covered Financing⁴
• declares unenforceable any Covered Financing transaction made on or after January 1, 2028, by a CFP that is neither licensed as such nor awaiting action on its complete application for such a license⁵

The Act, together with the existing Commercial Financing Disclosure Law (CFDL)⁶ that requires providers of commercial financing of the same types and with the same $500,000 cap as covered by the Act to give recipients detailed disclosures of the terms and conditions of such financing, arguably makes the DFPI the most powerful (state or federal) regulator in the country with respect to commercial financing entities and transactions.

Additional details concerning the Act are set forth below.

Licensing

First and foremost, the Act requires nonexempt CFPs and CFBs to be licensed as such – or have a complete application pending at the DFPI – before engaging in a nonexempt Covered Financing transaction with a recipient on or after July 1, 2028. It also renders unenforceable any Covered Financing transaction provided on or after that date by a CFP that is neither licensed as such nor awaiting action by the DFPI on its complete application for such a license.⁷ 

The Act also extends to Covered Persons virtually all of the CFL's licensing-related General Provisions (found in Chapter 1). This means that applicants for a CFP or CFB license, similar to applicants for a finance lender or broker license, must, among other things:

• submit fingerprints (unless they already hold a CFL license)
• pay various application-related fees
• submit financial statements showing that they satisfy the applicable minimum net worth requirement
• submit personal and financial information concerning their key individuals
• obtain a surety bond in a specified minimum amount
• file their applications through the Nationwide Multistate Licensing System (NMLS)

It also means that to maintain their licenses in good standing, CFPs and CFBs, as with licensed finance lenders and brokers, must fulfill various obligations, including obligations to:

• maintain their surety bond
• promptly notify the DFPI of any change of address or change of name
• retain and preserve (for at least three years) specified books and records concerning their business activities, including files of their commercial financing transactions
• file annual reports and special reports (if required by the DFPI)
• pay annual assessments to the DFPI to help cover the DFPI's costs to administer the CFL
• not make materially false or misleading statements about the terms of any financing they offer to recipients, either directly or in any advertisements
• not commit an act that constitutes fraud or dishonest dealings ⁸

New Definitions, Exemptions, Requirements and Prohibitions Applicable to Covered Persons

The Act adds an entire new chapter to the CFL, Chapter 3.1,⁹ which includes the following definitions, exemptions, requirements and prohibitions applicable exclusively to Covered Persons and Covered Financing transactions.

Definitions 

Chapter 3.1 defines, among other terms:

• CFP. A person that extends a specific offer of commercial financing to a recipient, including, but not limited to, a nondepository institution that enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.¹⁰ (The last part of the definition appears clearly intended to require FinTech companies and the like, which operate online lending platforms through which prospective recipients can apply for and obtain Covered Financing from a banking institution, to hold a CFP license.)
• CFB. A person engaged in the business of performing any one of the following acts in connection with a Covered Financing transaction with a prospective recipient:
  • transmitting sensitive data about the recipient to a CFP for compensation in connection with a referral
  • referring the recipient after determining, pursuant to an agreement with the CFP, that the recipient meets certain criteria involving sensitive data
  • participating in a Covered Financing negotiation between a CFP and the recipient
  • counseling, advising or making recommendations about a Covered Financing transaction to the recipient based on the recipient's sensitive data
  • participating in the preparation of Covered Financing documents
  • communicating to the recipient a CFP's approval of a Covered Financing application
  • charging the recipient a fee for services related to the recipient's application for a Covered Financing from a CFP¹¹
• Recipient. A small business or small business owner who is presented with a specific Covered Financing offer by a CFP.¹²

Exemptions

Chapter 3.1 exempts from its provisions essentially the same persons and types of transactions that are exempted from the CFDL: 1) lenders regulated under the federal Farm Credit Act, 2) commercial financing transactions secured by real property, 3) persons who make one or fewer covered commercial financing transactions (or five or fewer such transactions if they are incidental to the person's business) in the state in a 12-month period, and 4) commercial financing transactions in which the recipient is a motor vehicle dealer or an affiliate of a dealer or a motor vehicle rental company or an affiliate such a comply.¹³

The lone exemption in the CFDL that is not included in the Act is an exemption for depository institutions. However, this appears to be a difference without a distinction since the CFL provides in Chapter 1 that the CFL "does not apply to any person doing business under any law of any state or of the United States relating to [in pertinent part] banks, trust companies, savings and loan associations, …, [and] credit unions…."¹⁴

Requirements

Chapter 3.1 requires:

• CFBs to clearly and conspicuously display on their websites the average and maximum annual percentage rates (APRs) for the Covered Transactions they facilitated during the most recent calendar year
• CFPs to electronically file through the DFPI's website a verified report containing detailed information relating to Covered Financing transactions (other than Commercial Loans) in which it engaged during the preceding calendar year¹⁵

Prohibitions

Chapter 3.1 prohibits Covered Persons from:

• taking a confession of judgment or any power of attorney before a default by a recipient under the terms of a Covered Financing agreement
• including a provision in a Covered Financing agreement that limits or restricts recipients from disclosing information they gain from their business activities with the CFP, including terms or conditions of a product or service offered by the CFP
• engaging in any unfair, deceptive, or abusive act or practice as those terms are defined in the Act or any act or practice that is unlawful (presumably under some law other than the CFL)¹⁶

In addition, Chapter 3.1 prohibits Covered Financing transactions that are found to be unconscionable pursuant to Section 1670.5 of the California Civil Code.¹⁷

Revocations and Penalties

Finally, the Act generally authorizes the DFPI to utilize the same enforcement powers against Covered Persons that it currently has under CFL Chapter 4 with respect to finance lenders and brokers. The DFPI is thus empowered to take actions such as:

• investigating and/or examining Covered Persons' books and records
• demanding full access to Covered Persons' books and records and places of business
• ordering a Covered Person who, in the DFPI's opinion, is engaging in commercial financing business without a license and/or violating provisions of the CFL, its implementing regulations or any DFPI order to immediately 1) cease and desist from such conduct and/or 2) provide ancillary relief (e.g., refunds, restitution, disgorgement or damages) on behalf of injured persons
• ordering a Covered Person to immediately discontinue any business practice that the DFPI, following an investigation, has reasonable grounds to believe is unsafe or injurious
• ordering a Covered Person's license to be suspended or revoked on any one of several specified grounds, including, in the case of a CFP, its "repeated failure" to consider, in determining the size, duration and repayment features of a Covered Financing transaction, the recipient's financial ability to repay the transaction in accordance with the terms of the financing agreement or refinance the transaction at maturity¹⁸

Open Questions

1. Must a licensed finance lender that makes only Commercial Loans also obtain or submit a complete application for a CFP license on or before July 1, 2028, to continue to make Commercial Loans thereafter?

Because the Act specifically requires a CFP to be licensed as such and defines "Covered Financings" to include Commercial Loans, it would not be unreasonable to conclude that the answer to this question is yes. However, the authority granted to the holder of a commercial finance lender license is broader in scope than that granted to the holder of a CFP license, i.e., the former authorizes finance lenders to make Commercial Loans in any amount (greater than or equal to $5,000) to any borrower, whereas the latter authorizes CFPs only to provide Covered Financings (including Commercial Loans) of $500,000 or less to small business recipients. Accordingly, there does not appear to be a persuasive reason why a licensed finance lender that only makes Commercial Loans (including Commercial Loans that qualify as Covered Financings) should need a separate CFP license to continue to do so on or after July 1, 2028, (although it apparently would still need to comply with the provisions in new Chapter 3.1).

(The same reasoning should apply as well to licensed commercial finance brokers wishing to continue helping to arrange Commercial Loans on or after July 1, 2028.)

2. How do CFBs determine APRs for the transactions they broker for purposes of the Website Publication Requirement?

The Act does not address this question. However, it seems likely that the DFPI, when drafting implementing regulations for the Act, will rely on the provisions in the CFDL and its implementing regulations that address APR calculations for the different types of commercial financings it covers.

3. Does the Act require a FinTech company to be licensed simply because it operates an online platform through which applicants for Covered Financing can submit only applications for such financing directly to a banking institution?

The Act requires a FinTech company to be licensed as a CFP if it has a written agreement with a depository institution "to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution." Simply administering an online platform through which applicants for Covered Financing can complete applications for such financing and submit them to the depository institution does not appear to rise to the level of "arranging for the extension of commercial financing by the depository institution" so as to require the FinTech to be licensed as a CFP (although it may need a CFB license).

Moreover, even if the FinTech's online platform did more than simply take applications from prospective recipients and submit them to the depository institution such that it could be deemed to be "arrang[ing] for the extension of commercial financing" by the depository, it would arguably still need to administer the platform to trigger licensing as a CFP. For example, if a FinTech licenses its platform to the depository and the depository administers it under its own name, it would seem that the FinTech would not need a CFP license (nor for that matter might it need a CFB license).¹⁹

Recommendations

Pay Attention and Participate in the Regulatory Process

Hopefully, the questions raised above and any other open questions regarding the Act will be addressed by the DFPI during the regulatory process. Persons engaged in the commercial financing business should closely monitor and participate in that process to ensure, to the extent possible, that the DFPI's regulations do not overreach in a way that significantly impedes their legitimate business interests. 

Apply for Your License at the Earliest Possible Date

With regard to the licensing process itself, persons that will need a CFP license going forward should pay close attention to the processes and procedures to be developed by the NMLS to obtain that license and submit their applications in accordance with those processes and procedures at the earliest possible date but no later than January 1, 2028. If a CFP applicant has not filed before that date, any Covered Financing transaction that it provides between January 1, 2028, and the date it receives notice from the DFPI that its application is complete can be deemed to be unenforceable. Also, any CFP or CFB applicant that files its application on or after July 1, 2028, will be prohibited from engaging in a Covered Financing transaction until it actually receives its license, regardless of how long that process may take.²⁰

Comply with Requirements of New Chapter 3.1 When Engaging in Any Covered Financing Transaction on or After January 1, 2028

Because the Act specifies that the operative date of Chapter 3.1 is January 1, 2028, any Covered Person that engages in a Covered Financing transaction on or after that date and does not comply with the requirements and prohibitions in Chapter 3.1 would be in violation of the Act. This is so even if the Covered Person is licensed or awaiting decision from the DFPI on a complete application it filed with the DFPI.

For more information or questions, please contact the authors.

Notes

¹ The Act's provisions (other than its licensing requirement) become operative on January 1, 2028. See Cal. Fin. Law Section 22662, as added by the Act.

² Cal. Fin. Code Section 22100.6(c) as added by the Act.

³ Cal. Fin. Law Sections 22655(e). Chapter 3.1 defines each of these types of commercial financings by reference to definitions in Section 22800 of California's Commercial Financing Disclosure Law (except for the definition of "commercial loan," which is found at existing CFL Section 22502.

⁴ Cal. Fin. Law Sections 22655(f).

⁵ Cal. Fin. Code Section 22658 as added by the Act.

⁶ Cal. Fin. Code Sections 22800-22807.

⁷ Cal. Fin. Code Section 22100.6 as added by the Act. This unenforceability provision applies only to Covered Financing transactions. It does not apply generally to other loan transactions covered by the CFL.

⁸ However, the Act does not subject Covered Persons to CFL Sections 22152, 22154 or 22155 of the CFL, which require finance lenders and brokers, respectively, to 1) obtain a separate license for each location at which they conduct CFL business, 2) obtain written authorization from the DFPI to conduct CFL business at a location in which other business is conducted and 3) transact CFL business only under the name and at the location specified on their license.

⁹ Cal. Fin. Law Sections 22655-22662.

¹⁰ Cal. Fin. Code Section 22655(g) as added by the Act. (This is the same definition as in the CFDL.)

¹¹ Cal. Fin. Code Section 22655(f)(1) as added by the Act. Subsection (2) of this provision lists certain activities that, by themselves, do not trigger licensing as a CFB.

¹² Cal. Fin. Code Section 22655(l) as added by the Act.

¹³ Cal. Fin. Law Section 22656. Note that a commercial motor vehicle rental company or an affiliate of such a company is covered only if the commercial financing is a commercial loan or commercial open-end credit plan in the amount of at least $50,000. Id., subs. (c)(2).

¹⁴ See Cal. Fin. Code Section 22050(a).

¹⁵ Cal. Fin. Law Sections 22659(d), 22660(b).

¹⁶ Cal. Fin. Law Sections 22659(a), (c), 22661(a).

¹⁷ Cal. Fin. Law Section 22659(b).

¹⁸ Cal. Fin. Law Sections 22701, 22712, 22714(a), including (a)(6). Unlike cease and desist and discontinuance of business orders, which can be effective immediately and subject to challenge only later, a suspension or revocation order cannot become effective until the licensee has received notice and an opportunity for an administrative hearing.

¹⁹ If the FinTech licenses its online platform to a depository (regardless of whether or not the platform is limited to taking applications for Covered Financing and transmitting them to the depository) and the depository administers the platform under its own name, arguably, only the depository – not the FinTech – can be considered to be engaging in any of the activities that trigger licensing as a CFB under the Act.

²⁰ The Act specifically allows persons that file for a CFP or CFB license on or before July 1, 2028, to engage in the business of a CFP or a CFB if "the person submits a complete application on or before July 1, 2028, and is awaiting approval or denial of the application." See Cal. Fin. Law Section 22100.6, as added by the Act.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.