BILL NUMBER: SB 1041 CHAPTERED 08/04/97 CHAPTER 201 FILED WITH SECRETARY OF STATE AUGUST 4, 1997 APPROVED BY GOVERNOR AUGUST 2, 1997 PASSED THE SENATE JULY 18, 1997 PASSED THE ASSEMBLY JULY 14, 1997 AMENDED IN ASSEMBLY JUNE 16, 1997 INTRODUCED BY Senators Johnson and Polanco FEBRUARY 27, 1997 An act to amend Sections 18205.5, 18206, and 18455 of, to repeal Sections 18267 and 18273 of, and to repeal Article 7 (commencing with Section 18310) of, Chapter 3 of Division 7 of, the Financial Code, relating to industrial loan companies. LEGISLATIVE COUNSEL'S DIGEST SB 1041, Johnson. Industrial loan companies. (1) Existing law authorizes an industrial loan company to make a loan or acquire an obligation that is repayable in unequal periodic payments throughout its term and that is secured by real or personal property, or both, provided that it is not a consumer loan or obligation. This bill would delete provisions permitting the above loans to be secured by both real or personal property. (2) Existing law prohibits an industrial loan company from making a consumer loan or acquiring a consumer obligation other than a loan or obligation secured by a motor vehicle unless the loan or obligation is repayable by equal or substantially equal periodic payments during its term. This bill would repeal this prohibition. (3) Existing law provides that the aggregate principal balance of loans or other obligations that are secured partially by real property, but not secured primarily by real property, shall in no event exceed 25% of the industrial loan company's outstanding loans and obligations. Existing law also provides that certain specified secured loans or obligations must be secured by motor vehicles or other personal property collateral of a market value of at least 100% or real property collateral of a market value of at least 115% of the principal amount owing on the loans or obligations, and that the personal property or collateral held as security shall be of a kind or class that has been declared eligible by regulation of the Commissioner of Financial Institutions. This bill would repeal these provisions. (4) Existing law permits an industrial loan company to purchase, sell, or originate lease obligations in accordance with specified provisions upon the authorization of the commissioner. This bill would repeal this provision. (5) Existing law prohibits an industrial loan company from making any loan to, purchasing a contract, loan, or chose in action from, holding a lease obligation of, or purchasing a lease contract from specified persons and entities, including officers and directors of the company. This prohibition does not apply to the purchase of a contract, loan, or chose in action from a finance lender, a mortgage broker, a mortgage banker, a real estate broker, or other licensed lender, provided written authorization for the purchase is obtained from the commissioner, or to the purchase of life insurance by the company on behalf of an officer or director as part of a benefit plan package. This bill would provide that the prohibition also does not apply to a transaction between an industrial loan company and a subsidiary corporation or other entity in which the industrial loan company is the owner of 50% or more of the common stock or equity interest, or directly controls the management of the corporation or other entity, or to the purchase of loans or other obligations by an industrial loan company from an affiliated company pursuant to a sale and repurchase agreement. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 18205.5 of the Financial Code is amended to read: 18205.5. Notwithstanding any other provision of this division, an industrial loan company may make a loan or acquire an obligation that is repayable in unequal periodic payments during its term and that is secured by either real property or personal property. In order to ensure the safety and soundness of industrial loan companies and to avoid an unreasonable concentration of loans and obligations that could result in balloon payments, all these loans and obligations with a term in excess of 10 years shall be repaid in substantially equal weekly, semimonthly, monthly, or quarterly installments during the term. For purposes of this section, "real property" means real property other than home loans and other residential real property loans subject to Title VIII (Alternative Mortgage Transaction Parity Act of 1982) of the Garn-St. Germain Depository Institutions Act of 1982, as those terms are defined in Part 541 of Title 12 of the Code of Federal Regulations, as amended. For purposes of this section, the term of a nonconsumer loan or a nonconsumer obligation secured solely or primarily by personal property shall not exceed 15 years and 30 days from the date the loan is made or obligation is acquired by the industrial loan company. For purposes of this section, the term of a nonconsumer loan or a nonconsumer obligation secured primarily by real property shall be as set forth in subdivision (a) of Section 18210. SEC. 2. Section 18206 of the Financial Code is amended to read: 18206. Consumer loans made and obligations acquired that are secured by a motor vehicle and repayable other than in equal periodic payments during its term shall not exceed 50 percent of all consumer loans and obligations that are secured by motor vehicles or 20 percent of assets, whichever is less. This section shall not apply to a loan made to a graduate student while attending an accredited college or university and for the purpose of actively pursuing a study program leading to a postbaccalaureate degree. SEC. 3. Section 18267 of the Financial Code is repealed. SEC. 4. Section 18273 of the Financial Code is repealed. SEC. 5. Article 7 (commencing with Section 18310) of Chapter 3 of Division 7 of the Financial Code is repealed. SEC. 6. Section 18455 of the Financial Code is amended to read: 18455. An industrial loan company shall not, directly or indirectly, make any loan to, or purchase a contract, loan, or chose in action from, hold a lease obligation of, or purchase a lease contract from, any of the following: (a) A person who is an officer or director of the industrial loan company or of its holding or affiliated company. (b) A person who is a holder of record or beneficiary of the shares of the industrial loan company or of any holding or affiliated company. This restriction shall not apply to persons holding less than 10 percent of the shares of a holding company or affiliated company that is exempt from the qualification requirements of the Corporate Securities Law of 1968 contained in Section 25130 of the Corporations Code, pursuant to subdivision (a) or (b) of Section 25101 of the Corporations Code. (c) A person in which an officer or director of the industrial loan company or of any holding or affiliated company directly or indirectly is financially interested, directly or indirectly. (d) A person in which the holder of record or beneficiary of the shares of the industrial loan company or of any holding or affiliated company directly or indirectly is financially interested, directly or indirectly. This restriction shall not apply to persons holding less than 10 percent of the shares of a holding company or affiliated company that is exempt from the qualification requirements of the Corporate Securities Law of 1968 contained in Section 25130 of the Corporations Code, pursuant to subdivision (a) or (b) of Section 25101 of the Corporations Code. (e) A person who acquired those contracts directly or indirectly or through intervening assignments from a person described in subdivision (a), (b), (c), or (d). Any officer, director, or shareholder of an industrial loan company who directly or indirectly makes or procures, or participates in making or procuring, a loan or contract in violation of this section or knowingly approves the same is personally liable for any loss resulting to an industrial loan company from the loan or contract, in addition to any other penalties provided by law. (f) The prohibition contained in this section shall not apply to the purchase by an industrial loan company of a contract, loan, or chose in action from a finance lender, as described in Section 22009, a mortgage broker, a mortgage banker, a real estate broker or other licensed lender, provided written authorization for the purchase is obtained from the commissioner. (g) The prohibition contained in this section shall not apply to the purchase of life insurance by an industrial loan company on behalf of an officer or director as part of the officer's or director' s employee benefit plan package. (h) The prohibition contained in this section shall not apply to the following transactions: (1) A transaction between an industrial loan company and a subsidiary corporation or other entity in which the industrial loan company is the owner of 50 percent or more of the common stock or equity interest, or directly controls the management of the corporation or other entity. (2) The purchase of loans or other obligations by an industrial loan company from an affiliated company pursuant to a sale and repurchase agreement.