Montgomery Confirms No BRE License Necessary To Sell Note Hypothecations
To Non-institutional Investors
By Anthony Geraci, Managing Partner
A case that seemingly has no impact on the California mortgage industry
ends up having a major impact in the arena of note hypothecation. On June
12, 2015, the California Court of appeals issued its decision in
Montgomery v. GFCS.
Montgomery v. GFCS, Cash Call assigned their promissory notes to a non-institutional investor
via their CFL license. Investors tried to use
Cal. Fin. Code 22340(a) ("licensee may sell promissory notes ... to institutional
investors for the collection of payments or the performance of services
with respect to those notes"). The plaintiff attempted to use 22340(a)
as a sword, stating that because her debt to Cash Call was sold to a non-institutional
3rd party (GFCS), that they violated 22340(a) and therefore could not
collect on the debt. It was a novel argument in a law that has not been
clarified to date. Since
Cal Fin. Code 22620 is worded exactly the same way except that it applies to commercial
notes instead consumer notes, this case would apply equally to that section.
The key question the court struggled with was whether the CFL law "permits
licensees to sell their notes to" non-institutional persons or whether
22340(a) limits the sale of loans only to institutional investors. Digging
into the legislative intent of 22340(a), the Court determined that 22340(a)'s
intent was to clarify that selling of debt secured by real estate to institutional
investors was within the purview of the lender's license and did not
require a BRE license in addition to the CFL license. The Court then concluded
that 22340(a) did
not prohibit a finance lender from selling the debt to a party other than an
Impact on Your Business
It was always unclear whether 22340(a) (and by analysis 22620(a)) would
limit whether you could only sell notes to institutional investors. This
would apply largely to loans secured by note hypothecations or pledges.
For the first time we can say with confidence that if your business is
loans secured by note hypothecations, you can sell your loans to non-institutional
investors under your CFL license and not be considered with the BRE law.
Providing Peace of Mind to You
Should you have any questions regarding the attached, please do not hesitate
to call any of the below regarding this.