On September 30, 2026, Governor Newsom signed AB 2116. The headlines call it a small business lending bill. Most of the commentary is aimed at factoring companies, Merchant Cash Advance funders, and revenue-based finance shops. If you are in those industries, the confusion is finally cleared up and CFLL is required for smaller transactions as described below.
If you run an RTL or CRE bridge platform in California, your first instinct will be to file it under someone else’s problem.
That instinct is mostly right. It is not entirely right. And the places where it is wrong sit in two spots that matter: the side products you offer borrowers, and the capital structures you use to fund your book. If you provide that capital through a Master Repurchase Agreement, the law reaches you too.
AB 2116 expands the California Financing Law to create two new license categories, the commercial financing provider and the commercial financing broker. It layers on UDAAP prohibitions, a ban on confessions of judgment, a de facto ability-to-repay standard, and APR disclosure for brokers. Most importantly, it makes covered agreements with unlicensed providers unenforceable. That last piece is a sharp break from existing California case law, which has generally not voided commercial loans just because the lender lacked a CFL license.
The substantive provisions take effect January 1, 2028. Licensure is required by July 1, 2028. That sounds far away. It is not, once you account for the time it takes to renegotiate a repo facility or rebuild a product line.
AB 2116 Does Not Change Your Core Real Estate-Secured Loan
Start with the good news. The new commercial financing chapter does not apply to transactions secured by real property. A first lien RTL loan secured by a deed of trust is outside the new regime. So is a first lien CRE bridge loan. Your core product does not change. Your existing licensing analysis for those loans, whether you operate under a DRE broker license, a CFL finance lender license, or another exemption, stays where it was.
Three other limits narrow the law further. It reaches only offers of $500,000 or less. It reaches only small businesses, defined as for-profit entities with annual gross receipts of $16 million or less, adjusted every two years. And it exempts a provider that makes one or fewer covered transactions in California in a 12-month period, or five or fewer that are incidental to its business. Providers may rely on the recipient’s written representations about purpose and gross receipts. Build those representations into your applications now.
Notice what the $16 million test does. Nearly every fix-and-flip borrower is a small business. So are many emerging RTL and bridge lenders. That second point is where the capital markets analysis begins.
Where AB 2116 Can Reach RTL and Bridge Lenders
The real property carveout protects the loan secured by real property. It does not protect everything else you sell to the same borrower. Look hard at the products that ride alongside your first lien program.
EMD loans are the obvious one. They are small, short, made to small businesses, and usually unsecured or secured only by an assignment of the purchase contract. Transactional or double-close funding can land in the same place depending on how it is papered. Unsecured gap or rehab top-up advances backed only by a guaranty fit the profile. On the bridge side, a mezzanine loan secured by a pledge of LLC interests is secured by personal property, not real property. A $400,000 mezz piece to a sponsor entity under $16 million in receipts is squarely in the frame.
If any of those products fall within the law and you are not licensed as a commercial financing provider, the agreement may be unenforceable. That means the guaranty you were counting on may not help you collect. It also means the confession of judgment and pre-default power of attorney provisions sitting in some of these forms have to come out.
One more point. Your origination network now has a statutory definition. Referral partners, ISOs, and wholesale relationships that negotiate terms, prepare documents, or communicate approvals on covered products can be commercial financing brokers. They will need a license and will have to post their average and maximum APRs. If you are paying them, you want to know they are compliant.
AB 2116 and Master Repurchase Agreements
Now flip the lens. On a Master Repurchase Agreement, you are not the lender. You are the recipient of financing. The repo buyer advances against your loans and you agree to repurchase them at a price that includes a time-differential. In substance, that is asset-based financing to a business. AB 2116 defines commercial financing to include asset-based loans and accounts receivable purchase transactions. A repo facility to an RTL lender with less than $16 million in gross receipts fits the recipient side of the definition.
For most institutional facilities, the $500,000 ceiling should end the inquiry. A $25 million warehouse line is not a covered offer, at least if the offer is measured at the facility level. That assumption deserves more scrutiny than it has gotten, and we return to it below. There is also a credible argument that a repo of mortgage loans is a transaction secured by real property, since every purchased asset is a note secured by a deed of trust. We would not build a structure that depends on that argument alone. The statute does not address it, and the DFPI has not yet written implementing rules.
Licensing, Usury and Repo Facility Risk
The more interesting effect on repo is the usury change. AB 2116 extends the CFL’s exemption from the constitutional 10 percent usury cap to any CFL licensee, regardless of the form of the transaction. Recharacterization risk has always lurked behind repo facilities provided by non-bank buyers. If a court treats the repo as a disguised loan, the time-differential and fees become interest. For a CFL-licensed buyer, that question stops mattering for usury purposes. Expect non-bank repo providers, debt funds, and family offices that fund RTL lenders to take a hard look at getting licensed. Expect them to prefer licensed counterparties for the same reason.
Expect AB 2116 to Show Up in Your Next Facility Renewal
The last effect is the one you will feel at your next renewal. Buyers and their counsel have read the same alerts we have. The enforceability rule turns originator licensing into an asset eligibility issue. Expect new representations that every purchased loan was originated by a properly licensed provider, new eligibility criteria excluding loans that fail that test, and new repurchase triggers tied to it. Expect broader compliance-with-law reps and regulatory change provisions too.
Negotiate the scope. A rep that every loan was originated in compliance with AB 2116 is fine for real-property-secured assets that sit outside the chapter. A blanket rep that the seller holds every license required for every product it offers is different. If your EMD program is out of compliance, that rep can trip an event of default across the entire facility, even though no EMD loan was ever on the repo line. Tie licensing reps to purchased assets. Carve covered side products out of the cross-default, or fix the side products before the rep is given.
If you are on the other side of that agreement, the analysis changes. Banks are generally outside the CFL, so bank repo desks are largely unaffected. The exposure sits with non-bank buyers: debt funds, family offices, and specialty finance shops that provide MRAs to RTL and bridge originators. A non-bank buyer is a commercial financing provider if it makes a covered offer.
If you are on the other side of that agreement, the analysis changes. Banks are generally outside the CFL, so bank repo desks are largely unaffected. The exposure sits with non-bank buyers: debt funds, family offices, and specialty finance shops that provide MRAs to RTL and bridge originators. A non-bank buyer is a commercial financing provider if it makes a covered offer.
The $500,000 Question for Smaller Facilities
The hard question is how the offer is measured.
An MRA is one master agreement with a stated maximum amount. Each purchase under it is a separate Transaction. A $20 million line built from $300,000 Transactions can be read either way. Buyers will argue the offer is the facility. A regulator or a seller’s litigation counsel may argue each Transaction is its own offer. The DFPI has not addressed it. The same question decides the de minimis exemption, since counting Transactions individually blows through the one-per-year and five-incidental limits almost immediately. Until the DFPI speaks, draft to support the facility-level reading. Use a committed or stated maximum amount, a strong single-agreement clause, and recitals framing the MRA as one integrated financing.
If a facility is covered, several standard provisions break. The statute bars taking a power of attorney before default. Most RTL repo documents include a seller power of attorney so the buyer can endorse notes, record assignments, and file UCCs. Some are effective at signing. Those need to be granted and exercisable only after an Event of Default, with ministerial steps handled through bailee letters and pre-signed allonges. The law also voids provisions that restrict the recipient from disclosing the terms of its financing. Fee letter and MRA confidentiality clauses barring the seller from sharing pricing will not hold for a covered facility.
The enforceability rule is the real exposure. An unlicensed buyer on a covered facility may be unable to enforce the repurchase obligation, the guaranty, or a deficiency claim, whatever the answer on title to the purchased loans. Ability-to-repay, UDAAP, and unconscionability standards apply as well. Most buyers already underwrite the seller. The file should now show it. Placement agents who arrange covered lines and negotiate terms or communicate approvals may be commercial financing brokers.
For a fund running small-ticket lines to emerging originators, licensing may be the cheaper answer. A CFL license resolves the offer question, the enforceability risk, and the usury recharacterization risk in one step. It also becomes a selling point with originators whose own counsel is now asking these questions.
The $500,000 line does more work in the smaller structures that emerging lenders actually use. A note-on-note loan against a single RTL asset. A $300,000 line from a high-net-worth individual to a first-year fund. A hypothecation facility sized to a handful of loans. These are commercial financing to a small business, often from a non-bank capital provider, and often under the threshold. If the capital provider is unlicensed and the transaction is covered, the provider may be unable to enforce its own agreement. That is a problem for your capital partner first. It becomes your problem when they figure that out and pull the line.
Whole loan sales and true participations are different. In a true sale, the buyer is acquiring an asset, not extending financing to you. Keep the true sale analysis clean. Avoid recourse, put-back, and yield-maintenance features that look like a financing, because those features are what push a participation toward recharacterization.
Back leverage on bridge platforms follows the same logic as repo. Large credit facilities sit above the threshold. Small single-asset or pledge-based back leverage may not. Where the back leverage lender takes a pledge of your loan or your entity rather than a lien on real property, do not assume the real property carveout covers it.
What California RTL and Bridge Lenders Should Do Now
Watch the dates closely. The enforceability rule bites on agreements entered into on or after January 1, 2028. The license requirement does not kick in until July 1, 2028. A provider with a complete application on file can keep operating while it waits. The statute’s pending-application safe harbor, however, is not operative until July 1. That leaves a six-month window where an unlicensed provider has no clear protection. The practical answer is simple. If you need a license, have a complete application on file before January 1, 2028.
Here is what we are telling California RTL and bridge clients to do now:
- Inventory every product you offer and flag anything not secured by real property.
- Decide whether to license, restructure those products onto real property collateral, or exit them.
- Pull your MRA and warehouse documents and mark every licensing rep, eligibility criterion, and cross-default that could be read to reach side products.
- Raise those points at your next amendment, not your next renewal.
- Ask your smaller capital partners whether they plan to license.
- Review your broker and referral agreements for the new definition.
- If you provide repo capital, decide whether to license or to paper your facilities for the facility-level reading. Either way, take pre-default powers of attorney and pricing confidentiality out of your standard small-facility form.
AB 2116 was written for a different corner of the market. It will still reach yours. The lenders who sort out scope now will negotiate their next facility on their terms. The ones who wait will negotiate it on the buyer’s.
The DFPI has not yet issued implementing regulations for AB 2116. This analysis reflects the statute as signed and will be updated as rulemaking develops. It is general information, not legal advice for any specific transaction.
