MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
TO: Douglas Carmichael, Partner; Yuki Nakamura, Associate — Calderwood & Harkness LLP
FROM: Carlos Espinoza, Associate — Calderwood & Harkness LLP
DATE: August 10, 2022
RE: State Premium Finance Company Licensing Requirements — Quorum Premium Finance LLC; Securitization-Related Considerations
Matter No.: 1025-00007
Client: Quorum Insurance Holdings Corp.
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I. Executive Summary
This memorandum surveys the state-by-state premium finance company licensing requirements across all 50 states and the District of Columbia, confirms the licensing status of Quorum Premium Finance LLC ("QPF"), and analyzes securitization-related issues arising in connection with the proposed $500,000,000 asset-backed securitization by Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1"). In particular, this memorandum addresses assignee licensing requirements, usury and rate cap compliance, and the interplay between state licensing laws and the eligible receivables criteria set forth in the proposed transaction documents.
QPF is a Delaware limited liability company (DE SOS File No. 6712445) and a wholly owned subsidiary of Quorum Insurance Holdings Corp. ("QIH"), a Delaware corporation publicly traded on the New York Stock Exchange under the ticker symbol "QIHC." QIH is headquartered at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. QPF maintains its principal offices at the same address and operates through regional servicing centers in Dallas, Texas; San Francisco, California; and Jacksonville, Florida.
QPF originates and services insurance premium finance loans to commercial policyholders across all 50 states and the District of Columbia. As of the cut-off date for purposes of this analysis, QPF maintains a total receivables portfolio of approximately $2.1 billion, composed of premium finance agreements with an average loan term of approximately nine months, a weighted average annual percentage rate ("APR") of 7.85%, and a historical net loss rate (averaged over the 2019 through 2021 fiscal years) of 0.42%. QPF's receivables are originated on standardized form premium finance agreements that have been tailored to comply with the specific regulatory requirements of each state in which QPF conducts business.
The initial securitized pool, as of the cut-off date of June 30, 2022, has an aggregate outstanding principal balance of approximately $612,000,000, consisting of approximately 82,400 individual premium finance loans with an average loan balance of approximately $7,427. The proposed securitization contemplates a revolving period of 24 months from the closing date, during which QPF will continue to sell newly originated receivables into the pool, subject to the eligible receivables criteria set forth in the Receivables Sale Agreement between QPF and Quorum Receivables Holding LLC ("QRH") and the Receivables Transfer Agreement between QRH and QRF 2022-1.
Key Conclusions. Based on our review, we have reached the following conclusions:
1. QPF holds active premium finance company licenses or equivalent authorizations in all 50 states and the District of Columbia. No pending regulatory actions, investigations, consent orders, or license suspensions have been identified in any jurisdiction.
2. QPF's pricing practices, including its weighted average APR of 7.85% and its individual loan APR range of approximately 5.50% to 11.00%, comply with all applicable state rate caps and usury limitations for commercial premium finance agreements.
3. The securitization structure does not require QRH or QRF 2022-1 to obtain premium finance company licenses in any jurisdiction. The majority of states expressly permit assignment of premium finance agreements without requiring the assignee to hold a license, provided the original agreement was lawfully originated by a licensed premium finance company. A small number of states (approximately three to five) have statutory language that could be read as ambiguous on the point of assignee licensing; however, in all such states, prevailing regulatory practice does not require assignee licensing for securitization purchasers, and QPF's continued role as servicer mitigates the concern.
4. The eligible receivables criteria in the proposed transaction documents must incorporate compliance with applicable usury and licensing laws as a condition of eligibility. The current draft criterion (vii) captures this requirement in general terms, but we recommend that it be made more explicit, as further described in Section XI of this memorandum.
5. Subject to the specific recommendations set forth in Section XI below regarding enhanced representations, covenants, and disclosure, no licensing-related impediment to the proposed $500,000,000 securitization has been identified.
II. Background on the Transaction Structure
The proposed securitization utilizes a two-tier special purpose vehicle ("SPV") structure, which is standard in asset-backed securitizations of this type and is designed to achieve a "true sale" of the receivables for bankruptcy-remoteness purposes.
Originator/Seller. QPF, in its capacity as originator and initial seller, originates premium finance agreements with commercial policyholders in the ordinary course of its business. QPF sells the receivables arising under those agreements to QRH pursuant to a Receivables Sale Agreement.
Depositor/Intermediate SPV. QRH is a Delaware limited liability company (DE SOS File No. 7894228). QRH's sole member is QPF. QRH was organized for the sole purpose of acquiring receivables from QPF and transferring them to QRF 2022-1. QRH is a bankruptcy-remote entity with an independent manager, Eleanor M. Vasquez, a principal of Fortbridge Corporate Services LLC, who must consent to any voluntary bankruptcy filing by QRH. QRH transfers the receivables it acquires from QPF to QRF 2022-1 pursuant to a Receivables Transfer Agreement.
Issuer. QRF 2022-1 is a Delaware limited liability company (DE SOS File No. 7894231). QRF 2022-1's sole member is QRH. QRF 2022-1 was organized for the sole purpose of issuing asset-backed notes secured by the receivables it acquires from QRH and granting a security interest in those receivables and related assets to Calvoneth Trust Company, N.A. (as indenture trustee) for the benefit of the noteholders. QRF 2022-1 is a bankruptcy-remote entity with an independent manager, Timothy R. Callan, also a principal of Fortbridge Corporate Services LLC.
Notes. QRF 2022-1 will issue three classes of notes:
In addition to the $485,000,000 aggregate principal amount of notes, the structure includes $15,000,000 of overcollateralization in the form of a retained interest held by QRH, bringing the total assets supporting the structure to approximately $500,000,000. The aggregate initial pool balance of $612,000,000 includes additional receivables that will support the revolving feature of the structure.
Offering Format. The notes will be offered and sold in reliance on the exemption from registration provided by Rule 144A under the Securities Act of 1933, as amended, and to persons outside the United States in reliance on Regulation S thereunder.
Servicing. QPF will serve as the initial servicer of the receivables pool pursuant to a Servicing Agreement among QPF, QRF 2022-1, and Calvoneth Trust Company, N.A. (as indenture trustee). As servicer, QPF will be responsible for all collections, enforcement of cancellation rights, processing of unearned premium refunds, and administration of the receivables in accordance with its customary servicing practices and the requirements of the Servicing Agreement. Northvane Bank, N.A., a national banking association, will serve as the back-up servicer and will assume servicing duties in the event of a servicer termination event under the Servicing Agreement.
Relevance of Licensing to the Securitization. The transfer of receivables from QPF to QRH, and from QRH to QRF 2022-1, raises several questions that are central to the validity and enforceability of the securitization structure:
• Assignee Licensing. Whether QRH and QRF 2022-1, as purchasers and holders of premium finance receivables, must themselves hold premium finance company licenses under applicable state law. If a license were required but not obtained, the receivables could be unenforceable or subject to challenge in the hands of the assignee, which would undermine the true sale structure and the security interest granted to the indenture trustee.
• Compliance as Eligibility Criterion. Compliance with state rate caps and licensing requirements is both a representation and warranty made by QPF and an eligibility criterion for receivables entering the pool. Any receivable that was originated by QPF without the requisite license, or at a finance charge exceeding the applicable statutory maximum, would be an ineligible receivable and would need to be repurchased by QPF.
• Ongoing Compliance. During the revolving period, QPF must maintain its licenses in all states to continue originating eligible receivables for sale into the pool. The loss of a license in a state with a material concentration of receivables could affect QPF's ability to originate new receivables and could constitute a servicer default or early amortization event.
These issues are analyzed in detail in Sections V through VII below.
III. Overview of State Premium Finance Regulation
A. General Regulatory Framework
Insurance premium finance is regulated exclusively at the state level. There is no federal statute or regulatory framework governing the licensing or operation of premium finance companies. Most states have adopted some version of the National Association of Insurance Commissioners ("NAIC") Model Premium Finance Company Act (the "Model Act"), first promulgated in 1963 and subsequently revised, or have enacted analogous legislation tailored to the specific regulatory priorities of the state. While the specific statutory provisions vary from state to state, the general structure and requirements are broadly consistent across jurisdictions.
Under the Model Act and its state-level counterparts, a "premium finance company" is generally defined as any person or entity engaged in the business of entering into premium finance agreements with insureds, under which the premium finance company agrees to advance funds to an insurer or insurance agent on behalf of the insured in return for the insured's promise to repay the amount advanced, together with a finance charge. This definition is intentionally broad and is designed to capture any entity that, as a regular business activity, provides financing for insurance premiums, regardless of the entity's form of organization or other business activities.
Virtually all states require any person or entity meeting the definition of a "premium finance company" to obtain a license or certificate of authority from the state insurance department (or equivalent regulatory body) before conducting premium finance business in the state. Operating without the required license is typically a violation of state law, which may result in civil penalties, criminal sanctions, and, critically, the potential unenforceability of premium finance agreements originated without a license.
The regulatory requirements imposed on licensed premium finance companies typically include the following:
• Application and Approval. Submission of a detailed application to the state insurance department, including information about the applicant's ownership, management, financial condition, and proposed business operations. Most states require approval of the application before a license is issued.
• Minimum Capital or Net Worth Requirements. Many states require premium finance companies to maintain a minimum level of net worth or paid-in capital, typically ranging from $25,000 to $250,000, depending on the state. QPF's audited net worth significantly exceeds the requirements of all states.
• Surety Bond Requirements. Some states require premium finance companies to post a surety bond, typically in amounts ranging from $10,000 to $100,000, as a condition of licensure. The bond provides a fund for the payment of claims arising from the licensee's premium finance activities.
• Annual Reporting. Licensed premium finance companies are generally required to file annual reports with the state insurance department, providing information about the company's financial condition, the volume and nature of its premium finance business, and compliance with applicable regulatory requirements.
• Rate and Charge Limitations. As discussed in more detail in Section III.B below, most states impose maximum permissible finance charges on premium finance agreements, which licensed premium finance companies must observe.
• Disclosure Requirements. State premium finance statutes typically require specific disclosures in premium finance agreements, including the amount financed, the finance charge, the total of payments, the number and amount of installments, and the insurance policies being financed.
• Cancellation Notice Procedures. Premium finance statutes prescribe specific procedures that must be followed when a premium finance company seeks to cancel a financed insurance policy due to the insured's default. These procedures, which are discussed in Section VIII below, typically require advance written notice to the insured and the insurer and are a critical component of the premium finance regulatory framework.
• Examination Authority. State insurance departments generally have the authority to examine the books, records, and operations of licensed premium finance companies on a periodic basis to ensure compliance with applicable laws and regulations.
B. Rate and Charge Limitations
Most states impose maximum permissible finance charges on premium finance agreements. These limitations are typically expressed as a per annum rate of interest or as a flat rate per $100 of premium financed. The specific maximum rates vary by state, and some states impose different caps depending on whether the financed policy is a commercial or personal lines policy.
For commercial premium finance agreements — which constitute QPF's entire portfolio — the most common statutory caps range from approximately 10% to 18% per annum. The majority of states set the maximum permissible commercial premium finance charge in the range of 12% to 18% per annum. A smaller number of states impose caps below 12%, with the lowest identified cap being approximately 10% per annum.
QPF's weighted average APR across the portfolio is 7.85%, and individual loan APRs range from approximately 5.50% to 11.00%. Based on our review of the applicable rate caps in all 50 states and the District of Columbia, QPF's pricing practices are within the permissible range in every jurisdiction. QPF's rates are well below the statutory maximum in the vast majority of states and within a comfortable margin of the maximum even in the states with the most restrictive caps.
In addition to limitations on the basic finance charge, several states impose additional limitations on ancillary fees and charges that may be assessed in connection with premium finance agreements. These include:
• Late Fees. Many states limit the late charge that may be assessed for a delinquent installment payment to a fixed dollar amount (e.g., $5.00 or $10.00) or a percentage of the overdue installment (e.g., 5% of the past-due installment). Some states impose both a percentage cap and a dollar cap, requiring the premium finance company to charge the lesser of the two.
• Cancellation Charges. Some states limit or prohibit charges assessed in connection with the cancellation of a financed insurance policy upon the insured's default. In states that permit cancellation charges, the amounts are typically modest.
• Returned Check or Payment Fees. Several states limit the fee that may be charged for a returned check or declined electronic payment to a specified amount, which varies by state but is generally in the range of $15.00 to $35.00.
QPF's fee schedules have been reviewed and are designed to comply with the most restrictive state standards for each type of fee. A summary of state-by-state rate caps for commercial premium finance is set forth in Appendix B.
Usury Considerations. In states without specific premium finance statutes, general usury laws would apply to premium finance transactions. However, all 50 states and the District of Columbia have enacted premium finance-specific legislation that establishes a separate and distinct regulatory framework for insurance premium finance, including specific rate limitations applicable to licensed premium finance companies. In states that have enacted such legislation, the premium finance-specific rate limitations generally preempt and supersede the state's general usury statutes for transactions entered into by licensed premium finance companies. Accordingly, as long as QPF maintains its premium finance company licenses and originates its agreements in compliance with the applicable premium finance statutes, the general usury laws of the states should not apply to QPF's premium finance transactions.
C. Scope of Licensing — Commercial vs. Personal Lines
Some states distinguish between premium financing of commercial insurance policies and personal lines insurance policies. This distinction is relevant to QPF because QPF originates premium finance agreements exclusively with U.S. commercial policyholders; it does not finance personal lines insurance premiums.
A few states exempt commercial premium finance transactions from licensing requirements if the premium being financed exceeds a stated threshold. For example, certain states exempt premium finance agreements from licensing if the total premium financed exceeds $25,000 or $100,000, on the theory that commercial policyholders financing large premiums are sophisticated parties capable of protecting their own interests without the need for regulatory oversight. Similarly, a small number of states apply different or less restrictive regulatory requirements to commercial premium finance transactions as compared to personal lines transactions.
Even in states where commercial premium finance exemptions are available, QPF has elected to maintain full premium finance company licenses. This approach ensures operational flexibility (QPF is not limited to transactions above any exemption threshold) and provides compliance certainty. Because QPF holds licenses in all jurisdictions, it is not necessary for QPF to make a determination on a transaction-by-transaction basis as to whether a particular premium finance agreement qualifies for a commercial exemption. This approach also simplifies the eligible receivables analysis for the securitization: each receivable in the pool was originated by a fully licensed premium finance company, regardless of the size of the premium financed.
The eligible receivables criteria for the QRF 2022-1 securitization require that each obligor be a "U.S. commercial policyholder," which is consistent with QPF's origination practices. Personal lines premium finance agreements are excluded from the pool by definition.
IV. QPF Licensing Status — State-by-State Survey
A. Methodology
In connection with the preparation of this memorandum, Calderwood & Harkness conducted a comprehensive review of QPF's licensing status in all 50 states and the District of Columbia. Our review included the following:
1. Statutory Review. We reviewed the applicable insurance codes and premium finance statutes for each of the 50 states and the District of Columbia, with particular attention to: (a) the definition of "premium finance company" and the scope of activities requiring licensure; (b) licensing requirements, including application procedures, minimum capital or net worth requirements, and surety bond requirements; (c) maximum permissible finance charges for commercial premium finance; (d) assignability of premium finance agreements and any requirements applicable to assignees; (e) cancellation notice requirements; and (f) penalties for non-compliance.
2. Internal Records Review. We reviewed QPF's internal licensing database, which is maintained by QPF's compliance department under the supervision of Nolan Whitford, General Counsel of QIH. We also reviewed copies of QPF's active licenses and certificates of authority in each jurisdiction, as provided to us by Mr. Whitford on July 18, 2022.
3. Online Verification. We independently verified QPF's licensing status through the online regulatory databases and license verification portals maintained by the state insurance departments or equivalent regulatory agencies in each jurisdiction. This verification was conducted during the period of July 18 through August 5, 2022.
4. Examination Reports. We reviewed QPF's most recent state examination reports, where available, to identify any compliance deficiencies, findings, or recommendations noted by state examiners. We note that QPF has been subject to regulatory examinations in several states during the past three years, including comprehensive examinations by the Connecticut Insurance Department (2020), the Texas Department of Insurance (2021), and the California Department of Insurance (2022), with no material findings or adverse actions in any jurisdiction.
5. Compliance Filings. We confirmed that QPF's annual reports and renewal filings are current in all jurisdictions as of the date of this memorandum.
Our review was conducted as of July 2022. All license expiration and renewal dates were confirmed as current through at least December 31, 2022, in all jurisdictions, providing a reasonable margin for the anticipated closing of the securitization in September or October 2022.
B. Summary of Findings
Based on our comprehensive review, we confirm the following:
• QPF holds active, unexpired premium finance company licenses (or equivalent authorizations) in all 50 states and the District of Columbia.
• No pending regulatory actions, investigations, consent orders, or license suspensions have been identified in any jurisdiction. QPF has not received any notice of a pending investigation or enforcement action from any state insurance department or other regulatory body.
• All required surety bonds are in place and current. In each state that requires a surety bond as a condition of licensure, QPF maintains a bond in the required amount, issued by a surety company rated at least "A-" by A.M. Best Company. Bond renewal dates have been confirmed as current in all applicable jurisdictions.
• All annual reports and renewal filings are up to date. QPF has filed all required annual reports and license renewal applications in all jurisdictions. No delinquent filings have been identified.
• QPF's compliance department maintains a robust licensing management system that tracks license expiration dates, renewal deadlines, annual filing requirements, and bond renewal dates in all jurisdictions. The system generates automated alerts at least 90 days prior to any license renewal deadline or filing due date.
C. State-by-State Chart (Representative Jurisdictions)
The following table presents QPF's licensing status in representative jurisdictions, with particular emphasis on the states with the largest concentrations of receivables in the proposed securitization pool. A complete chart covering all 50 states and the District of Columbia is set forth in Appendix A.
Key Concentration States. The three states with the largest concentrations of receivables in the pool are:
• Texas: 14.2% of the pool, representing approximately $86,904,000 in receivables. QPF is licensed under Texas Insurance Code Chapter 651 and is in good standing with the Texas Department of Insurance.
• California: 11.8% of the pool, representing approximately $72,216,000 in receivables. QPF is licensed under California Insurance Code Sections 12280 through 12302 and is in good standing with the California Department of Insurance. California imposes a maximum finance charge of 1.5% per month simple interest (equivalent to 18% per annum) for commercial premium finance, which is well above QPF's applicable rates.
• Florida: 9.6% of the pool, representing approximately $58,752,000 in receivables. QPF is licensed under Florida Statutes Section 627.840 et seq. and is in good standing with the Florida Office of Insurance Regulation.
The aggregate concentration of the top three states is 35.6% of the pool. The transaction documents impose a single-state concentration limit of 20% of the pool balance. All states are currently within this limit, with Texas at 14.2% and California at 11.8% being the two highest concentrations.
D. Licenses Requiring Near-Term Renewal
We have reviewed the renewal dates for all of QPF's premium finance company licenses to identify any licenses with renewal deadlines within the next 12 months — that is, within the expected revolving period commencement. The following licenses have renewal deadlines prior to August 10, 2023:
• Several states have December 31, 2022 renewal dates, including Alabama, Delaware, Ohio, Texas, Virginia, and the District of Columbia. QPF has confirmed that renewal applications for all of these licenses have been submitted or will be submitted in accordance with each state's required lead time.
• States with renewal dates in the first quarter of 2023 include Georgia (March 31, 2023) and Pennsylvania (March 31, 2023).
• States with renewal dates in the second quarter of 2023 include Connecticut (June 30, 2023), Illinois (June 30, 2023), and Washington (June 30, 2023).
• Certain states, including California and New York, issue perpetual licenses that do not expire but require annual or biennial filing of reports or renewal statements.
QPF's compliance department has confirmed that it has established procedures for timely filing of all renewal applications and that no licenses are at risk of lapsing. Based on our review of QPF's renewal procedures and historical track record, we do not identify any near-term risk of license lapse in any jurisdiction.
V. Assignee Licensing Requirements — Securitization Analysis
A. The Core Question
A fundamental question in any securitization of premium finance receivables is whether the purchasers or assignees of the receivables — here, QRH and QRF 2022-1 — must themselves hold premium finance company licenses under applicable state law. This question arises because the state premium finance statutes generally regulate the "business of entering into premium finance agreements" and the activities of "premium finance companies," and the transfer of receivables to an unlicensed entity could, in theory, be challenged as a transaction that requires the transferee to hold a license.
The answer to this question is critical to the validity of the true sale structure and the enforceability of the receivables in the hands of the assignee. If a state were to require assignee licensing, and QRH or QRF 2022-1 were not licensed, the consequences could include: (a) unenforceability of the receivables in that state against the obligors; (b) inability of the assignee to exercise cancellation rights or collect unearned premium refunds; (c) potential regulatory penalties; and (d) a challenge to the true sale characterization of the transfer, which could undermine the bankruptcy-remoteness of the structure.
B. General Principles
The weight of authority across the states supports the conclusion that a purchaser or assignee of premium finance agreements is not required to hold a premium finance company license, provided that the assignee is not itself originating new premium finance agreements or otherwise engaging in the "business" of premium financing. The basis for this conclusion includes the following:
Statutory Language. Many state premium finance statutes define the regulated activity as "entering into" or "making" premium finance agreements, which is a forward-looking, origination-focused definition. The purchase of existing premium finance receivables from a licensed originator does not, under this reading, constitute "entering into" or "making" a new premium finance agreement. Rather, it is a purchase of a financial asset in the secondary market.
Express Assignment Provisions. A significant number of state premium finance statutes expressly permit the assignment of premium finance agreements by the premium finance company to third parties, without requiring the assignee to be licensed. These provisions are a clear indication of the legislature's intent to permit secondary market transactions in premium finance receivables without imposing licensing burdens on the purchaser. States with express assignment provisions include, among others, Texas, California, Florida, New York, Illinois, Ohio, Pennsylvania, and Virginia.
Regulatory Practice. Even in states where the statute does not expressly address assignment, the prevailing regulatory practice of state insurance departments has generally been to not require assignee licensing for securitization purchasers or other secondary market acquirers of premium finance receivables. This practice is consistent with the general principle that premium finance licensing requirements are directed at the origination and servicing of premium finance agreements, not the passive holding of receivables.
Servicer as Licensed Entity. In the context of a securitization, the licensed premium finance company (here, QPF) typically continues to service the receivables, including performing all collection activities, exercising cancellation rights, and processing unearned premium refunds. Because the servicer — not the assignee — is the entity that interacts with insureds and insurers and performs the functions of a premium finance company, the risk that the assignee would be viewed as engaging in the "business" of premium financing is further reduced.
C. States Requiring or Potentially Requiring Assignee Licensing
Notwithstanding the general principles described above, our review has identified a small number of states — approximately four — where the statutory language could be read to require or arguably require assignee licensing, or where regulatory guidance on the point is ambiguous or absent. We analyze each of these states below.
1. Minnesota. Statutory Citation. Minn. Stat. §§ 59A.01 to 59A.16.
Analysis. The Minnesota premium finance statute defines "premium finance company" broadly as "a person engaged in the business of entering into premium finance agreements or acquiring premium finance agreements from other premium finance companies." The inclusion of the phrase "acquiring premium finance agreements from other premium finance companies" in the definition of "premium finance company" could be read to suggest that an entity that acquires premium finance agreements from a licensed premium finance company is itself required to be licensed.
However, the phrase "engaged in the business of . . . acquiring premium finance agreements" is a business-conduct-focused definition. QRH and QRF 2022-1 are special purpose entities organized for the sole purpose of the securitization; they do not hold themselves out as being "in the business of" acquiring premium finance agreements in the ordinary sense. Moreover, the Minnesota statute was adopted before the advent of modern securitization technology, and the broad statutory language was likely directed at bulk purchases of premium finance portfolios by competitor premium finance companies, not at securitization vehicles.
Pool Exposure. QPF's receivables originated in Minnesota represent approximately 1.4% of the pool balance, or approximately $8,568,000.
Risk Assessment. Low. The broad statutory language creates some theoretical ambiguity, but we are not aware of any Minnesota regulatory guidance or enforcement action requiring securitization vehicles to obtain premium finance licenses. QPF's continued role as servicer mitigates the risk.
Recommended Mitigation. QPF's continued servicing of Minnesota receivables; standard assignment language in the premium finance agreements; monitoring of Minnesota regulatory developments. If additional comfort is desired, QPF could seek informal regulatory guidance from the Minnesota Department of Commerce, though we do not believe this is necessary at this time.
2. Montana. Statutory Citation. Mont. Code Ann. §§ 33-17-701 to -717.
Analysis. Montana's premium finance statute requires a license for any person "engaged in the business of financing insurance premiums in this state." The term "financing insurance premiums" is not defined with specificity, and the statute does not contain an express provision addressing the assignment of premium finance agreements. The absence of an express assignment provision, combined with the broad definition of the regulated activity, creates some ambiguity regarding whether the purchase of existing premium finance receivables could be characterized as "financing insurance premiums."
Pool Exposure. QPF's receivables originated in Montana represent approximately 0.2% of the pool balance, or approximately $1,224,000.
Risk Assessment. Low. The pool exposure is de minimis, and the broad statutory language is more likely directed at origination activity than secondary market purchases.
Recommended Mitigation. QPF's continued servicing of Montana receivables; the immaterial nature of the pool exposure makes this a minimal concern.
3. Wisconsin. Statutory Citation. Wis. Stat. § 625.01 et seq.
Analysis. Wisconsin's premium finance statute requires licensing for any person "who engages in the business of a premium finance company" and defines a premium finance company as a person who "acquires" premium finance agreements. This language, like Minnesota's, could potentially be read to encompass securitization purchasers. However, the statute also contains a provision permitting licensed premium finance companies to "sell, assign, or transfer" premium finance agreements "without obtaining consent of the insured," which suggests a legislative expectation that secondary market transfers will occur and is inconsistent with a requirement that all assignees be licensed.
Pool Exposure. QPF's receivables originated in Wisconsin represent approximately 1.1% of the pool balance, or approximately $6,732,000.
Risk Assessment. Low. The assignment provision in the statute supports the conclusion that assignee licensing is not required, notwithstanding the broad definitional language.
Recommended Mitigation. Standard assignment language; QPF's continued servicing.
4. Kansas. Statutory Citation. Kan. Stat. Ann. §§ 40-2101 to -2112.
Analysis. Kansas defines "premium finance company" as any person "engaged in the business of entering into or purchasing premium finance agreements." The inclusion of "purchasing" in the statutory definition raises the same concern as in Minnesota and Wisconsin. Kansas does not have a separate provision expressly authorizing assignment without assignee licensing. However, the Kansas Insurance Department has not, to our knowledge, taken the position that securitization vehicles must be licensed, and the practical focus of the statute is on consumer protection in the origination context.
Pool Exposure. QPF's receivables originated in Kansas represent approximately 0.6% of the pool balance, or approximately $3,672,000.
Risk Assessment. Low to medium. The statutory language is the most concerning of the states identified, but the pool exposure is very small.
Recommended Mitigation. QPF's continued servicing of Kansas receivables; the de minimis pool exposure limits the practical significance of the issue. QPF could seek informal guidance from the Kansas Insurance Department if desired.
Conclusion. In all four states identified above, the risk of an assignee licensing requirement is assessed as low. The aggregate pool exposure to these four states is approximately 3.3% of the pool balance, or approximately $20,196,000. In no case is the risk sufficient to warrant obtaining a premium finance company license for QRH or QRF 2022-1. The prevailing regulatory practice in all identified states does not require assignee licensing for securitization purchasers, and the structure — with QPF continuing to service the receivables and interact with obligors and insurers — effectively mitigates the concern.
D. Impact on SPV Structure
QRF 2022-1 and QRH are not licensed as premium finance companies in any state, and they are not intended to originate, solicit, negotiate, or enter into any premium finance agreements. Their sole function in the transaction structure is to hold the receivables, issue the notes (in the case of QRF 2022-1), and serve as the intermediate SPV (in the case of QRH). Neither entity engages in the "business" of premium financing in any commercially meaningful sense.
QPF, as servicer, will continue to perform all functions associated with the origination and servicing of the premium finance agreements. This includes:
• Collection of installment payments from obligors
• Issuance of cancellation notices in compliance with state-specific requirements
• Processing of unearned premium refunds from insurers
• Communication with insureds, insurance agents, and insurance carriers
• Enforcement of rights under the premium finance agreements in the event of obligor default
• Compliance with all applicable state premium finance laws in the performance of servicing duties
Because QPF — a fully licensed premium finance company in all jurisdictions — is the entity performing these functions, the risk that QRH or QRF 2022-1 would be viewed as engaging in the business of premium financing is minimal.
Back-Up Servicer Considerations. In the event that a servicer termination event occurs and Northvane Bank, N.A. assumes the role of servicer, a separate analysis of Northvane's licensing status and obligations would be required. As a national banking association chartered under the National Bank Act, Northvane may benefit from federal preemption of state premium finance licensing requirements. The Office of the Comptroller of the Currency ("OCC") has generally taken the position that national banks may engage in activities permissible for national banks without obtaining state licenses, and premium finance lending and servicing have been recognized as activities within the authorized lending powers of national banks. However, the scope of federal preemption in the premium finance context has not been definitively tested in all states, and a state-by-state analysis would be warranted at the time Northvane assumes servicing duties. This issue is beyond the scope of the present memorandum, but we flag it for future attention.
VI. Usury Compliance Analysis
A. Framework
Each receivable in the proposed securitization pool must comply with the applicable state's maximum permissible finance charge or interest rate for premium finance agreements. Non-compliance with applicable rate limitations could result in significant adverse consequences, including:
• Unenforceability. A premium finance agreement originated at a finance charge exceeding the applicable statutory maximum may be void or voidable under state law, rendering the receivable uncollectible.
• Penalties. Many state premium finance statutes impose specific penalties for rate violations, which may include forfeiture of all finance charges (not merely the excess), treble damages in some states, and liability for the obligor's attorney's fees.
• Criminal Sanctions. In a number of states, willful violation of premium finance rate limitations constitutes a criminal offense, which could expose QPF's officers and directors to personal liability.
• Pool Eligibility. A receivable originated at a rate exceeding the applicable statutory maximum would not satisfy the eligible receivables criteria and would need to be repurchased by QPF.
For these reasons, usury compliance is a critical element of both QPF's origination practices and the eligible receivables criteria for the securitization.
B. QPF's Pricing Practices
QPF employs a disciplined pricing methodology that is designed to ensure compliance with all applicable state rate limitations. The key elements of QPF's pricing practices include:
• Weighted Average APR. QPF's weighted average APR across the entire receivables portfolio is 7.85%, which is well below the maximum permissible rate in all 50 states and the District of Columbia for commercial premium finance agreements. The weighted average APR for the initial securitized pool is consistent with this portfolio-wide figure.
• Individual Loan APR Range. Individual loan APRs within QPF's portfolio range from approximately 5.50% to 11.00%. The variation in APRs reflects differences in the credit profile of the obligor, the size and term of the loan, and competitive market conditions. Even at the high end of the range (approximately 11.00%), QPF's rates are within the permissible limits in all states.
• Automated Rate-Cap Compliance System. QPF's loan origination system includes an automated rate-cap compliance module that verifies, at the time of origination, that the proposed finance charge for each premium finance agreement does not exceed the maximum permissible rate in the obligor's state. The system is programmed with the applicable statutory rate cap for each state and is updated promptly to reflect any legislative changes. If a proposed finance charge exceeds the applicable state cap, the system generates an automatic error alert and does not permit the agreement to be processed until the rate is adjusted to a compliant level.
• Quarterly Compliance Audits. QPF's compliance department conducts quarterly audits of rate compliance across the portfolio. These audits include sampling of individual loan files to verify that the finance charges assessed are consistent with the rates documented in the premium finance agreements and that all rates comply with the applicable state caps. QPF has reported that no material rate compliance violations have been identified in any quarterly audit during the past three years.
C. Rate Cap Summary
The following table summarizes the maximum permissible commercial premium finance rates by state, organized by rate cap level. A complete state-by-state table is set forth in Appendix B.
States with Maximum Rates at or Above 15% Per Annum (30 states and D.C.):
These states impose maximum permissible finance charges for commercial premium finance agreements of 15% per annum or higher. Given QPF's maximum individual loan APR of approximately 11.00%, there is a significant margin of compliance in these jurisdictions. States in this category include, among others, Alabama (18%), Arizona (18%), California (18% — expressed as 1.5% per month simple interest), Colorado (15%), Connecticut (15%), Delaware (15%), the District of Columbia (15%), Hawaii (18%), Idaho (18%), Maine (18%), Nevada (18%), New York (per statute), Oklahoma (18%), Oregon (18%), and Virginia (15%).
States with Maximum Rates Between 10% and 15% Per Annum (18 states):
These states impose maximum permissible finance charges for commercial premium finance agreements of between 10% and 15% per annum. QPF's rates remain comfortably within the permissible range in all of these states. States in this category include, among others, Georgia (12%), Indiana (12%), Iowa (12%), Kentucky (12%), Michigan (12%), Missouri (12%), Nebraska (12%), New Hampshire (12%), New Jersey (12%), North Carolina (12%), Ohio (15%), Pennsylvania (12%), South Carolina (12%), Tennessee (12%), Vermont (12%), West Virginia (12%), Wisconsin (12%), and Wyoming (12%).
States with Maximum Rates Below 10% Per Annum (2 states):
Based on our review, no state imposes a maximum permissible commercial premium finance rate below 10% per annum. The lowest caps identified are in the range of 10% per annum, applicable in a very small number of states. Even in these states, QPF's weighted average APR of 7.85% and its maximum individual loan APR of approximately 11.00% are within the permissible limits, as QPF's origination system ensures that no loans originated in these states are priced above the applicable cap.
No State Has a Cap Below QPF's Weighted Average APR. We confirm that no state imposes a maximum permissible commercial premium finance rate that is lower than QPF's weighted average APR of 7.85%. QPF's rates are fully compliant in all jurisdictions.
D. Additional Fees and Charges
In addition to the basic finance charge, QPF assesses certain ancillary fees in connection with its premium finance agreements, including late fees for delinquent installment payments, returned payment fees for checks or electronic payments that are declined, and in certain circumstances, cancellation processing fees. Our analysis of the permissibility of these fees under applicable state law is summarized below.
Late Fees. QPF's standard late fee is the lesser of (a) 5% of the delinquent installment or (b) $15.00, assessed once per delinquent installment after a grace period of 10 days from the installment due date. This fee structure is designed to comply with the most restrictive state standards. Several states limit late charges to a fixed dollar amount (e.g., $5.00 in a small number of states), and QPF adjusts its late fee assessment in those states to comply with the applicable limitation. QPF's loan origination and servicing systems are programmed to apply the appropriate state-specific late fee schedule to each premium finance agreement.
Returned Payment Fees. QPF charges a returned payment fee of $25.00 for each check or electronic payment that is returned or declined by the obligor's financial institution. This fee is within the permissible range in all states. Several states limit returned payment fees to amounts ranging from $15.00 to $35.00; QPF's $25.00 fee falls within this range in all jurisdictions.
Cancellation Processing Fees. QPF does not assess a separate cancellation processing fee in most jurisdictions. In the small number of states that expressly permit cancellation charges, QPF reserves the right to assess a fee not exceeding the amount permitted by applicable law, but in practice QPF has generally not exercised this right.
All of QPF's ancillary fee schedules have been reviewed and are designed to comply with the most restrictive state standards for each type of fee. We recommend that QPF's fee schedules be periodically reviewed and updated to reflect any legislative changes.
E. Usury Savings Clauses
QPF's standard form premium finance agreements contain a usury savings clause, which provides, in substance, that:
"Notwithstanding any provision of this Agreement to the contrary, in no event shall the total of all finance charges, interest, fees, and other charges assessed under this Agreement exceed the maximum amount permitted by applicable law. If any such charge is assessed in excess of the maximum permitted amount, such charge shall be automatically reduced to the maximum permitted amount, and any amount collected in excess of the maximum permitted amount shall be applied to reduce the outstanding principal balance of this Agreement or, if such balance has been paid in full, shall be refunded to the Insured."
This usury savings clause serves as a "backstop" against inadvertent overcharges and provides additional protection to both QPF and the noteholders in the securitization. In the event that a premium finance agreement is later determined to have been originated at a rate exceeding the applicable state cap (whether due to a legislative change, a misapplication of the rate cap, or a system error), the usury savings clause would operate to reduce the finance charge to the maximum permitted amount, preserving the enforceability of the underlying agreement.
The Receivables Sale Agreement between QPF and QRH includes a representation by QPF that each receivable sold to QRH was originated in compliance with all applicable usury and rate limitations, including all state-specific maximum finance charge provisions. This representation is a condition of the receivable's eligibility for the pool and serves as the basis for a repurchase obligation if the representation is subsequently determined to be inaccurate.
VII. Interplay with Eligible Receivables Criteria
A. Overview of Eligibility Criteria
The eligible receivables criteria are set forth in the Receivables Sale Agreement between QPF and QRH and the Receivables Transfer Agreement between QRH and QRF 2022-1. These criteria are substantially identical in both agreements and are also reflected in the Final Term Sheet (v3, dated September 2, 2022) circulated to the rating agencies and the lead placement agent.
Under the eligible receivables criteria, a receivable is an "Eligible Receivable" only if it satisfies all of the following criteria (among others) as of the applicable cut-off date or purchase date:
(i) The receivable was originated by QPF in the ordinary course of its business in accordance with QPF's customary credit and underwriting practices.
(ii) The receivable is denominated and payable in United States dollars.
(iii) The receivable is secured by unearned premium refund rights arising under the financed insurance policy, pursuant to a valid assignment of such rights from the insured to QPF.
(iv) The original term of the receivable does not exceed 12 months.
(v) The obligor under the receivable is a United States commercial policyholder (i.e., the financed insurance policy is a commercial lines insurance policy).
(vi) The receivable is not in default, defined as a receivable for which any installment payment is more than 60 days past the applicable due date.
(vii) The receivable was originated in compliance with all applicable laws, including all applicable premium finance licensing statutes and usury/rate cap limitations in the state of origination.
Additional eligibility criteria not directly relevant to this memorandum include requirements relating to the financial strength rating of the insurer, the type of insurance policy being financed, the absence of material disputes or offsets, and the absence of fraud.
B. Licensing-Related Eligibility Requirements
Criterion (vii) is the key nexus between the state licensing and usury compliance analysis set forth in this memorandum and the eligibility of receivables for inclusion in the securitized pool. Under this criterion, a receivable is eligible for the pool only if it was originated by QPF while QPF held the requisite premium finance company license (or equivalent authorization) in the obligor's state, and the finance charge assessed on the receivable does not exceed the applicable statutory maximum.
This criterion serves a dual purpose. First, it protects the noteholders by ensuring that only legally enforceable receivables are included in the pool. A receivable originated without the required license, or at a rate exceeding the applicable state cap, may be void, voidable, or subject to penalty under state law, and its inclusion in the pool would impair the value of the collateral. Second, the criterion supports the representations and warranties made by QPF, which serve as the basis for QPF's repurchase obligation in the event of a breach.
Recommendation. While criterion (vii) captures the licensing and usury compliance requirement in general terms, we recommend that it be supplemented with more specific language to provide additional clarity and protection. Specifically, we recommend that the Receivables Sale Agreement include a separate representation by QPF that, as of the date of each sale of receivables to QRH:
(a) QPF held all required premium finance company licenses (or equivalent authorizations) in the state or jurisdiction in which each receivable being sold was originated;
(b) Each receivable being sold was originated in compliance with all applicable state premium finance statutes, including all rate and charge limitations, disclosure requirements, and cancellation notice provisions; and
(c) The premium finance agreement evidencing each receivable contains a usury savings clause providing that the finance charge shall not exceed the maximum amount permitted by applicable law.
These representations would supplement, not replace, the general compliance criterion in clause (vii) and would provide a more specific basis for the repurchase obligation in the event of a breach.
C. Ongoing Compliance During the Revolving Period
The revolving period for the QRF 2022-1 securitization is 24 months from the closing date. During the revolving period, QPF will continue to originate new premium finance agreements in the ordinary course of its business and will sell the receivables arising under those agreements to QRH (and indirectly to QRF 2022-1) for inclusion in the pool, subject to the eligible receivables criteria.
This revolving structure means that QPF's licensing status is not merely a backward-looking, historical fact to be confirmed at closing; it is an ongoing requirement that must be satisfied throughout the two-year revolving period. If QPF's license in a particular state were to be revoked, suspended, or allowed to lapse during the revolving period, receivables originated in that state after the date of revocation, suspension, or lapse would not satisfy the eligibility criteria and could not be sold into the pool. If the affected state has a material concentration of receivables, the inability to sell new receivables from that state could affect the performance of the pool and the adequacy of the collateral supporting the notes.
Recommendation. The Servicing Agreement and the Receivables Sale Agreement should include the following provisions to address this risk:
(a) Affirmative Covenant. QPF shall covenant to maintain all premium finance company licenses (and equivalent authorizations) required for the origination and servicing of premium finance agreements in all states in which QPF conducts business, throughout the term of the transaction.
(b) Prompt Notice. QPF shall provide prompt written notice (not later than five business days) to QRF 2022-1 and Calvoneth Trust Company, N.A. (as indenture trustee) of any revocation, suspension, non-renewal, or material adverse modification of any premium finance company license held by QPF, or of any material regulatory action, investigation, or proceeding commenced against QPF by any state insurance department or other regulatory body.
(c) Early Amortization Trigger. If QPF's premium finance company licenses in states representing more than 10% (or such other threshold as may be agreed upon) of the then-current pool balance are suspended, revoked, or otherwise terminated, such event should constitute a servicer default under the Servicing Agreement and/or an early amortization event under the Indenture. This trigger is consistent with the structural protections required by Brindoval Ratings (Andrew Petrosian, lead analyst) and Pinnacle Rating Services (Monica Sung, lead analyst) to support the expected ratings of the notes.
D. Concentration Limits and Licensing