Existing law, the California Finance Lenders Law, provides for the licensure and regulation of finance lenders and brokers brokers, which includes any person who is engaged in the business of making consumer loans, by the Commissioner of Business Oversight and makes a willful violation of its provisions a crime. Existing law authorizes the commissioner to investigate at any time the loans and business, and examine the books, accounts, records, and files used in the business of every person engaged in the business of a finance lender or broker for the purpose of discovering violations or securing information required by the commissioner in the administration and enforcement of the California Finance Lenders Law, as provided.

This bill would require the commissioner to examine at least every 48 months the affairs of every person engaged in the business of a finance lender or broker for compliance under that law, and would authorize the commissioner to examine those persons as often as the commissioner deems necessary and appropriate for those purposes.

Existing law, the California Finance Lenders Law, provides for the licensure and regulation of finance lenders and brokers by the Commissioner of Business Oversight and makes a willful violation of its provisions a crime. Under existing law, a finance lender includes any person who is engaged in the business of making consumer loans. With respect to consumer loans of less than a bona fide principal amount of $2,500, existing law authorizes every licensee under that law who lends money to contract for and receive charges at a rate not exceeding the sum of certain percentages on specified parts of the unpaid principal balance, or at a charge determined by an alternative method.

This bill would repeal those consumer loan provisions and would instead require the commissioner to establish an installment loan rate review process for licensees that intend to offer unsecured full amortizing installment loans of a minimum principal upon origination of at least $300 and a maximum principal amount of $2,500. The bill would require a licensee applying to make loans under this process to provide to the commissioner specified information in order for its loan product to be considered for approval, including information about the proposed loan fees and other charges associated with the loan and the length of the loan.

This bill would require the rate review applications submitted to the commissioner to be in a manner prescribed by the commissioner, and accompanied by a fee, in an amount calculated by the commissioner to cover its administration costs. The bill would provide that an installment loan product approved for a licensee under this process is deemed approved for any licensee in good standing, and would require the commissioner to maintain a list on its Internet Web site of approved loan products.

Because a willful violation of these provisions would be a crime, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law, the California Finance Lenders Law, provides for the licensure and regulation of finance lenders and brokers by the Commissioner of Business Oversight and makes a willful violation of its provisions a crime. Under existing law, a finance lender includes any person who is engaged in the business of making consumer loans. With respect to consumer loans of less than a bona fide principal amount of $2,500, existing law authorizes every licensee under that law who lends money to contract for and receive charges at a rate not exceeding the sum of certain percentages on specified parts of the unpaid principal balance, except as specified. or at a charge determined by an alternative method.

Existing law, the California Finance Lenders Law, provides for the licensure and regulation of finance lenders and brokers by the Commissioner of Business Oversight. Under existing law, a finance lender includes any person who is engaged in the business of making consumer loans. With respect to consumer loans, existing law authorizes every licensee under that law who lends money to contract for and receive charges at a rate not exceeding the sum of certain percentages on specified parts of the unpaid principal balance, except as specified.

This bill would make a nonsubstantive change to that latter provision.

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Glazer, Chair

2015 - 2016 Regular

Bill No: AB 268 Hearing Date: June 15, 2016

Subject: California Finance Lenders Law: violations

SUMMARY

Authorizes new rates, fees, and lending practices for unsecured, consumer-purpose installment loans made under the California Finance Lenders Law (CFLL) in principal amounts of $3,000 or less, as specified.

DESCRIPTION

1. Establishes a new article under the CFLL, applicable to unsecured consumer loans with a maximum principal balance upon origination of $3,000 or less.
   
2. Provides that this new article does not apply to loans made pursuant to the Pilot Program for Increased Access to Responsible, Small-Dollar Loans (the pilot program), and provides that any sections of the CFLL, which are in conflict with the new article, do not apply to loans made pursuant to the new article.
   
3. Requires loans made pursuant to the new article to meet all of the following criteria:
   
   1. Interest must accrue on a simple-interest basis, through the application of a daily periodic rate to the unpaid principal balance.
      
   2. Prepayment penalties and balloon payments are prohibited.
      
   3. Licensees must disclose the annual percentage rate (APR), periodic payment amount, and total finance charge to each prospective borrower in writing at the time of loan application and must inform the consumer that he or she has the right to rescind his or her loan by the end of the business day following the date the loan is consummated, as specified.
      
   4. Loans must have minimum lengths and maximum allowable charges, as follows:
      

• 1. Licensees must reduce the interest rate on a loan with a principal amount between $1,001 and $3,000 and a monthly interest rate in excess of 8.25% per month after every three on-time payments made by a borrower, until the rate is reduced to 36% APR.
     
  2. Licensees must give a discounted rate to a borrower who has made on-time payments and successfully completed a previous loan.
     
  3. Licensees must underwrite each loan to determine a borrower’s ability and willingness to repay that loan according to its terms. A licensee may not make a loan if it determines through its underwriting that a borrower’s total monthly debt service payments at the time of origination, including the loan for which the borrower is being considered, and across all outstanding forms of credit that can be independently verified, will exceed 50% of the borrower’s gross monthly income.
     
     1. In making this determination, a licensee must verify the information provided by the borrower using a credit report from at least one of the national credit reporting agencies or an alternative credit reporting agency approved by the Commissioner of Business Oversight (commissioner).
        
     2. Notwithstanding the aforementioned requirements, a licensee may use a proprietary underwriting model approved by the commissioner to determine a borrower’s ability to repay.
        
  4. Licensees must report each borrower’s payment performance to at least one national credit reporting agency or to an alternative credit reporting agency designated by the commissioner. Licensees must inform each borrower of the name of the agency or agencies to which it will report the borrower’s payment history.
     
  5. A borrower who is unable to successfully repay a loan of up to $600 may request, and a licensee must provide, a no-cost repayment plan which converts the loan from a minimum length of 90 days to a minimum length of 120 days.
     
  6. Licensees may charge an administrative fee equal to the lesser of 6% of the principal amount of a loan or $75, on any loan whose monthly interest rate is less than 8.25% per month. Administrative fees may be charged no more frequently than once every six months in connection with a new loan origination and no more frequently than once every eight months in connection with a refinanced loan.
     
  7. Licensees may charge a delinquency fee of up to $12 for a period in default not less than 7 days or up to $18 for a period in default not less than 14 days. No more than one delinquency fee may be imposed per delinquent payment, no more than two delinquency fees may be imposed during any period of 30 consecutive days, and no delinquency fee may be imposed on a borrower who is 180 days or more past due, if that fee would result in the sum of the borrower’s remaining unpaid principal balance, accrued interest, and delinquency fees exceeding 180% of the original principal amount of the borrower’s loan.
     
  8. Licensees may refinance loans, subject to restrictions that are identical to those imposed on pilot program lenders.
     
  9. Licensees may use the services of referral partners, pursuant to rules that are similar to those imposed on pilot program lenders with respect to their use of finders (the pilot calls these individuals finders, while this bill calls them referral partners). The following represent the key differences between the provisions of this bill applicable to referral partners and the provisions of the pilot program with respect to finders:
     
     1. The pilot program requires licensees to ensure that a loan is not consummated until the licensee has completed a two-way communication, as defined, with a loan applicant. This bill lacks a similar requirement.
        
     2. The pilot program requires finders who will disburse loan proceeds, accept loan payments, or provide loan disclosures on behalf of licensees to be licensed, as specified. This bill includes those licensing requirements, but additionally authorizes the commissioner to allow licensees to use referral partners in the aforementioned capacities, if those referral partners register with the commissioner in a manner and on a form prescribed by the commissioner.
        
     3. The pilot program caps the compensation that may be paid by licensees to finders, and requires licensees to calculate the compensation paid to finders on a per loan basis, to ensure that the total amount does not exceed $65 per loan, nor does it exceed the sum of the origination fee plus interest charges paid by a borrower in connection with that loan. This bill caps the total compensation that may be paid by a licensee to a referral partner at $65 per loan, on average, assessed annually, and does not prohibit the compensation paid per loan from exceeding the sum of the origination fee plus interest charges paid by a borrower in connection with a loan.
        
  10. No person in connection with or incidental to the making of any loan made pursuant to the bill may require a borrower to contract for credit insurance, as defined, or for insurance on tangible personal or real property, as defined.
      
  11. Licensees are subject to identical prohibitions regarding waivers of rights and discrimination against borrowers as those are pilot program lenders.
      
      

EXISTING LAW

1. Provides for the CFLL (Financial Code Sections 22000 et seq.), administered by the Department of Business Oversight (DBO). The CFLL includes separate rules applicable to consumer installment loans (Financial Code Sections 22200 through 22470) and commercial loans (Financial Code Sections 22500 through 22650). The following are the key rules applied to consumer loans made pursuant to the CFLL:
   
   1. CFLL licensees who make unsecured or secured consumer loans under $2,500 are capped at interest rates which range from 12% to 30% per year, depending on the unpaid balance of the loan (Sections 22303, 22304, and 22308). Administrative fees are capped at the lesser of 5% of the principal amount of the loan or $50 (Section 22305).
      
   2. In addition to the requirements in “a” above, CFLL licensees who make unsecured or secured consumer loans under $5,000 are prohibited from imposing compound interest or charges (Section 22309); limited in the amount of delinquency fees they may impose (Section 22320.5; delinquency fees are capped at a maximum of $10 on loans 10 days or more delinquent or $15 on loans 15 days or more delinquent); required to prominently display their schedule of charges to borrowers (Section 22325); prohibited from splitting loans with other licensees (Section 22327); prohibited from requiring real property collateral (Section 22330), and limited to a maximum loan term of 60 months plus 15 days (Section 22334).
      
   3. In addition to the requirements in “a” and “b” above, CFLL licensees who make unsecured or secured consumer loans under $10,000 are limited in their ability to conduct other business activities on the premises where they make loans (Section 22154); must require loan payments to be paid in equal, periodic installments (Section 22307); and must meet certain standards before they may sell various types of insurance to the borrower (Sections 22313 and 22314);
      
   4. Generally speaking, the terms of consumer loans of $10,000 or above are not restricted under the CFLL.
      
2. In lieu of the rates and fees summarized in 1a immediately above, CFLL licensees accepted to participate in the pilot program may make unsecured consumer loans in amounts between $300 and $2,500 (Financial Code Sections 22365 through 22381). Pilot program loans are capped at interest rates that currently range from 32.25% to 36% per year, depending on the unpaid principal balance of the loan. Administrative fees are capped at the lesser of 7% or $90 on the first loan made by a lender to a borrower and at the lesser of 6% or $75 on the second and subsequent loans made to a borrower by the same lender. Late fees are capped at a maximum of $14 on loans that are at least 7 days delinquent or a maximum of $20 on loans that are at least 14 days delinquent. Lenders are required to adhere to rigorous underwriting requirements; notify borrowers of amounts due prior to payment due dates; offer borrower’s credit education prior to loan disbursement; report each borrower’s payment performance to at least one consumer reporting agency that compiles and maintains files on consumers on a nationwide basis; and submit detailed data regarding borrower performance to DBO on an annual basis.

COMMENTS

1. Purpose: AB 268 is intended to reform the unsecured lending provisions of the CFLL up to $3,000, by replacing the existing provisions of the CFLL applicable to these loans with new rates, charges, and fees.
   
2. Background: This bill was introduced in an attempt to increase the small dollar credit options available to persons who are struggling to make ends meet, and are unable to obtain low-interest credit cards, bank or credit union loans, or other forms of relatively low-cost credit. Relatively few installment loans are made in California with principal amounts under $2,500 (345,796 unsecured installment loans of less than $2,500 were made during 2014, relative to 12.4 million payday loans made during the same period). The relatively small number of small dollar installment loans made in California represents a challenge to the significant population of people who are unable to access affordable credit through banks and credit unions. Californians who lack credit scores, or have very thin credit files or damaged credit, currently have very few affordable options when they need to borrow money. Credit cards are often unavailable to this population, or, if available, bear very high interest rates and fees. When their spending needs outpace their incomes, these Californians commonly turn to payday loans, auto title loans, or high-interest rate, unsecured installment loans. All three of these options come with high costs, and none rewards timely loan repayment with a credit score increase.
   
   Although California created a pilot program in 2010 to increase the number of affordable, responsible, small dollar installment loans made in amounts of up to $2,500, that program has been slow to grow. According to this bill’s author, “thus far, few licensees are in the pilot program and most of the loan volume is conducted by one company (Oportun) that helps build credit for borrowers with thin or no credit files. Lending to this market space is vital but does not help consumers that may have damaged credit but still need a loan.” Although the pilot program has shown promise in helping borrowers who qualify for its loans obtain and improve their credit scores, borrowers who cannot qualify for pilot program loans are left without installment loan options from licensed California lenders.
   
   The characteristics and needs of the population on which this bill is focused were described in a 2012 study by the Center for Financial Services Innovation (CFSI) titled, “A Complex Portrait: An examination of Small-Dollar Credit Consumers” (http://www.cfsinnovation.com/CMSPages/GetFile.aspx?guid=f937e096-abcf-46cc-84d0-1c6c3aec2d3e). In that study, CFSI surveyed over 1,100 small dollar credit (SDC) consumers and an additional 500 non-SDC consumers for comparison. CFSI defined a SDC consumer as one who had used a payday loan, pawn loan, direct deposit advance, auto title loan, or non-bank installment loan of $5,000 or less at least once during the prior 12 months. Among CFSI’s key findings a) only 27% of SDC consumers had a credit card, while 61% of non-SDC consumers had one; b) the top three uses for an SDC product included utility bills, general living expenses, and rent; 3) the top three reasons for funds shortage included living expenses consistently greater than income, bill or payment due before paycheck received, and unexpected events such as emergency expenses or income drops; 4) users of very short-term loans were almost twice as likely as other SDC consumers to borrow for routine expenses such as utility bills or general living expenses; 5) in addition to borrowing, SDC consumers also reported cutting back on their general spending and going without something they needed in order to address their cash shortfalls; 6) while 66% of SDC consumers had no savings, more than half of those with savings chose not to use it all and preferred to rely on credit, instead; and 7) the top three loan attributes that mattered most to SDC consumers were quick access to money, ability to qualify, and clear terms.
   
   This bill is an attempt by the author to attract more small-dollar credit providers to the California marketplace, and to encourage them to responsibly offer credit to the significant population of California consumers who are struggling to make ends meet, and who cannot qualify for lower-cost credit options.
   
3. Pending Consumer Financial Protection Bureau (CFPB) Regulations: On June 2, 2016, the CFPB released long-awaited draft regulations for certain short-term and longer-term credit products (http://files.consumerfinance.gov/f/documents/Rulemaking_Payday_Vehicle_Title_Certain_High-Cost_Installment_Loans.pdf). The CFPB’s rule is intended to prohibit several practices in the small dollar credit lending markets that the CFPB believes have had detrimental effects on consumers. In releasing its draft regulations, CFPB explained that it “has serious concerns that risky lender practices in the payday, auto title, and payday installment markets are pushing borrowers into debt traps. Chief among these concerns is that consumers are being set up to fail with loan payments that they are unable to repay. Faced with unaffordable payments, consumers must choose between defaulting, reborrowing, or skipping other financial obligations like rent or basic living expenses like food and medical care. The CFPB is concerned that these practices also lead to collateral damage in other aspects of consumers’ lives such as steep penalty fees, bank account closures, and vehicle seizures.”
   
   The CFPB’s draft regulations propose one set of rules for short-term covered loans, as defined; a different set of rules for longer-term covered loans, as defined; and rules related to payment practices, loan tracking requirements, and record retention requirements, which apply to lenders that make covered loans of any type. Although a detailed summary of the draft CFPB regulations is beyond the scope of this analysis, a brief overview of the CFPB’s proposal is relevant because, as noted below, the loans covered by the CFPB rules overlap to some extent with the loans covered by this bill.
   
   1. Covered short-term loans: The CFPB defines a covered short-term loan under its draft proposal as one extended for personal, family, or household purposes, in which the consumer is required to pay substantially the entire amount of the loan within 45 days of loan consummation. Because this bill establishes no minimum loan length for loans of up to $149 and a minimum loan length of 30 days for loans of up to $300, loans of up to $300 that are made pursuant to the provisions of this bill also meet the CFPB’s definition of covered short-term loans. As described immediately below, if the CFPB rules are enacted as proposed, the provisions of this bill that apply to loans with principal amounts below $300 will be inconsistent with those federal rules.
      
      The draft CFPB rules prohibit a lender from making a short-term covered loan or increasing the credit available under a covered short-term loan, unless the lender first makes a reasonable determination that the consumer will have the ability to repay that loan according to its terms. To make a reasonable determination of a consumer’s ability to repay a covered loan, a lender must obtain the consumer’s written statement regarding the amount and timing of the consumer’s net income receipts and the amount and timing of payments required for categories of the consumer’s major financial obligations, and must obtain independent verification evidence, specified in the regulations, regarding income and expenses.
      
      Using both sets of data, the lender must make a reasonable projection of the amount and timing of a consumer’s net income and payments for major financial obligations and must reasonably conclude that: (1) the consumer’s residual income will be sufficient for the consumer to make all required loan payments and meet basic living expenses, as defined, during the contractual term of the loan; and (2) the consumer will be able to make payments required for major financial obligations as they fall due, make any remaining payments under the loan, and meet basic living expenses for 30 days after having made the highest payment due under the loan on its due date (which generally means for 30 days following the conclusion of the loan term).
      
      The underwriting requirements contained in the draft CFPB rules are much more expansive and detailed than those contained in this bill. For example, the CFPB rule requires lenders to consider certain information this bill does not require be considered (such as a consumer’s housing expenses and major financial obligations), requires lenders to consider a consumer’s ability to meet their basic living expenses for 30 days after having repaid their loan (not required by this bill), and requires lenders to presume that a borrower cannot afford a covered short-term loan, if a borrower meets one of three presumptions of unaffordability specified in the draft regulations (this bill includes no such presumptions of unaffordability).
      
      Although the CFPB rules for short-term covered loans do provide for limited conditional exemptions that allow lenders to extend short-term covered loans without making ability-to-repay determinations, the requirements applicable to these conditional exemptions envision determinations that are beyond the scope and requirements of this bill.
      
   2. Covered longer-term loans: The CFPB defines a covered longer-term loan under its draft proposal as one extended for personal, family, or household purposes, in which the consumer is not required to repay substantially the entire amount of the loan within 45 days of consummation, the total cost of credit for the loan exceeds a rate of 36% a year as measured at the time of loan consummation, and the lender either obtains a leveraged payment mechanism or vehicle security at the same time as or within 72 hours after the consumer receives the entire amount of funds he or she is entitled to receive under the loan. A leveraged payment mechanism is one in which the lender has the right to initiate a transfer of money from a consumer’s checking, savings, or prepaid account to satisfy a loan obligation; has the contractual right to obtain payment directly from the consumer’s employer or consumer’s other source of income; or requires the consumer to repay the loan through a payroll deduction or deduction from another source of income.
      
      The following represent the APRs of loan subject to the provisions of this bill, as measured at the time of loan consummation, as well as the minimum loan lengths allowed under this bill’s provisions. As the table below shows, any loan of over $600, which is made under this bill’s provisions, and which carries the maximum allowable charges and minimum allowable loan length permitted by the bill, will be considered a covered longer-term loan by the CFPB, if the lender obtains a leveraged payment mechanism with which to secure loan repayment. If the CFPB rules are enacted as proposed, the provisions of this bill that apply to those loans will be inconsistent with the federal rules.
      

The CFPB’s draft rule imposes nearly identical underwriting requirements on lenders with respect to covered longer-term loans as it imposes on lenders with respect to covered short-term loans. For this reason, the underwriting requirements for longer-term loan that are contained in the draft CFPB rules are much more expansive and detailed than the underwriting requirements for these loans that are contained in this bill.

Although the CFPB rules for covered longer-term loans do provide for limited conditional exemptions that allow lenders to extend longer-term covered loans without making an ability-to-repay determination, the structure, interest rates, and allowable administrative fees for those loans are very different than those envisioned by this bill.

Of note, the CFPB’s longer-term covered loan rules do contemplate use of proprietary underwriting models, as is proposed in this bill. However, the CFPB’s rules limit the use of such models to loans that carry a modified total cost of credit of not more than 36%, not including an origination fee that represents a reasonable proportion of the lender’s cost of underwriting loans. In contrast, this bill allows the use of proprietary underwriting models approved by the commissioner, without regard to the interest rate of the loan on which that model is being used. The CFPB’s rules also require that any proprietary underwriting model used by a lender generate a portfolio default rate no greater than 5% per year, a requirement that is missing from this bill. Finally, the CFPB’s rules require lenders to refund origination fees to any borrower who is underwritten using a proprietary underwriting model that generates a portfolio default rate higher than 5% per year, a requirement this bill lacks.

• 1. Payment Practices, Loan Tracking, and Record Retention: The draft CFPB rules also require lenders making covered loans to notify consumers before each attempt to withdraw payment for a covered loan from a consumer’s checking, savings, or prepaid account; limit the number of times that lenders making covered loans may debit a consumer’s account for payment, if an attempt to withdraw payment fails due to insufficient funds; require lenders to report loan performance to registered information systems, which are defined in the CFPB rules; require lenders to develop written policies and procedures reasonably designed to ensure compliance with the proposal’s requirements; and require lenders to retain evidence of compliance for 36 months following the date on which a covered loan ceases to be an outstanding loan. None of these consumer protections is contained in this bill, although none of this bill’s provisions appear to be inconsistent with any of these rules.
     

1. Further Refinement: This bill’s author acknowledges that the bill before this Committee is a work in progress, which requires a level of further revision, clarification, and refinement that exceeds the time available to this Committee in which to consider the bill. If this Committee wishes to move AB 268 forward to allow its author to continue working on the measure, with the idea of calling the bill back for a re-hearing after it has been further refined, it may wish to obtain a commitment from the author to address the following issues:
   
   1. If this bill is enacted, there will be four sets of rules for consumer-purpose loans made under the CFLL (the existing rate structure that applies to both secured and unsecured loans of up to $2,500; the pilot program that can be used in lieu of the existing rate structure on unsecured loans of up to $2,500; the existing set of rules applicable to both secured and unsecured loans over $2,500; and the rules established by this bill, which will apply to unsecured loans of up to $3,000, except where these rules conflict with other rules). Although this bill contains language which provides that “any other sections in this division that are in conflict with this article shall not apply to these loans,” it would be enormously helpful to consumers, licensees, the commissioner, and stakeholders if this bill were explicit regarding the sections of existing law that will and will not apply to loans made pursuant to the article of law being created by this bill.
      
      This clarification would also be helpful to further the author’s stated intent to replace the existing provisions of the CFLL applicable to unsecured loans in amounts of up to $3,000 with the provisions of this bill. As drafted, AB 268 appears to add its provisions as an alternative to existing rates and fees, rather than replace them.
      
   2. The rate structure this bill proposes for principal amounts of up to $1,000 would benefit from revision to eliminate unintended consequences (page 4, lines 6 through 16). As shown in the table below, this bill’s step-type rate structure on principal amounts of up to $1,000 establishes perverse incentives that impose lower borrowing costs on borrowers that borrow more money for a longer period of time than it imposes on borrowers that borrow less money for a shorter period of time. For example, a $320 loan will cost $38 and provide a borrower access to that money for 60 days, while a $280 loan will cost $42 and provide a borrower access to that money for only 30 days; the same sorts of inconsistencies affect loan amounts bracketing $600.
      

• 1. Amendments would also be helpful to clarify whether loans made in amounts of up to $1,000 may be paid back over multiple installments, and, if so, the minimum and maximum allowable frequency of those installments.
     
  2. This bill requires lenders to “reduce the interest rate after every three on-time payments until the rate is reduced to 36% APR” on loan amounts between $1,000 and $3,000, whose interest rates exceed 8.25% per month (page 4, lines 29 through 35). This language would benefit from clarification to resolve the following questions: What is the minimum frequency with which lenders must collect payments on installment loans of this size? By what amount must the interest rate be reduced? Must it be reduced by the same amount after every three on-time payments or can a lender reward longer-term successful borrowers with larger reductions? Must the on-time payments be consecutive (i.e., does the clock reset to zero once a borrower experiences a late payment)? Does the reference to interest rates in excess of 8.25% per month refer to the initial interest rate imposed at loan origination?
     
     Calculating the range of full-loan costs and APRs of loans with principal amounts above $1,000, using the rate and fee structure proposed in this bill, will be impossible until these questions are answered.
     
  3. This bill provides that “a borrower who has made on-time payments and successfully completed a previous loan shall receive a discounted rate for subsequent loans” (page 4, lines 36 through 38) This language would benefit from clarification to resolve the following questions: Is one lender is required to honor on-time payments made by a borrower on a loan obtained from a different lender? To which loans does this provision apply (all loans or only loans above $1,000)? What is meant by “on-time payments” (does this mean that all payments due on a loan must have been made timely or could a borrower have experienced and then cured one or more delinquencies and remain eligible for a discounted rate on a subsequent loan)?
     
  4. This bill allows for an administrative fee to be charged on any loan that is made with a rate of less than 8.25% per month (page 5, lines 21 through 26). It is unclear whether the author intends for this provision to apply to all loans made pursuant to the new article or only to loans with principal amounts above $1,000. It would also be helpful to amend this language to clarify that the 8.25% per month threshold refers to the interest rate upon origination.
     
  5. Language regarding late fees refers to periods “in default,” an artifact of language in Section 22320.5 of the Financial Code, which was corrected in the pilot program to refer to periods “in delinquency.” An amendment is suggested to replace the words “in default” with “in delinquency” (page 5, lines 36 through 39).
     
  6. This bill requires licensees to report borrower payment performance to at least “one of the national credit reporting agencies” (page 6, lines 17 through 20). The pilot program more correctly refers to “a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis” and defines such an agency as “one that meets the definition in Section 603(p) of the federal Fair Credit Reporting Act (15 USC Sec. 1681a(p)).” This bill would benefit from the substitution of language similar to that used in the pilot program.
     
     Similarly, if they wish to do so, this bill allows licensees to report borrower payment performance to “any alternative consumer credit reporting agency designated by the commissioner in the United States.” When contacted by Committee staff, a representative of Clarity, the country’s largest specialty credit bureau focusing on nonprime consumers, confirmed that his company is also subject to the federal Fair Credit Reporting Act (FCRA). Staff suggests clarifying the language around alternative consumer credit reporting agencies by requiring that any alternative agency designated by the commissioner be subject to FCRA requirements. Doing so will provide consumers whose data is reported to an alternative bureau the protections afforded by the FCRA.
     
  7. As discussed in more detail above, the underwriting requirements of this bill are inconsistent with the draft CFPB regulations for covered short-term and longer-term loans and may require revision to minimize future potential conflict. However, if this bill’s underwriting requirements are viewed independently of the CFPB rules (as may be appropriate given the potential for significant changes to those rules before they are finalized), there are issues that would benefit from correction and clarification. The biggest of these issues involves the language which states, “notwithstanding this section, a licensee may use a proprietary underwriting model, approved by the commissioner, to determine a borrower’s ability to repay” (page 6, lines 36 through 39).
     
     As currently drafted, this bill provides no guidance to the commissioner regarding what program elements or performance requirements constitute the minimum allowable to warrant approval of a proprietary underwriting model by commissioner. The bill also fails to provide the commissioner with express authority to rescind her approval of a proprietary underwriting model, if that model proves ill-equipped to appropriately vet the ability and willingness of borrowers to repay their loans. The bill is also silent on the steps that must be taken by licensees that update and refine their approved underwriting models. Must an underwriting model be re-submitted for approval each time it is updated to reflect additional performance data on a lender’s customers? Finally, this bill is silent on the extent to which the components of a lender’s proprietary model will be subject to Public Records Act requests directed to the commissioner. If the author intends for these proprietary models to remain confidential, an amendment providing for that confidentiality will be necessary.
     
     Subdivision (l), which contains the underwriting language, would also benefit from technical corrections (page 6, lines 24 through 39). Paragraph (1) of subdivision (l) refers to underwriting a borrower’s ability and willingness to repay a loan (see line 25), while paragraph (2) refers only to underwriting a borrower’s ability to repay (see lines 32 and 33). The phrase “notwithstanding this section” on lines 36 and 37 should also be replaced by the phrase “notwithstanding this paragraph.”
     
  8. The language on page 11, line 6 that refers to subdivision (d) of Section 22373 needs correction to refer, instead, to subdivision (c) of Section 22352.
     
  9. There are several elements of the pilot program that have been excluded from this new article. This Committee may wish to ask the author to explain why he has chosen to exclude all of the following consumer-friendly elements of the pilot program from this bill: (1) enhanced borrower disclosures at the time of loan application; (2) an offer of free credit education prior to loan disbursement; (3) borrower notification at least two days prior to each payment due date regarding the amount due and the due date, (4) requirement for lenders to develop and implement policies and procedures designed to respond to questions raised by applicants and borrowers regarding their loans; (5) detail regarding which data sources are required to verify a borrower’s gross monthly income and debt obligations; and (6) prohibitions against offers or sales of and referrals to persons who offer or sell credit insurance and insurance on tangible personal or real property in connection with loans.
     
     It would also be helpful to understand the logic behind the differences in this bill’s referral partner provisions relative to the finder provisions of the pilot program.
     
  10. Finally, this Committee may wish to ask the author to address two questions regarding the scope of the bill. First, what is the logic of choosing $3,000 as this bill’s upper cutoff, when both the pilot program and Financial Code Sections 22303, 22304, and 22308 use $2,500 as their cutoff? Second, what is the logic of limiting this bill to unsecured loans, when the CFLL applies to both secured and unsecured loans.
      

1. Summary of Arguments in Support:
   
   1. The Online Lending Alliance (OLA) supports the author’s efforts to expand the availability of credit to California consumers under the CFLL in the currently-underserved $300 to $2,500 market and is supportive of his ongoing efforts to create a regulatory framework in that space that would be economically viable for companies beyond those few operating under the small dollar loan pilot program. “As regulated CFLL-licensed lenders, our companies would very much like to lend in this market segment. The amendment circulated June 6^th, however, present several significant problems as drafted.” OLA offers a series of concerns and recommendations.
      
      OLA’s recommendations: The bill should be limited to loan amounts below $2,500 and amended to clarify that it does not affect loans made under the Deferred Deposit Transaction Law (payday loan law). The bill should be clarified to ensure that proprietary underwriting analytics remain confidential, and to ensure that any regulatory review of underwriting standards is outcome-based and consistent with emerging CFPB ability-to-repay requirements. The rate structure in the bill should be simplified significantly, and the mandatory rate reduction concept should be limited to subsequent loans that are obtained from the same lender. The bill should be amended to allow for the use of online referral partners. Finally, OLA urges the Committee to avoid enacting legislation that is duplicative of and/or inconsistent with pending CFPB rules for small dollar lending, arbitration waivers, and bank overdraft policies.
      
   2. Although Advance America has concerns regarding the lower loan amounts authorized by this bill, the interest rate calculations, and the complex nature of the interest rate reductions mandated by the bill, the company supports the author’s desire to create a viable loan product under $3,000 that will create a more robust, regulated marketplace in California. Advance America believes that AB 268 is worthy of passage out of this Committee, to allow the author to continue refining his legislation.
2. Summary of Arguments in Opposition: A coalition of 36 consumer advocacy groups, legal aid organizations, and economic development organizations submitted a joint letter of opposition identifying several key concerns with the bill, all of which serve to weaken the current protections in the CFLL for loans between $300 and $2,500. Among the organizations’ concerns: Loans between $300 and $2,500 could have effective APRs significantly higher than what is currently permitted by the CFLL. The ability-to-repay underwriting criteria in the bill do not include rental housing costs, a major omission given California’s current affordable housing crisis. The bill will allow lenders to use unspecified proprietary underwriting models and to employ referral partners who are not subject to state licensure or federal oversight, despite their ability to perform core functions, such as disbursing loan proceeds and taking consumers’ payments. Finally, the bill will allow lenders to offer credit insurance, an add-on product that can inflate the cost of a loan.
   
   The organizations also point to CFPB’s draft rule to regulate payday, car title, and installment loans. “In light of these significant changes underway, we question whether it is sensible to consider a major overhaul of the CFLL with AB 268 as the vehicle, which substantially weakens existing consumer protections for these loans between $300 and $2,500. This Committee is being asked to advance a major piece of legislation, the substance of which has been in print for less than a week, with barely three months left in our current session...In the next legislative session, we ask you to consider addressing existing problems across all types of high-cost loans, building off of the CFPB’s minimum federal standards. By doing so, you will help level the playing field and allow for safer, more affordable, responsible lending alternative to emerge in California.”
3. Prior and Related Legislation:
   
   1. SB 1146 (Florez), Chapter 640, Statutes of 2010: Authorized California’s original small-dollar loan pilot program within the CFLL, named the Pilot Program for Affordable Credit-Building Opportunities. Allowed lenders approved to participate in the pilot program to charge higher interest rates and fees on loans of up to $2,500 than those authorized under CFLL. Required pilot program lenders to rigorously underwrite their loans, offer credit education at no cost to their borrowers, and report borrower payment history to at least one major credit bureau. Required detailed reporting of loan outcomes to DBO. Originally scheduled to sunset on January 1, 2015, but was replaced by the Pilot Program for Increased Access to Responsible Small Dollar Loans, as described immediately below.
      
   2. SB 318 (Hill), Chapter 467, Statutes of 2013: Replaced the Pilot Program for Affordable, Credit-Building Opportunities with the Pilot Program for Increased Access to Responsible Small Dollar Loans. Retained several aspects of the original pilot, including the underwriting requirements, offers of free credit education, reports to at least one major credit bureau, and detailed reporting of program loan outcomes, but modified other aspects of the original pilot program. These modifications increased the maximum interest rates and fees that pilot lenders could charge, allowed pilot lenders to originate new loans and to refinance loans more frequently than under the original pilot, and eliminated several administrative and licensing rules that were serving as bureaucratic barriers to the success of the original pilot. Scheduled to sunset on January 1, 2018.
      
   3. SB 235 (Block), Chapter 505, Statutes of 2015: Expanded the activities in which pilot program finders could engage on behalf of pilot program lenders. Authorized finders to disburse loan proceeds to borrowers, receive loan payments from borrowers, and provide notices and disclosures to borrowers, as specified, and provided pilot program lenders with greater flexibility in the ways in which they may compensate their finders.
      
   4. SB 984 (Hueso), 2015-16 Legislative Session: Extends the sunset date on the pilot program to January 1, 2023.
      

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

Advance America

Online Lending Alliance

Opposition

API Legal Outreach

Asian Law Alliance

Asian Pacific Planning & Policy Council

California Capital Financial Development Corporation

California Reinvestment Coalition

Center for Responsible Lending

Community Legal Services of East Palo Alto

Consumer Action

Consumers Union

Courage Campaign

Dreams for Change

East Bay Community Law Center

Fresno Community Development Financial Institution

Greenlining Institute

Law Foundation of Silicon Valley

Little Tokyo Service Center

Mexican American Opportunity Fund

Mission Economic Development Agency

My Path

National Council of La Raza

NEW Economics for Women

Nuestra Casa de East Palo Alto

Opportunity Fund

Presente.org

Public Counsel

Public Good Law Center

Public Law Center

Religious Action Center of Reform Judaism

Rural Community Assistance Corporation

Silicon Valley Debug

Thai Community Development Center

Valley Economic Development Center

West Valley Community Services

Working Partnerships USA

Wrigley is Going Green

Youth Leadership Institute

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 268

Author:(Dababneh)

As Amended Ver:January 4, 2016

Majority vote

SUMMARY: Requires the Commissioner of the Department of Business Oversight (DBO) to examine every person engaged in the business of a finance lender or broker for compliance with the California Finance Lenders Law (CFLL) at least every 48 months, or as often as the commissioner deems necessary and appropriate.

EXISTING LAW:

1. Provides for the CFLL, administered by DBO, which authorizes the licensure of finance lenders, who may make secured and unsecured consumer and commercial loans (Financial Code (FC) Section 22000 et seq.). The following are the key rules applied to consumer loans made pursuant to the CFLL:
   1. CFLL licensees who make consumer loans under $2,500 are capped at interest rates which range from 12% to 30% per year, depending on the unpaid balance of the loan (FC Sections 22303 and 22304). Administrative fees are capped at the lesser of 5% of the principal amount of the loan or $50 (FC Section 22305).
   2. In addition to the requirements in a) above, CFLL licensees who make consumer loans under $5,000 are prohibited from imposing compound interest or charges (FC Section 22309); are limited in the amount of delinquency fees they may impose (FC Section 22320.5; delinquency fees are capped at a maximum of $10 on loans 10 days or more delinquent and $15 on loans 15 days or more delinquent); are required to prominently display their schedule of charges to borrowers (FC Section 22325); are prohibited from splitting loans with other licensees (FC Section 22327); are prohibited from requiring real property collateral (FC Section 22330), and are limited to a maximum loan term of 60 months plus 15 days (FC Section 22334).
   3. In addition to the requirements in a) and b) above, CFLL licensees who make consumer loans under $10,000 are limited in their ability to conduct other business activities on the premises where they make loans (FC Section 22154); must require loan payments to be paid in equal, periodic installments (FC Section 22307); and must meet certain standards before they may sell various types of insurance to the borrower (FC Sections 22313 and 22314).
   4. Generally speaking, the terms of loans of $10,000 or above are not restricted under the CFLL.
2. Until January 1, 2018, provides for the Pilot Program for Increased Access to Responsible Small Dollar Loans within the CFLL (FC Section 22365 et seq.). Licensees accepted into the pilot program are required to follow the CFLL, but are allowed to charge slightly higher interest rates, origination fees, and late fees to borrowers than is allowed under the CFLL, as long as they adhere to specified underwriting criteria, offer DBO-approved credit education to their borrowers, report borrower payment history to at least one major credit bureau, provide specified disclosures to borrowers, and follow other rules intended to protect consumers.

Loans made under the pilot program must have principal amounts of between $300 and $2,500. Interest rates are capped at 36% on principal amounts up to $1,000 and at 32% on principal amounts between $1,001 and $2,499. Origination fees are capped at the lesser of 7% or $90 on the first loan to a borrower; lesser of 6% or $75 on the second and subsequent loans to a borrower. Late fees are capped at $14 for payments that are at least seven days late or at $20 for payments that are at least 14 days late (lenders must choose between these two options). Actual insufficient funds fees may also be charged. Minimum loan lengths are 90 days for loans with principal amounts less than $500, 120 days for loans with principal amounts between $500 and $1,499, and 180 days for loans between $1,500 and $2,500.

1. Allows the commissioner, for purposes of discovering of violations of the CFLL to investigate the loans and business of the licensee and examine the books, accounts, records and files used in the business.

FISCAL EFFECT: According to Assembly Appropriations Committee, the DBO is expected to incur increased costs for additional examinations pursuant to this bill. If an additional four examiners were needed, costs would be in the range of $600,000 (State Corporations Fund).

COMMENTS:

This bill is the first step in the author's push to reform the CFLL by bringing the CFLL in line with other laws administered by DBO. This bill establishes a minimum time frame of at least once every 48 months in which CFLL licensees must be examined by the commissioner and clarifies that the commissioner may examine licensees at any time if necessary. This is identical authority for the commissioner that is in the Residential Mortgage Lending Act, FC Section 50302.

This bill is a vehicle for additional reforms that result from stakeholder meetings that started early last year. Last year, the author brought together varied stakeholder groups to discuss revisions to the CFLL. Several large stakeholder meetings occurred that included discussions on the existing consumer loan market in California and potential recommendations for changes to the CFLL that would bring transparency and fairness to the consumer loan market in California.

On January 11, 2016 the Assembly Banking and Finance Committee held an oversight hearing, "The State of Small Dollar Consumer Lending in California" that heard from various consumer and industry representatives concerning recommendations for reform to the CFLL. Hearing documents are available at: http://abnk.assembly.ca.gov/20112012oversighthearing.

The Consumer Financial Protection Bureau released a framework to regulation short-term loan products nationwide that will significantly alter California's lending statutes. The final rules on these loan products are set to be released in stages. According to the latest information available, the first round of rules covering payday loans and deposit advance products are set to be released sometime during February of 2016. The rules for installment loans and vehicle title loans are set for release September of 2016.

Analysis Prepared by: Mark Farouk / B. & F. / (916) 319-3081 FN: 0002572

Date of Hearing: January 21, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 268

Author:(Dababneh) – As Amended Ver:January 4, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill requires the Commissioner of the Department of Business Oversight (DBO) to examine every person engaged in the business of a finance lender or broker for compliance with the California Finance Lenders Law (CFLL) at least every 48 months.

FISCAL EFFECT:

The DBO is expected to incur increased costs for additional examinations pursuant to this bill. If an additional four examiners were needed, costs would be in the range of $600,000 (State Corporations Fund).

The DBO currently has the authority to examine CFLL licensees as needed, and ten examiners are currently assigned to this purpose. According to DBO, there are 5,925 CFLL licensees and license examinations take 15 hour on average. Licensees are billed for the exact cost of their own examination on a fee-for-service basis.

COMMENTS:

1. Purpose. This bill aligns the DBO's oversight of finance lender or brokers licensed by the department with their existing authority over residential mortgage lenders. This bill is intended to also be a vehicle for further reforms to the CFLL as it pertains to small-dollar lending.
2. New Federal Rules. In 2015, the federal Consumer Financial Protection Bureau released a framework to federally regulate short-term loan products (generally payday and vehicle title loan products). According to a brief from the Pew Charitable Trust, under the proposed guidelines, high-interest, small-dollar loans would remain available, but revenue would be constrained by limits, such as on charges, interest, and repayment periods. The final rules on these loan products are set to be released in stages, potentially in February and September 2016. California law may require significant updates to align with the new federal rules.
3. Related Legislative Activity. Last year, the author brought together stakeholder groups to discuss revisions to the CFLL, with the intent to improve transparency and fairness in the state's consumer loan market. These meetings resulted in some potential recommendations for revisions to CFLL. In addition, the Assembly Banking and Finance Committee held an oversight hearing on these issues Tuesday, January 12, 2016.

Analysis Prepared by: Lisa Murawski / APPR. / (916) 319-2081

Date of Hearing: January 11, 2016

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Matthew Dababneh, Chair

ABPCA Bill Id:AB 268 (

Author:Dababneh) – As Amended Ver:January 4, 2016

SUBJECT: California Finance Lenders Law: violations

SUMMARY: Requires the Commissioner of the Department of Business Oversight (DBO) to examine every person engaged in the business of a finance lender or broker for compliance with the California Finance Lenders Law (CFLL) at least every 48 months, or as often as the commissioner deems necessary and appropriate.

EXISTING LAW:

1. Provides for the CFLL, administered by DBO, which authorizes the licensure of finance lenders, who may make secured and unsecured consumer and commercial loans (Financial Code Sections 22000 et seq.). The following are the key rules applied to consumer loans made pursuant to the CFLL:
   
   1. CFLL licensees who make consumer loans under $2,500 are capped at interest rates which range from 12% to 30% per year, depending on the unpaid balance of the loan (Sections 22303 and 22304). Administrative fees are capped at the lesser of 5% of the principal amount of the loan or $50 (Section 22305).
      
   2. In addition to the requirements in “a” above, CFLL licensees who make consumer loans under $5,000 are prohibited from imposing compound interest or charges (Section 22309); are limited in the amount of delinquency fees they may impose (Section 22320.5; delinquency fees are capped at a maximum of $10 on loans 10 days or more delinquent and $15 on loans 15 days or more delinquent); are required to prominently display their schedule of charges to borrowers (Section 22325); are prohibited from splitting loans with other licensees (Section 22327); are prohibited from requiring real property collateral (Section 22330), and are limited to a maximum loan term of 60 months plus 15 days (Section 22334).
      
   3. In addition to the requirements in “a” and “b” above, CFLL licensees who make consumer loans under $10,000 are limited in their ability to conduct other business activities on the premises where they make loans (Section 22154); must require loan payments to be paid in equal, periodic installments (Section 22307); and must meet certain standards before they may sell various types of insurance to the borrower (Sections 22313 and 22314).
      
   4. Generally speaking, the terms of loans of $10,000 or above are not restricted under the CFLL.
      
2. Until January 1, 2018, provides for the Pilot Program for Increased Access to Responsible Small Dollar Loans within the CFLL (Financial Code Section 22365 et seq.). Licensees accepted into the pilot program are required to follow the CFLL, but are allowed to charge slightly higher interest rates, origination fees, and late fees to borrowers than is allowed under the CFLL, as long as they adhere to specified underwriting criteria, offer DBO-approved credit education to their borrowers, report borrower payment history to at least one major credit bureau, provide specified disclosures to borrowers, and follow other rules intended to protect consumers.
   
   Loans made under the pilot program must have principal amounts of between $300 and $2,500. Interest rates are capped at 36% on principal amounts up to $1,000 and at 32% on principal amounts between $1,001 and $2,499. Origination fees are capped at the lesser of 7% or $90 on the first loan to a borrower; lesser of 6% or $75 on the second and subsequent loans to a borrower. Late fees are capped at $14 for payments that are at least seven days late or at $20 for payments that are at least fourteen days late (lenders must choose between these two options). Actual insufficient funds fees may also be charged. Minimum loan lengths are 90 days for loans with principal amounts less than $500, 120 days for loans with principal amounts between $500 and $1,499, and 180 days for loans between $1,500 and $2,500
   
3. Allows the commissioner, for purposes of discovering of violations of the CFLL to investigate the loans and business of the licensee and examine the books, accounts, records and files used in the business.

FISCAL EFFECT: Unknown

COMMENTS:

AB 268 is the first step in the author's push to reform the CFLL by bringing the CFLL in line with other laws administered by DBO. AB 268 establishes a minimum time frame of at least once every 48 months in which CFLL licensees must be examined by the commissioner and clarifies that the commissioner may examine licensees at any time if necessary. This is identical authority for the commissioner that is in the Residential Mortgage Lending Act, Financial Code Section 50302.

This bill is a vehicle for additional reforms that result from stakeholder meetings that started early last year. Last year, the author brought together varied stakeholder groups to discuss revisions to the CFLL. Several large stakeholder meetings occurred that included discussions on the existing consumer loan market in California and potential recommendations for changes to the CFLL that would bring transparency and fairness to the consumer loan market in California. The Consumer Financial Protection Bureau released a framework to regulation short-term loan products nationwide that will significantly alter California's lending statutes. The final rules on these loan products are set to be released in stages. According to the latest information available, the first round of rules covering payday loans and deposit advance products are set to be released sometime during February of 2016. The rules for installment loans and vehicle title loans are set for release September of 2016.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file.

Opposition

None on file.

Analysis Prepared by: Mark Farouk / B. & F. / (916) 319-3081