Existing law, the California Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. A willful violation of the CFL is a crime, except as specified. The CFL prescribes limits on the maximum rate of charges and administrative fees that a licensee may contract for, and receive, on consumer loans of up to $2,500. The CFL requires a licensee, with respect to loans secured by a lien on a motor vehicle, to comply with specified notice requirements related to the disposition of a repossessed or surrendered motor vehicle. The CFL requires that any person who is liable on a consumer loan secured by a lien on a motor vehicle has the right to reinstate the loan in the event of a default by the borrower, subject to certain conditions and exceptions.

This bill would prohibit a licensee from providing a title loan unless the interest rate on that loan does not exceed 36% per calendar year on the unpaid principal amount of that loan and the licensee provides certain disclosures to the borrower. receiving charges under a title loan agreement in an amount that is greater than 3% per month on the unpaid principal balance of the title loan. Because a willful violation of the bills provisions would be a crime, the 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 Financing Law (CFL), provides for the licensure and regulation of finance lenders and brokers and, beginning on January 1, 2019, program administrators, by the Commissioner of Business Oversight. The CFL prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license. Existing law defines a finance lender as any person who is engaged in making consumer loans or commercial loans, as defined. A willful violation of the CFL is a crime, except as specified. The CFL prescribes limits on the maximum rate of charges and administrative fees that a licensee may contract for, and receive, on consumer loans of up to $2,500. The CFL requires a licensee, with respect to loans secured by a lien on a motor vehicle, to comply with specified notice requirements related to the disposition of a repossessed or surrendered motor vehicle. The CFL requires that any person who is liable on a consumer loan secured by a lien on a motor vehicle has the right to reinstate the loan in the event of a default by the borrower, subject to certain conditions and exceptions.

This bill would prohibit a licensee from providing a title loan unless the interest rate on that loan does not exceed 36% per calendar year on the unpaid principal amount of that loan and the licensee provides certain disclosures to the borrower. Because a willful violation of the bills provisions would be a crime, the 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.

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2017 - 2018 Regular

Bill No: AB 2953 Hearing Date: June 27, 2018

Subject: California Financing Law: consumer loans: title loans.

SUMMARY

This bill provides that a licensee under the California Financing Law (CFL) may not receive charges, as defined, of greater than 36% per year on auto title loans of $2,500 or more.

EXISTING LAW

1. Provides for the CFL (Financial Code Sections 22000 et seq.), administered by the Department of Business Oversight (DBO). The following are the key rules applied to consumer loans made pursuant to the CFL, which are relevant for this analysis:
   
   1. CFL 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. Defines charges under the CFL as the aggregate interest, fees, bonuses, commissions, brokerage, discounts, expenses, and other forms of costs charged, contracted for, or received by a licensee in connection with the investigating, arranging, negotiating, procuring, guaranteeing, making, servicing, collecting, and enforcing of a loan or forbearance of money, credit, goods, or things in action, or any other service rendered (Financial Code Section 22200).
   
3. Provides that charges under the CFL do not include actual and necessary expenses of up to $500, which are paid in connection with the repossession of a motor vehicle to repossession agencies, as specified (Financial Code Section 22202).

THIS BILL

1. Defines a title loan, for purposes of the CFL, as a nonpurchase money loan with a bonafide principal amount of $2,500 or more, where the lender obtains a security interest in a motor vehicle.
   
2. Provides that a licensee under the CFL may not receive charges under a title loan agreement in an amount greater than 3% per month on the unpaid principal balance.
   
3. Provides that charges under the CFL do not include actual and necessary expenses of up to $500, which are paid in connection with the repossession of a motor vehicle to repossession agencies, as specified, as long as the licensee complies with the 3% per month rate cap above.
   

COMMENTS

1. Reconsideration: On June 20^th, this measure failed passage in the Senate Banking and Financial Institutions Committee on a vote of 3-2. The measure is now back before this Committee on reconsideration.
   
2. Purpose: This bill is sponsored by the author to incentivize improved underwriting by auto title lenders and, in doing so, reduce defaults on auto title loans.
   
3. Discussion: During calendar year 2016 (the most recent calendar year for which aggregate data are available), there were approximately 108,000 vehicle title loans made under the CFL, totaling $433 million. As shown in the chart below, only 375 of those loans were made in amounts below $2,500; the vast majority were made in amounts of $2,500 and above – loan amounts which, as noted above, are not subject to interest rate caps under the CFL.
   

As shown in the table below, the vast majority of auto title loans made in California during 2016 carried annual percentage rates of 70% or more. The average length of an auto title loan during 2016 was 26 months.

During calendar year 2016, a total of 20,648 repossessions were conducted in connection with vehicle title loans. As shown in the chart below, slightly over one-third of those vehicles were eventually returned to their owners, either through reinstatement of the loans (about one quarter of total repossessions; 5,095) or through redemption of the collateral (12% of total repossessions; 2,401). Slightly under two thirds of the repossessions resulted in collateral sales and loss of the vehicles by their owners (63% of total repossessions; 12,917). In total during 2016, approximately 12% of all outstanding car title loans resulted in collateral sales.

This bill is a direct response to concerns about the high interest rates charged in connection with auto title loans in California and the high percentage of collateral sales that result when borrowers fail to repay those loans. Enactment of this bill is likely to significantly reduce, and possibly eliminate auto title lending in California. As a result, a significant portion of the roughly 110,000 people who annually obtain auto title loans in California will be forced to do without or go elsewhere to obtain financing.

1. Support:
   
   1. A coalition of eight consumer groups, including the Consumer Federation of California, Consumers for Auto Reliability and Safety, CALPIRG, Housing and Economic Rights Advocates, and others write, “if AB 2953 is enacted, California will join 25 states and the District of Columbia that cap title loan APRs at no higher than 35% or explicitly prohibit lending against a car title....When car title lenders repossess vehicles due to defaults, it ruins the consumer’s credit, making it more difficult to purchase another vehicle, causing extreme hardship and sometimes costing them their only means of transportation to work, leading to job loss...Consumers who are strapped for cash usually have other, far less risky alternatives, and often would be better off if they obtained a smaller loan that meets their needs without putting their vehicle at risk. Often, they would be in a better financial position if they sold their vehicle themselves and purchased a less expensive one, rather than having to pay exorbitant charges and face losing their vehicle to a car title lender. In sum, AB 2953 is an important consumer protection measure that will improve the lives of vulnerable California consumers and their families.”
      
      The Western Center on Law and Poverty expresses similar arguments in support.
      
   2. The Greenlining Institute writes that “the auto title loan product is among the most predatory financial products currently permitted in California...communities of color are particularly vulnerable to being ravaged by an unregulated auto title loan industry....The Greenlining Institute believes AB 2953 is one step towards addressing our widening racial wealth gap and economic inequality.”
      
2. Opposition:
   
   1. A coalition of auto title lenders, including Wheels Financial Group, CURO Financial Technologies Corporation, TitleMax of California, Community Loans of America, and Check Into Cash are opposed to the bill. The coalition, which represents approximately 65% to 70% of title loan volume in California believe that if AB 2953 were to pass as written, the negative consequences to California consumers would be significant. “Very few lenders could or would continue to operate with a 36% rate cap, because, simply put, it is not economically viable. Evidence demonstrates that most consumers who make use of emergency credit products such as title loans do not qualify for an unsecured loan (due to, for example, the absence of a bank account), while that same consumer may qualify for a secured loan. Elimination of the title-secured installment product, however, will not eliminate the credit needs of California consumers who cannot access traditional credit sources. Those consumers will still need funds; funds for rent to avoid an eviction, funds for utilities and food, funds for car repairs (so the consumer can get to work and remain employed), funds for schooling, medical care and other emergencies. These consumers will seek relief from non-state licensed lenders including unlicensed, and thus unregulated, online lenders and/or tribal lenders (lending at rates, according to supermoney.com ranging from 400% to as high as 1300%). If a title loan is unavailable for consumers who do not qualify for any other form of credit. In the alternative, such consumers will not be able to secure the needed funds (for vehicle repair, or will face an eviction, or have their electricity turned off, or will be unable to pay for childcare).”
      
      The California Financial Services Providers Association opposes the bill for similar reasons.
      
   2. Cashback Loans believes the bill “will lead California consumers to unlicensed, unregulated, illegal on-line lenders – just as it has in every other state where a similar cap was put in place.”
3. Amendments:
   
   1. This bill’s definition of a title loan not only includes vehicle title loans, but also includes traditional, automobile-secured installment loans that are refinanced. The following amendment is being offered by this bill’s author to narrow this bill to the loans that are her focus:
      
      Page 3, line 31, after the period, insert: Title loans differ from traditional auto loans, which are financed and secured by a lien on the vehicle in the purchase or refinance of a car.
4. Prior and Related Legislation:
   
   1. AB 336 (Dickinson), 2011-12 Legislative Session, would have prohibited a CFL licensee from taking the title to a vehicle as security for a consumer loan unless the interest rate for the loan was 36% or less and specified disclosures were provided to the borrower. Never taken up by the author in the Assembly Banking and Finance Committee.
      

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

CALPIRG

Clergy and Laity United for Economic Justice

Consumer Action

Consumer Attorneys of California

Consumer Federation of California

Consumers for Auto Reliability and Safety

East Bay Community Law Center

Greenlining Institute

Housing and Economic Rights Advocates

Legal Aid Society of San Diego

Public Counsel

Public Law Center

Western Center on Law and Poverty

Opposition

California Financial Services Providers Association

Cashback Loans

Check Into Cash

Community Loans of America

CURO Financial Technologies (dba Speedy Cash)

TitleMax of California (dba TitleMax)

Wheels Financial Group (dba LoanMart)

-- END --

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2017 - 2018 Regular

Bill No: AB 2953 Hearing Date: June 20, 2018

Subject: California Financing Law: consumer loans: title loans.

SUMMARY

This bill provides that a licensee under the California Financing Law (CFL) may not receive charges, as defined, of greater than 36% per year on auto title loans of $2,500 or more.

EXISTING LAW

1. Provides for the CFL (Financial Code Sections 22000 et seq.), administered by the Department of Business Oversight (DBO). The following are the key rules applied to consumer loans made pursuant to the CFL, which are relevant for this analysis:
   
   1. CFL 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. Defines charges under the CFL as the aggregate interest, fees, bonuses, commissions, brokerage, discounts, expenses, and other forms of costs charged, contracted for, or received by a licensee in connection with the investigating, arranging, negotiating, procuring, guaranteeing, making, servicing, collecting, and enforcing of a loan or forbearance of money, credit, goods, or things in action, or any other service rendered (Financial Code Section 22200).
   
3. Provides that charges under the CFL do not include actual and necessary expenses of up to $500, which are paid in connection with the repossession of a motor vehicle to repossession agencies, as specified (Financial Code Section 22202).

THIS BILL

1. Defines a title loan, for purposes of the CFL, as a nonpurchase money loan with a bonafide principal amount of $2,500 or more, where the lender obtains a security interest in a motor vehicle.
   
2. Provides that a licensee under the CFL may not receive charges under a title loan agreement in an amount greater than 3% per month on the unpaid principal balance.
   
3. Provides that charges under the CFL do not include actual and necessary expenses of up to $500, which are paid in connection with the repossession of a motor vehicle to repossession agencies, as specified, as long as the licensee complies with the 3% per month rate cap above.
   

COMMENTS

1. Purpose: This bill is sponsored by the author to incentivize improved underwriting by auto title lenders and, in doing so, reduce defaults on auto title loans.
   
2. Discussion: During calendar year 2016 (the most recent calendar year for which aggregate data are available), there were approximately 108,000 vehicle title loans made under the CFL, totaling $433 million. As shown in the chart below, only 375 of those loans were made in amounts below $2,500; the vast majority were made in amounts of $2,500 and above – loan amounts which, as noted above, are not subject to interest rate caps under the CFL.
   

As shown in the table below, the vast majority of auto title loans made in California during 2016 carried annual percentage rates of 70% or more. The average length of an auto title loan during 2016 was 26 months.

During calendar year 2016, a total of 20,648 repossessions were conducted in connection with vehicle title loans. As shown in the chart below, slightly over one-third of those vehicles were eventually returned to their owners, either through reinstatement of the loans (about one quarter of total repossessions; 5,095) or through redemption of the collateral (12% of total repossessions; 2,401). Slightly under two thirds of the repossessions resulted in collateral sales and loss of the vehicles by their owners (63% of total repossessions; 12,917). In total during 2016, approximately 12% of all outstanding car title loans resulted in collateral sales.

This bill is a direct response to concerns about the high interest rates charged in connection with auto title loans in California and the high percentage of collateral sales that result when borrowers fail to repay those loans. Enactment of this bill is likely to significantly reduce, and possibly eliminate auto title lending in California. As a result, a significant portion of the roughly 110,000 people who annually obtain auto title loans in California will be forced to do without or go elsewhere to obtain financing.

1. Support:
   
   1. A coalition of eight consumer groups, including the Consumer Federation of California, Consumers for Auto Reliability and Safety, CALPIRG, Housing and Economic Rights Advocates, and others write, “if AB 2953 is enacted, California will join 25 states and the District of Columbia that cap title loan APRs at no higher than 35% or explicitly prohibit lending against a car title....When car title lenders repossess vehicles due to defaults, it ruins the consumer’s credit, making it more difficult to purchase another vehicle, causing extreme hardship and sometimes costing them their only means of transportation to work, leading to job loss...Consumers who are strapped for cash usually have other, far less risky alternatives, and often would be better off if they obtained a smaller loan that meets their needs without putting their vehicle at risk. Often, they would be in a better financial position if they sold their vehicle themselves and purchased a less expensive one, rather than having to pay exorbitant charges and face losing their vehicle to a car title lender. In sum, AB 2953 is an important consumer protection measure that will improve the lives of vulnerable California consumers and their families.”
      
      The Western Center on Law and Poverty expresses similar arguments in support.
      
   2. The Greenlining Institute writes that “the auto title loan product is among the most predatory financial products currently permitted in California...communities of color are particularly vulnerable to being ravaged by an unregulated auto title loan industry....The Greenlining Institute believes AB 2953 is one step towards addressing our widening racial wealth gap and economic inequality.”
      
2. Opposition:
   
   1. A coalition of auto title lenders, including Wheels Financial Group, CURO Financial Technologies Corporation, TitleMax of California, Community Loans of America, and Check Into Cash are opposed to the bill. The coalition, which represents approximately 65% to 70% of title loan volume in California believe that if AB 2953 were to pass as written, the negative consequences to California consumers would be significant. “Very few lenders could or would continue to operate with a 36% rate cap, because, simply put, it is not economically viable. Evidence demonstrates that most consumers who make use of emergency credit products such as title loans do not qualify for an unsecured loan (due to, for example, the absence of a bank account), while that same consumer may qualify for a secured loan. Elimination of the title-secured installment product, however, will not eliminate the credit needs of California consumers who cannot access traditional credit sources. Those consumers will still need funds; funds for rent to avoid an eviction, funds for utilities and food, funds for car repairs (so the consumer can get to work and remain employed), funds for schooling, medical care and other emergencies. These consumers will seek relief from non-state licensed lenders including unlicensed, and thus unregulated, online lenders and/or tribal lenders (lending at rates, according to supermoney.com ranging from 400% to as high as 1300%). If a title loan is unavailable for consumers who do not qualify for any other form of credit. In the alternative, such consumers will not be able to secure the needed funds (for vehicle repair, or will face an eviction, or have their electricity turned off, or will be unable to pay for childcare).”
      
      The California Financial Services Providers Association opposes the bill for similar reasons.
      
   2. Cashback Loans believes the bill “will lead California consumers to unlicensed, unregulated, illegal on-line lenders – just as it has in every other state where a similar cap was put in place.”
3. Amendments:
   
   1. This bill’s definition of a title loan not only includes vehicle title loans, but also includes traditional, automobile-secured installment loans that are refinanced. The following amendment is being offered by this bill’s author to narrow this bill to the loans that are her focus:
      
      Page 3, line 31, after the period, insert: Title loans differ from traditional auto loans, which are financed and secured by a lien on the vehicle in the purchase or refinance of a car.
4. Prior and Related Legislation:
   
   1. AB 336 (Dickinson), 2011-12 Legislative Session, would have prohibited a CFL licensee from taking the title to a vehicle as security for a consumer loan unless the interest rate for the loan was 36% or less and specified disclosures were provided to the borrower. Never taken up by the author in the Assembly Banking and Finance Committee.
      

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

CALPIRG

Clergy and Laity United for Economic Justice

Consumer Action

Consumer Attorneys of California

Consumer Federation of California

Consumers for Auto Reliability and Safety

East Bay Community Law Center

Greenlining Institute

Housing and Economic Rights Advocates

Legal Aid Society of San Diego

Public Counsel

Public Law Center

Western Center on Law and Poverty

Opposition

California Financial Services Providers Association

Cashback Loans

Check Into Cash

Community Loans of America

CURO Financial Technologies (dba Speedy Cash)

TitleMax of California (dba TitleMax)

Wheels Financial Group (dba LoanMart)

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 2953

Author:(Limón)

As Amended Ver:March 19, 2018

Majority vote

SUMMARY: Prohibits a California Financing Law (CFL) licensee from charging more than 36% annual interest on a title loan.

Specifically, this bill:

1. Defines title loan as a nonpurchase money loan with a bona fide principal amount of $2,500 or greater where the lender obtains a security interest in a motor vehicle.
2. Prohibits a CFL licensee from receiving charges under a title loan agreement in an amount greater than 36% annual interest on the unpaid principal balance of the title loan.

FISCAL EFFECT: According to the Assembly Appropriations Committee, potential one-time significant costs, likely in excess of $150,000 special fund, for the Department of Business Oversight (DBO) to implement the provisions of this bill.

COMMENTS:

Background

California law describes title loans as having "the characteristics of a short-term loan (typically 12 to 36 months) in which a borrower with clear title to his or her vehicle may immediately receive a loan secured by the borrower's vehicle. These loans typically are more than $2,500 and have a higher interest rate. The loans differ from traditional auto loans, which are financed and secured by a lien on the vehicle in the purchase or refinance of a car." (Title 10 California Code of Regulations Section 1430)

Title loans are a relatively small but growing subset of small dollar consumer loans. Title loans accounted for approximately 13% of all CFL small dollar consumer loans in 2016 with a total loan volume of $377 million. The title loan market has grown significantly over the past five years, with annual loan volume increasing 72% from 2012 to 2016.

Title loans are expensive for borrowers and costly to administer for lenders based on current industry standards and business practices. Due to a combination of borrower credit quality and the cost structure of the industry, nearly 60% of title loans had an interest rate of more than 100% in 2016 and an additional 35% of loans had an interest rate of 70%-100%.

Policy Problem

Weak underwriting practices in the title loan industry are leading to negative outcomes for consumers, including high vehicle repossession rates and high average interest rates on loans. In 2016 over 20,000 consumers in California lost their vehicle to repossession after defaulting on a title loan, compared to 108,080 total title loans originated. These data indicate that a proportionately high number of consumers are offered loans that they cannot repay, even in spite of the looming threat that they could lose their car if they fail to make a payment. Given the growing prevalence of title loans, this bill would strongly incentivize stronger underwriting practices that reduce the rate of financial hardship that results from consumers getting into a loan that they cannot afford to repay.

The Department of Business Oversight issued a consumer advisory in December 2014 in response to the growing prevalence of title loans in California. As the state regulator charged with enforcing consumer financial protections, the DBO was particularly concerned that consumers were putting one of their most important assets at risk in exchange for a high cost loan. Media reports have also highlighted concerns with the auto title industry. The LA Times published an article on June 7, 2015 titled "More auto title lenders are snagging unwary borrowers in cycle of debt." The article described Jennifer Jordan's experience with a title lender. Jordan sought a $400 loan to meet her monthly expenses, but the title lender said it would not make a loan that small. The lender offered her a $2,600 loan at 153% interest, and Jordan pledged her 2005 Buick as collateral. The lender did not consider Jordan's monthly income of $900 from disability benefits when it offered her the loan with a $345 monthly payment. Six months after taking out the loan, Jordan could not keep up with the payments and her vehicle was repossessed.

Proposed Solution

This bill proposes a 36% annual interest rate cap on title loans, extending similar protections to consumers as the federal Military Lending Act and California's Pilot Program for Increased Access to Responsible Small Dollar Loans (Financial Code Section 22365 et seq.). If this bill becomes law, California would join 25 states and the District of Columbia that cap title loan interest rates at no higher than 36% or explicitly prohibit lending against a car title.

Arguments in support and opposition

Writing in support, the Western Center on Law & Poverty states that AB 2953 "would eliminate the practice of charging triple-digit interest rates on consumer loans that require a vehicle pink slip to secure the loan." The letter states the importance of vehicles to the financial health of families and cites studies that have found strong, positive impacts of vehicle ownership on employment outcomes for lower-income households.

A coalition of title lenders opposes the bill, stating that very few lenders could or would operate within the proposed 36% interest rate cap. The coalition argues that consumers who use emergency credit products such as title loans do not qualify for an unsecured loan and state that consumers will turn to unlicensed lenders if a title loan is not available.

Analysis Prepared by: Michael Burdick / B. & F. / (916) 319-3081 FN: 0003236

Date of Hearing: April 18, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2953

Author:(Limón) – As Amended Ver:March 19, 2018

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

SUMMARY:

This bill prohibits a California Financing Law (CFL) licensee from charging more than 3% per month (or 36% APR) on a title loan, which is defined as a nonpurchase money loan with a least a $2,500 principal amount and where the lender obtains a security interest in a motor vehicle.

FISCAL EFFECT:

Potential one-time significant costs, likely in excess of $150,000 special fund, for the Department of Business Oversight (DBO) to implement the provisions of this bill. Generally, DBO has adequate staff and resources to enforce these proposed restrictions on title loans. However, given this bill is likely to result in significant changes to more than half of the title loan market, the first year of implementation can be expected to generate a high volume of complaints and DBO will need to respond and conduct outreach and education.

COMMENTS:

1. Background and purpose. Title loans are a category of small-dollar consumer loans with the characteristics of a short-term loan, but the loan is secured by the borrower’s vehicle. Title loans are a small but growing subset of small dollar consumer loans, and represented approximately 13% of all CFL small-dollar consumer loans in 2016, and more than half of these loans had an interest rate higher than 100%. Moreover, a sizable share of borrowers ultimately lose their vehicle: In 2016, more than 20,000 California consumers lost their vehicles to repossession after defaulting on a title loan, compared to 108,000 title loans originated.

According to the author, AB 2953 will address problems that arise from the weak underwriting standards in the title loan industry. The bill proposes a 36% APR cap on title loans, which is intended to provide a strong incentive for lenders to conduct ability-to-repay underwriting before offering a title loan to a consumer.

1. Related legislation. AB 2500 (Kalra), of the 2017-18 Legislative Session, prohibits CFL licensees from receiving charges on a consumer loan at a rate exceeding 36% APR for loans from $2,500 to $5,000 and a 24% APR for loans $5,000 to $10,000. AB 2500 is pending in this committee.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 2, 2018

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Monique Limón, Chair

ABPCA Bill Id:AB 2953 (

Author:Limón) – As Amended Ver:March 19, 2018

SUBJECT: California Financing Law: consumer loans: title loans

SUMMARY: Prohibits a California Financing Law (CFL) licensee from charging more than 36% APR on a title loan.

Specifically, this bill:

1. Defines title loan as a nonpurchase money loan with a bona fide principal amount of $2,500 or greater where the lender obtains a security interest in a motor vehicle.
2. Prohibits a CFL licensee from receiving charges under a title loan agreement in an amount greater than 3 percent per month on the unpaid principal balance of the title loan.

EXISTING LAW:

1. Provides for the CFL, administered by the Department of Business Oversight (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 CFL:
   
   1. CFL 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). In addition to the allowable interest charges, licensees may receive an administrative fee 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, CFL 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). For loans above $2,500, administrative fees are capped at $75 (Section 22305).
      
   3. In addition to the requirements in “a” and “b” above, CFL 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 CFL.
2. Until January 1, 2023, authorizes the Pilot Program for Increased Access to Responsible Small Dollar Loans (Pilot) within the CFL (Financial Code Sections 22365 et seq.). The following are key rules applied to consumer loans made pursuant to the Pilot:
   1. Permits approved licensees to make a loan with a bona fide principal amount of at least $300, but less than $2,500. Interest rates are capped at the lesser of 36% or 32.75% plus the prime rate for the unpaid principal balance up to $1,000, and the lesser of 35% or 28.75% plus the prime rate for the unpaid principal balance in excess of $1,000 (Section 22370(a) and (b)).
   2. Provides that a licensee may charge an administrative fee in an amount not to exceed 7% of the principal amount, or $90, whichever is less, on a first loan, and 6% of the principal amount, or $75, whichever is less, on a second or subsequent loan. A licensee may not charge an underwriting fee more than once in any four-month period, and no administrative or underwriting fee may be charged in connection with a loan refinance unless at least eight months have elapsed, as specified (Section 22370(c)).
   3. Requires a licensee to underwrite each loan and states that the licensee shall not make the loan if it determines that the borrower's total monthly debt service payments exceed 50% of the borrower's gross monthly income, as specified (Section 22370 (f)).
3. Imposes a 36% APR on consumer credit extended to members of the military and their dependents. (10 USC Sec. 987.)

FISCAL EFFECT: Unknown

COMMENTS:

1. PURPOSE

According to the author, the purpose of this bill is to provide a strong incentive for title lenders to conduct ability-to-pay underwriting. In 2016 20,648 vehicles were repossessed due to defaults on title loans compared to 108,080 total title loans originated, according to DBO’s annual report on CFL licensees. For those consumers who avoided default, they often paid over 100% APR interest, effectively subsidizing the costly business models employed by title lenders. By establishing a 36% APR cap, lenders will be incentivized to improve underwriting standards upfront which will reduce the incidence of financial hardship caused by loan defaults and vehicle repossessions.

1. BACKGROUND

CFL lenders typically serve consumers who have limited credit options due to damaged credit history or minimal credit experience. These consumers often lack the option to obtain credit from banks and credit unions, so they rely on alternative financial service (AFS) providers (e.g., payday, title, and installment lenders) for their credit needs. Due to the higher credit risk of borrowers and less efficient business models of AFS providers relative to banks and credit unions, the interest rates and finance charges for AFS products are significantly higher than typical credit card rates, often exceeding 100% APR.

Title loans are a category of small dollar consumer loans (defined in this analysis as a consumer loan with a principal amount of less than $10,000) under the CFL. DBO regulations describe a title loan as having “the characteristics of a short-term loan (typically 12 to 36 months) in which a borrower with clear title to his or her vehicle may immediately receive a loan secured by the borrower's vehicle. These loans typically are more than $2,500 and have a higher interest rate. The loans differ from traditional auto loans, which are financed and secured by a lien on the vehicle in the purchase or refinance of a car.” (Title 10 California Code of Regulations § 1430)

Title loans are a relatively small but growing subset of small dollar consumer loans. Title loans accounted for approximately 13% of all CFL small dollar consumer loans in 2016 with a total loan volume of $377 million. The title loan market has grown significantly over the past five years, with annual loan volume 72% higher in 2016 than 2012.

Title loans are expensive for borrowers and costly to administer for lenders based on current industry standards and business practices. Due to a combination of borrower credit quality and the cost structure of the industry, nearly 60% of title loans had an interest rate of more than 100% in 2016 and an additional 35% of loans had an interest rate of 70%-100% (see Chart 1).

Chart 1

1. POLICY PROBLEM

The author is concerned that weak underwriting standards in the title loan industry are leading to negative outcomes for consumers, including high vehicle repossession rates and high average interest rates on loans. In 2016 over 20,000 consumers in California lost their vehicle to repossession after defaulting on a title loan, compared to 108,080 total title loans originated. These data indicate that a proportionately high number of consumers are offered loans that they cannot repay, even in spite of the looming threat that they could lose their car if they fail to make a payment. The author’s concerns were magnified after her staff met with the CEO of a leading auto title lender who described his firm’s underwriting practices as focused on the value of the car, rather than the consumer’s income and debt obligations. Given the growing prevalence of title loans, the author seeks to establish standards that will incentivize underwriting upfront and reduce the rate of financial hardship that occurs when consumers get into a loan that they cannot afford to repay.

The Department of Business Oversight issued a consumer advisory in December 2014 in response to the growing prevalence of title loans in California. As the state regulator charged with enforcing consumer financial protections, the DBO was particularly concerned that consumers were putting one of their most important assets at risk in exchange for a high cost loan. The advisory warned consumers that although title loans are quick and easy to obtain, consumers pay higher prices for the convenience.

Media reports have also highlighted concerns with the auto title industry. The LA Times published an article on June 7, 2015 titled “More auto title lenders are snagging unwary borrowers in cycle of debt.” The article described Jennifer Jordan’s experience with a title lender. Jordan sought a $400 loan to meet her monthly expenses, but the title lender said it would not make a loan that small. The lender offered her a $2,600 loan at 153% interest, and Jordan pledged her 2005 Buick as collateral. The lender did not consider Jordan’s monthly income of $900 from disability benefits when it offered her the loan with a $345 monthly payment. Six months after taking out the loan, Jordan could not keep up with the payments and her vehicle was repossessed.

1. PROPOSED SOLUTION

This bill proposes a 36% APR cap on title loans, extending similar protections to consumers as the federal Military Lending Act and California’s Pilot Program for Increased Access to Responsible Small Dollar Loans (Financial Code Section 22365 et seq.). If this bill becomes law, California would join 25 states and the District of Columbia that cap title loan APRs at no higher than 36% or explicitly prohibit lending against a car title.

The 36% cap would provide a strong incentive for lenders to conduct ability-to-repay underwriting before offering a title loan to a consumer. The repossession process is costly for lenders to administer, and the 36% cap will prevent lenders from sustaining a profitable business if their borrowers continue to default at such a high rate.

Auto title lending that is predicated on ability-to-repay underwriting will continue to be available if this bill becomes law. One of the largest providers of small dollar consumer loans in California performs underwriting to establish a prospective borrower’s ability to repay. If the consumer qualifies for an unsecured loan, the lender may also offer the option for a secured loan at a lower price, and the consumer gets to decide which loan fits their needs. The author’s office has confirmed with the lender that this bill will not prevent the lender from continuing to offer this option to consumers.

1. SUPPORT

Writing in support, the Western Center on Law & Poverty states that AB 2953 “would eliminate the practice of charging triple-digit interest rates on consumer loans that require a vehicle pink slip to secure the loan.” The letter states the importance of vehicles to the financial health of families and cites studies that have found strong, positive impacts of vehicle ownership on employment outcomes for lower-income households.

Consumer Attorneys of California states:

Title loans are an especially risky form of loan for consumers. Those who seek title loans are often in extreme financial turmoil and cannot receive loans from traditional credit agencies. Given their financial instability, title loan consumers are likely to default on the high-interest payments required by title lenders, resulting in the loss of their most valuable asset and means of transportation.

AB 2953 is a good first step to ensure that title loan lenders do not utilize predatorily high interest rates to take advantage of consumers who are already facing economic hardship.

1. OPPOSITION

The California Financial Service Providers Association (CFSP) represents businesses that provide alternative financial services, such as payday loans, check cashing, installment loans, and title loans. CFSP asserts that the proposed policy would harm consumers with already limited access to financial products and believes that consumers will turn to unregulated lenders for their credit needs. CFSP states that “the interest rate proposed by this bill is simply unworkable and would shut off access to credit for the consumers that rely on this type of loan.”

1. RELATED LEGISLATION

AB 2500 (Kalra), 2017-18 Legislative Session: Prohibits CFL licensees from receiving charges on a consumer loan at a rate exceeding 36% APR of the unpaid principal balance of a loan from $2,500 to $5,000 and 24% APR of the unpaid principal balance of a loan from $5,000 to $10,000. Requires the cost of optional credit insurance to fit within the proposed rate caps. Adds consumer protections related to refinancing and minimum loan terms.

REGISTERED SUPPORT / OPPOSITION:

Support

Consumer Attorneys of California

Greenlining Institute

Western Center on Law & Poverty

Opposition

California Financial Service Providers

Cashback Loans

Community Loans of America

Loan Mart

TMX Finance

Analysis Prepared by: Michael Burdick / B. & F. / (916) 319-3081