BILL ANALYSIS                                                                                                                                                                                                    






                        SENATE COMMITTEE ON BANKING, FINANCE,
                                    AND INSURANCE
                           Senator Ronald Calderon, Chair


          AB 377 (Mendoza)         Hearing Date:  June 17, 2009  

          As Amended June 9, 2009
          Fiscal:             Yes
          Urgency:       No
          

           SUMMARY    Would enact various changes to the California Deferred  
          Deposit Transaction Law (CDDTL; Payday Lending Law). 
           
          DIGEST
            
          Existing law
            
           1.  Provides for the CDDTL (Financial Code Section 23000 et  
              seq.).  The CDDTL:

               a.     Applies to any person that makes a transaction in  
                 which the payday lender defers depositing a customer's  
                 personal check until a specific date, pursuant to a  
                 written agreement;

               b.     Does not apply to a state- or federally-chartered  
                 bank, thrift, savings association, or industrial loan  
                 company;

               c.     Requires applicants who wish to become payday  
                 lenders to submit an application for each location, an  
                 application fee of $200, and to submit to various other  
                 requirements including a background check, and prohibits  
                 anyone from engaging in the business of payday lending  
                 without a license from the Department of Corporations  
                 (DOC; the department); 

               d.     Allows payday lenders to defer the deposit of a  
                 customer's personal check for up to 31 days; limits the  
                 maximum value of the check to $300; limits the maximum  
                 fee to 15% of the face amount of the check; and requires  
                 payday lenders to distribute a notice to customers prior  
                 to entering into any payday loan transaction that  
                 includes information about the loan and loan charges and  




                                               AB 377 (Mendoza), Page 2




                 a listing of the borrower's rights;

               e.     Requires each payday loan agreement to be in writing  
                 in a type size of 10 point or greater, written in the  
                 same language that is used to advertise and negotiate the  
                 loan, signed by both the borrower and the lender's  
                 representative, and provided by the lender to the  
                 borrower, as specified; 

               f.     Allows payday lenders to grant borrowers an  
                 extension of time or a payment plan to repay an existing  
                 payday loan, and prohibits the lender from charging any  
                 additional fee in connection with the extension or  
                 payment plan;

               g.     Requires each payday lender to maintain a net worth  
                 of at least $25,000 and a surety bond of $25,000 at all  
                 times;

               h.     Prohibits payday lenders from entering into a payday  
                 loan with a customer who already has a payday loan  
                 outstanding, and from doing any of the following:

                     i.          Accepting or using the same check for a  
                      subsequent transaction;

                     ii.         Permitting a customer to pay off all or a  
                      portion of one payday loan with the proceeds of  
                      another;

                     iii.        Entering into a deferred deposit  
                      transaction with a person lacking the capacity to  
                      contract;

                     iv.         Accepting any collateral or making any  
                      payday loan contingent on the purchase of insurance  
                      or any other goods or services;

                     v.          Altering the date or any other  
                      information on a check, accepting more than one  
                      check for a single payday loan, or taking any check  
                      on which blanks are left to be filled in after  
                      execution;

                     vi.         Engaging in any unfair, unlawful, or  
                      deceptive conduct or making any statement that is  




                                               AB 377 (Mendoza), Page 3




                      likely to mislead in connection with the business of  
                      deferred deposit transactions;

                     vii.        Offering, arranging, acting as an agent  
                      for, or assisting a deferred deposit originator in  
                      any way in the making of a deferred deposit  
                      transaction unless the deferred deposit originator  
                      complies with all applicable federal and state laws  
                      and regulations;

               i.     Provides that licensees who violate the payday loan  
                 law are subject to suspension or revocation of their  
                 licenses, and that violations of the payday loan law are  
                 subject to civil penalties of $2,500 per violation;

               j.     Requires the Commissioner to have provided a report  
                 to the Governor and the Legislature by December 1, 2007,  
                 on its implementation of the Payday Lending Law.   
                 Requires that report to have included, at a minimum,  
                 information regarding the demand for deferred deposit  
                 transactions, the growth and trends in the industry,  
                 common practices for conducting the business of payday  
                 lending, advertising practices of the industry, including  
                 any violation of Financial Code Section 23027 (which  
                 generally prohibits false, misleading, and deceptive  
                 advertising practices), and any other information the  
                 Commissioner deems necessary to inform the Governor and  
                 the Legislature about potential legislation that might be  
                 necessary to protect the people of California;  

           2.  States that the Commissioner's recommendations for future  
              action provided in the report referenced immediately above could  
              include, but not be limited to, changes in the fees charged to  
              customers, specifications regarding the length of time for  
              payday loans, maximum amount provided to a consumer, additional  
              regulation of advertising practices, and the implementation of  
              an installment loan product in lieu of a payday loan.
            
          This bill

            1.  Would increase the maximum amount of a check used to obtain  
              a payday loan from $300 to $500;

           2.  Would require each licensee to pay to the commissioner a  
              fee of 5 cents for each deferred deposit transaction paid in  
              full during the previous calendar year, prohibit licensees  




                                               AB 377 (Mendoza), Page 4




              from passing this fee on to their customers, and require the  
              commissioner to use this fee to provide financial literacy  
              education programs relative to payday loan transactions in  
              California;

           3.  Would require key individuals employed by payday lenders to  
              submit fingerprints and completed statements of identify and  
              questionnaire to the commissioner, with their applications  
              for licensure, as specified;

           4.  Would require all applicants for a payday loan license to  
              disclose whether any of the key individuals identified on  
              its application have, during the last 20 years, conducted a  
              payday loan or similar business in any other state; if so,  
              the time period during which that business was conducted;  
              and whether the person was found, either individually or as  
              a representative of the applicant, to have violated any  
              provision of that state's payday loan law or regulations, or  
              any similar laws and regulations;

           5.  Would require all applicants for a payday loan license to  
              identify any product or service, other than payday lending,  
              that the applicant intends to offer in its office(s), and  
              which the applicant anticipates will generate over 5% of the  
              gross monthly revenue of any of its offices;

           6.  Would require licensees to update the department within ten  
              days regarding changes in any of the information described  
              in numbers 1 and 2 above, and at least ten days prior to  
              offering a product or service that the licensee anticipates  
              will generate more than 5% of the gross monthly revenue of  
              any of its offices;

           7.  Would prohibit a payday loan licensee from placing an  
              advertisement primarily intended to reach California  
              residents, including Internet advertisements, without  
              disclosing that the applicant is licensed by the Department  
              of Corporations pursuant to the CDDTL, and would require  
              this disclosure to be in the same language as the primary  
              language of the advertisement;

           8.  Would require payday loan licensees to retain copies of all  
              advertising copy for at least two years from the date of its  
              use; 

           9.  Would prohibit a licensee from threatening a customer with  




                                               AB 377 (Mendoza), Page 5




              any criminal penalty for failure to comply with the terms of  
              a payday loan agreement;

           10. Would prohibit a licensee from referring or delivering a  
              check taken as part of a payday loan transaction to a  
              prosecutor or other law enforcement official, for purposes  
              of collection or criminal prosecution, unless the prosecutor  
              or law enforcement official requests the check as part of an  
              investigation that is not initiated by the licensee;

           11. Would amend the existing payday loan law notice  
              requirements by:

               a.     Requiring the notice provided by licensee to a  
                 customer to be separate and distinct from the payday loan  
                 agreement;

               b.     Requiring the notice to be initialed by the customer  
                 to acknowledge receipt, and requiring that the initialed  
                 copy by retained by the licensee;

               c.     Adding language informing the customer that he or  
                 she may rescind the payday loan at no cost, by notifying  
                 the payday lender of that wish and returning the proceeds  
                 of the transaction to the payday lender no later than the  
                 end of the business day following the date on which the  
                 loan was originally made;

               d.     Adding language informing the customer that he or  
                 she may request an extended payment plan, at no  
                 additional cost, as specified, if he or she is unable to  
                 repay his or her payday loan;

           12. Would require, rather than authorize, the use of a specific  
              chart showing the fee and annual percentage rate applicable  
              to different loan amounts and loan lengths;

           13. Would add a consumer's right to rescind a payday loan  
              transaction to the list of items that must be clearly and  
              conspicuously posted in unobstructed view of the public by  
              payday lenders;

           14. Would require each payday loan agreement to include three  
              new items, including:

               a.     Notification of the customer's right to an extended  




                                               AB 377 (Mendoza), Page 6




                 payment plan, as specified;

               b.     Notification of the customer's right to rescind the  
                 payday loan, as specified;

               c.     Notification that if the payday loan is being  
                 transacted over the Internet, the customer agrees to  
                 conduct the transaction electronically, and to receive  
                 the required notices and agreement electronically;

           15. Would clarify that if a payday lender conducts a payday  
              loan transaction over the Internet, the notices that are  
              required to be posted clearly and conspicuously and the  
              agreement that is required to be provided to the customer  
              must be provided electronically and must be available for  
              the customer to download and print;  

           16. Would further provide that, if an Internet customer is  
              unable to download the notice(s) and the payday loan  
              agreement, the payday lender must mail those notice(s) and  
              agreement to the customer within 24 hours of the Internet  
              transaction;

           17. Would require all payday loan transactions conducted over  
              the Internet to comply with the Uniform Electronic  
              Transactions Act (Section 1633.1 et seq. of the Civil Code);

           18. Would allow a payday loan customer who is unable to repay  
              his or her payday loan when due to elect, once in any  
              12-month period, to replay his or her payday loan using an  
              extended payment plan, would require the following with  
              respect to that payment plan:

               a.     The extended payment plan would have to include at  
                 least four installments, which would have to be scheduled  
                 for dates on or after dates that the customer receives  
                 regular income.  Unless otherwise agreed to by the  
                 customer and the licensee, the payment plan installments  
                 would have to be substantially equal in amount;  

               b.     The payday lender would have to allow any customer  
                 who receives an extended payment plan to repay his or her  
                 loan in full at any time without penalty;

               c.     The payday lender would be prohibited from charging  
                 a customer any interest or additional fees during the  




                                               AB 377 (Mendoza), Page 7




                 term of a customer's extended payment plan;

               d.     The payday lender would be prohibited from engaging  
                 in collection activities or making any additional payday  
                 loan to a customer while the customer is making timely  
                 payments, in accordance with the extended payment plan;

               e.     Customers would be limited to one extended payment  
                 plan during any twelve-month period, measured beginning  
                 on the date that the customer fully pays all amounts due  
                 under one extended payment plan and ending on the date  
                 that the customer enters into another extended payment  
                 plan;

               f.     If a customer fails to pay any extended payment plan  
                 installment when the installment is due, the customer  
                 would be in default of the extended payment plan, and the  
                 licensee would be able to accelerate payment immediately  
                 on the remaining balance;

               g.     If a customer defaults on an extended payment plan,  
                 the payday lender would be able to take action to collect  
                 all amounts due.


           COMMENTS

          1.  Purpose of the bill   To improve the payday loan product for  
              consumers, ensure that the product is used responsibly,  
              allow consumers with repayment issues to obtain an extended  
              repayment plan that helps them avoid a cycle of debt, and  
              impose additional requirements on the payday lending  
              industry.  

           2.  Background   As noted above, Financial Code Section 23057  
              required the commissioner to submit a report on December 1,  
              2007 regarding implementation of the payday loan law.  The  
              report had to include, at a minimum, information regarding  
              the demand for deferred deposit transactions, the growth and  
              trends in the industry, common practices for conducting the  
              business of deferred deposit transactions, the advertising  
              practices of the industry, and any other information the  
              Commissioner deems necessary to inform the Governor and the  
              Legislature regarding potential legislation that may be  
              necessary to protect Californians.  Under the provisions of  
              Section 23057, the Commissioner's recommendations for future  




                                               AB 377 (Mendoza), Page 8




              action had to include, but did not have to be limited to,  
              changes in the fees charged to consumers, specifications  
              regarding the length of time for deferred deposit  
              transactions, maximum amount provided to consumers,  
              additional regulation of advertising practices, and the  
              implementation of an installment loan product in lieu of a  
              deferred deposit transaction.

          On March 10, 2008, the DOC released two reports to fulfill its  
              requirements under Section 23057.  The two reports are  
              titled, "California Deferred Deposit Transaction Law,  
              California Department of Corporations, December 2007" and  
              "2007 Department of Corporations Payday Loan Study, December  
              2007, submitted to the California Department of Corporations  
              by Applied Management Planning Group, in conjunction with  
              Analytic Focus".  

          In the first of those reports, DOC included 22 recommendations,  
              which it divided into those intended to improve its  
              oversight of the industry (twelve recommendations) and those  
              intended to strengthen its enforcement of the Payday Loan  
              Law (ten recommendations).  

          AB 377, like SB 1551 before it, includes all or a portion of  
              nine of DOC's twelve regulatory oversight recommendations.   
              AB 377 also contains provisions not contained in either of  
              DOC's reports.  Each of the elements of AB 377 is summarized  
              in the next section, and is annotated to indicate whether it  
              was included as a recommendation by DOC or is a stand-alone  
              provision.

           3.  Discussion  

           DOC's recommendation number 1  proposed to clarify the payday  
              loan law, by confirming that licensees cannot refer  
              delinquent payday loans to a local prosecutor for collection  
              of returned checks.  Financial Code Section 23035 provides  
              that a customer is not subject to criminal penalty for  
              failure to comply with the terms of a payday loan agreement  
              and requires licensees to disclose to customers that they  
              cannot be prosecuted or threatened with prosecution to  
              collect a payday loan.  DOC's recommendation was intended to  
              clarify that a licensee may not use the criminal process to  
              collect a returned check in conjunction with a payday loan,  
              even if the customer is not criminally prosecuted.  





                                               AB 377 (Mendoza), Page 9




          AB 377 implements DOC's recommendation number 1 in its entirety.  
               However, it should be noted that this Committee and the  
              Senate Judiciary Committee held a joint informational  
              hearing on March 26, 2008 to discuss the two reports  
              referenced above.  During that hearing, Gail Hillebrand,  
              representing Consumers Union, suggested that DOC's  
              recommendation, and, by extension, the language of this  
              bill, should be expanded to prohibit licensees from  
              referring uncollected checks to district attorney (DA) check  
              diversion programs.  

          Penal Code Sections 1001.60 and 1001.61 authorize DAs to create  
              diversion programs for persons who write bad checks, and to  
              run the diversion programs themselves or contract out with  
              private entities to run the programs.  A diversion program  
              provides a way for someone who writes a bad check to avoid  
              prosecution for having done so, if they comply with several  
              requirements, including completing a class or classes  
              conducted by the DA or private entity under contract with  
              the DA, make full restitution to the victim of the bad  
              check, and pay any collection fee, if imposed.

          Ms. Hillebrand's suggestion was based on the concern that debt  
              collection agencies acting on behalf of a local DA pursuant  
              to a check diversion program can make it appear to borrowers  
              that the DA is pursuing them for writing a bad check.  She  
              suggested an amendment to prohibit licensees from referring,  
              or threatening to refer, a customer to a prosecutor's check  
              diversion program.  Language is provided in the Suggested  
              Amendments section below to implement this suggestion. 

           DOC's recommendation number 3  proposed to improve disclosures  
              for consumers, by requiring that the notice provided to  
              borrowers before they enter into a payday loan agreement be  
              a separate, distinct document from the written agreement;  
              require the licensee to have the borrower initial a copy of  
              the notice to acknowledge receipt; and require the licensee  
              to retain a copy of the notice with the borrower's initials  
              acknowledging receipt in the file.  These changes are  
              intended to ensure that customers have an opportunity to  
              review and understand the mandated notices and disclosures.   
              AB 377 implements this recommendation in its entirety.

           DOC recommendation number 4  proposed to require license  
              applicants and existing licensees to notify DOC of other  
              business that will be or is being conducted at the licensed  




                                               AB 377 (Mendoza), Page 10




              location.  This recommendation is intended to help  
              coordinate oversight of businesses with other agencies and  
              regulatory programs that may have jurisdiction over the  
              other businesses (e.g., check cashing, which is overseen by  
              the Department of Justice).  This recommendation could also  
              help detect whether consumers are receiving other products  
              or services in a manner that violates the law.  AB 377  
              implements recommendation number 4 in its entirety.

           DOC recommendation number 5  proposed to expand consumer  
              protections for payday loan transactions conducted over the  
              Internet, to ensure that consumers obtaining payday loans  
              over the Internet from California licensees are adequately  
              protected.  DOC proposed to require that all required  
              notices and disclosures be provided to Internet borrowers;  
              require that Internet borrowers can download the agreement,  
              notices, and disclosures, or, if they cannot download these  
              documents, require the licensee to mail copies to the  
              borrower within 24 hours; require that the borrower agree to  
              conduct the transaction over the Internet; and require the  
              transaction to comply with the Uniform Electronic  
              Transactions Act (Civil Code Section 1633.1 et seq.).  AB  
              377 implements recommendation number 5 in its entirety.

          It should be noted, however, that Internet payday lending is an  
              extremely controversial subject.  Members of the payday loan  
              industry believe that Internet payday lending is legal in  
              California, and point to the existence of several Internet  
              payday lenders who operate in California, with the knowledge  
              of DOC, and without regulatory enforcement action by DOC on  
              the basis of their Internet operations.  

          Consumer groups have previously testified before this Committee  
              that the core element of a payday loan is the existence of a  
              check, and the understanding that the payday lender will  
              wait to cash that check until the date written on it.  These  
              consumer groups believe that California's payday loan law  
              does not authorize Internet lending, nor should it.

           DOC's recommendation number 8  proposed requiring licensees to  
              prominently disclose that borrowers have the right to  
              request a written extension agreement and payment plan.  AB  
              377 implements this recommendation with a twist.  Instead of  
              informing customers that they are entitled to request a  
                                                            written payment plan, AB 377 informs them that they are  
              entitled to receive an extended payment plan, and prescribes  




                                               AB 377 (Mendoza), Page 11




              the terms and conditions of that repayment plan, as  
              summarized above.

           DOC's recommendation number 9  proposed to require licensees to  
              keep copies of their advertising for at least two years, to  
              help protect consumers from false advertising on the  
              Internet and ensure the availability of advertising records  
              for audit purposes.  AB 377 implements this recommendation  
              in its entirety.

           DOC's recommendation number 11  requires, rather than authorizes,  
              the use of a specific chart to compare payday loan fees and  
              related cost information.  Existing law requires licensees  
              to post a schedule of all charges and fees, as specified,  
              and provides an example of one way in which the information  
              may be presented.  This recommendation requires licensees to  
              use the sample chart provided in law.  AB 377 implements  
              this recommendation in its entirety.

           DOC's recommendation Number 12 was intended to help DOC detect  
              unscrupulous operators and bar them on an ongoing basis.    
              The recommendation proposed to require license applicants to  
              list each person in charge of a payday lending location, and  
              require that person to submit fingerprint information and a  
              historical profile through a Statement of Identify and  
              Questionnaire (SIQ).  It proposed to require the licensee to  
              notify DOC within ten days of a change in the person  
              responsible for the location, and to submit new fingerprint  
              information and an SIQ for that person.  Finally, it  
              proposed to require license applicants and all persons named  
              in license application to disclose whether they had  
              conducted or are conducting deferred deposit transaction  
              business in any other state, and whether they have violated  
              similar regulatory schemes in that other state/those other  
              states, both in the past and on an ongoing basis.   
              Substantially all of these recommendations are contained in  
              AB 377.  

          The one portion of recommendation number 12 that is not  
              contained in AB 377 is the portion that proposed to require  
              each licensee to notify DOC at least 60 days prior to a  
              change of its officers, directors, or any other persons  
              named in the application.  DOC proposed that this  
              notification include the effective date of the change, the  
              names of all persons involved in the change, and must  
              include fingerprint information and an SIQ for each  




                                               AB 377 (Mendoza), Page 12




              successor person involved in the change.  

           Provisions of the bill that were included as options (rather  
              than recommendations) in DOC's report:  

           Option Number 2  suggested increasing the maximum amount of a  
              payday loan from $300 to $500 or $750, based on the fact  
              that California's maximum loan amount is less than that of  
              most other states, and on the observation that the maximum  
              loan amount in California may be too low to help consumers  
              fully meet their emergency cash needs, since some borrowers  
              appear to be obtaining payday loans from multiple payday  
              lenders.  As one part of this option, DOC suggested amending  
              the law to provide that this maximum dollar amount not  
              include the fee (so, for example, instead of presenting a  
              check for a maximum of $300 and receiving only $255, because  
              the 15% fee is deducted from the $300, the law could be  
              changed to allow the maximum amount borrowed to equal $300,  
              and to impose the 15% fee on top of that $300 amount).   AB  
              377 includes the first half of this option, by increasing  
              the maximum amount of the check that may be presented to  
              obtain a payday loan from $300 to $500, but does not adopt  
              the second half of this option.  

           Option Number 6  suggested requiring licensees to offer a payment  
              plan with a minimum number of six, equal monthly installment  
              payments to all borrowers that have had continuous  
              (consecutive) loans for three months, and prohibit the  
              licensees from charging the customer any additional fees or  
              interest in connection with the payment plan.  AB 377  
              requires licensees to offer a payment plan with at least  
              four substantially equal payments to any borrower who  
              requests one, but limits the number of payment plans that  
              may be requested to one per calendar year.  Consistent with  
              DOC's option, AB 377 prohibits licensees from charging the  
              customer any additional fees or interest in connection with  
              the payment plan.

          Provisions of the bill that were not contained in DOC's report:  

          This bill's provisions giving consumers a right to rescind their  
              payday loans by the close of the business day following the  
              day on which the loan was taken out and imposing a 5-cent  
              per transaction fee on payday loans to fund financial  
              literacy programs relating to payday loans were not  
              contained in DOC's report.  They are offered by the author  




                                               AB 377 (Mendoza), Page 13




              as consumer protections.
           
          4.  Support   The California State Conference of the National  
              Association for the Advancement of Colored People (NAACP)  
              believes that it is important to provide an array of choices  
              to consumers to help them meet their financial obligations,  
              and feels that AB 377 contains provisions that represent  
              improvements to California's current payday loan regulatory  
              environment.  The California NAACP points to the bill's  
              right of rescission, right to receive an extended repayment  
              plan, and protection from referral to law enforcement for  
              collection purposes as examples of provisions it supports.   
              The California NAACP also believes that stronger controls on  
              licensees, such as disclosure of the previous conduct of the  
              same or similar business in any other state, and more  
              clarity on the identities of the officers, directors,  
              partners, and owners of payday loan businesses will enable  
              the state to better monitor their activities.

          The California Financial Service Providers (CFSP), a trade  
              association of payday lenders, check cashers, and other  
              financial service providers, states that AB 377 contains  
              many of the DOC's report recommendations, which it describes  
              as industry best practices and needed improvements for  
              California consumers.  CFSP also supports the proposed  
              increase in the maximum size of a check presented to obtain  
              a payday loan from $300 to $500, and cites the inclusion of  
              this provision as an option in DOC's report.  

          Check into Cash and Check n' Go concur with CFSP, observe that  
              the $300 limit on the size of a payday loan check has not  
              been increased since 1996, and assert that it was considered  
              modest to meet most consumers' needs back then.

          The Alameda Merchant's Association supports increased consumer  
              protection and financial options for its membership and  
              believes that AB 377 offers both.  "It is important to  
              continue to provide the hardworking people of the Los  
              Angeles community and California with financial products  
              that meet their needs."  The Merchant's Association observes  
              that payday loans are an important short-term financing  
              option in its community, and believes that it offers its  
              community a legal, regulated option that has clear  
              information on repayment and fees.  The Alameda Merchant's  
              Association believes that AB 377 helps clarify and  
              strengthen consumer protections on payday loans.  




                                               AB 377 (Mendoza), Page 14





          5.  Opposition   ACORN, the California Reinvestment Coalition,  
              the Center for Responsible Lending, Consumers Union, the  
              Greenlining Institute, and AARP oppose AB 377, unless it is  
              amended to address the debt trap created by payday lending.   
              These groups make four recommendations, including: 1)  
              extending the minimum loan term to 31 days, 2) restricting  
              customers from having payday loans outstanding from any  
              payday lender for more than three months during any  
              twelve-month period (which consumer groups note is  
              consistent with guidance on this topic adopted by the  
              Federal Deposit Insurance Corporation in 2005), 3) requiring  
              licensees to automatically provide borrowers who have had  
              two or more payday loans in any 45-day period with a payment  
              plan that includes at least six installment payments; and 4)  
              allowing DOC, in specified civil actions, to appoint a  
              receiver or conservator over a payday lender's assets and  
              require a licensee to take remedial action and/or provide an  
              accounting or audit or specified financial reports.  

          Writing in opposition to the bill, the groups assert that the  
              Legislature should not legitimize Internet payday lending  
              and state that payment plans have no real impact on reducing  
              the average annual number of loans or in mitigating the debt  
              trap.  They also cite data suggesting that increasing the  
              maximum amount of a payday loan will hurt, rather than help,  
              payday loan borrowers.  

          Writing in support of their suggested amendments, the groups  
              state that limiting borrowers to having loans during only  
              three months in any twelve-month period will prevent  
              borrowers from using payday loans as a long-term source of  
              credit.  Extending the minimum payday loan to 31 days will  
              reduce the APR on a $255 loan to 228% and give more  
              borrowers a longer period in which to save and budget for  
              repayment.  The consumer groups note that most payday loans  
              are due in full at a borrower's next payday (usually two  
              weeks).  

          While criticizing the value of payment plans, the groups believe  
              that any payment plan should be automatic, not simply  
              offered, to all borrowers who have had two or more payday  
              loans in any 45-day period.  Six equal installments payments  
              will bring the payments to $50, more in line with, though  
              still in excess of, the $45 required to obtain a new payday  
              loan in California.  




                                               AB 377 (Mendoza), Page 15





          Finally, the groups recommend adopting DOC's enforcement  
              recommendation number 6, to allow DOC, in certain  
              (unspecified) civil actions, to take specified actions to  
              prevent against further harm to consumers.

          The California Teamsters Public Affairs Council, California  
              Labor Federation, Teamsters, and several other labor  
              organizations agree with the author that the payday lending  
              industry needs more oversight and scrutiny, but believe that  
              AB 377 moves in the wrong direction, because it contains no  
              meaningful protections for payday borrowers.  The payment  
              plan it proposes has already been implemented in other  
              states and been shown to be ineffective in preventing the  
              debt trap.  Because the payment plan will cost nearly twice  
              the amount it will cost to take out a second loan, a  
              borrower struggling to pay his or her bills is unlikely to  
              choose to pay the higher amount.  

          Like the consumer groups above, the labor groups are concerned  
              that the bill legitimizes Internet payday lending.  They  
              note that many Internet lenders are based out of state, and  
              that others are tribal entities.  For those reasons, the  
              applicability of any state lending laws to their activities  
              is questionable.  They also cite a 2008 California Court of  
              Appeals ruling that payday lending companies owned by tribes  
              have sovereign immunity, and that DOC may not apply  
              California's payday loan law to them.  The labor groups  
              encourage the author to strike the bill's reference to  
              Internet payday loans.  The labor groups also support the  
              four amendments, described above, which are favored by the  
              consumer groups.  

          Veritec, a company that operates payday loan databases in eleven  
              states, is opposed to the bill on the basis that it will  
              prove useless and ineffective, without language requiring  
              the creation of a database to track payday loans made in  
              California.  In its letter of opposition, Veritec observes  
              that it does not advocate for or against the merits of  
              payday lending.  However, the company "cannot support  
              statutes that are 'good intentions,' yet do not provide any  
              level of enforcement."  Veritec believes that the creation  
              and maintenance of a database to track all loans made in  
              California is the only viable method of statewide payday  
              loan enforcement.  It points to the conclusion, reached by  
              AMPG in its payday loan report to DOC, that "there is an  




                                               AB 377 (Mendoza), Page 16




              immediate need for the establishment of a real time  
              information network that allows lenders to identify  
              borrowers who have more than one account and/or more than  
              one open loan at any given period."  

          DOC identified the creation of a uniform database to record all  
              transactions in real time as an option in its report.  It  
              noted that a single database to record payday loan  
              transactions would benefit consumers by providing for  
              immediate enforcement of restrictions regarding the number  
              of loans, multiple loans, terms of loans, rollovers, and  
              charges.  However, DOC noted that this benefit would need to  
              be weighed against any additional cost to licensees, which,  
              in turn, could be passed along to consumers.

          Veritec believes that if AB 377 is amended to include a  
              requirement to implement a payday loan database, the bill  
              would "solve or remedy 15 of the 28 recommendations referred  
              to in the" DOC and AMPG reports.  Absent this language,  
              Veritec opposes the bill, because "we simply cannot allow  
              the industry to work half-hearted reforms that embolden the  
              consumer protection groups to work to shut down the  
              industry."   
           
           6.  Suggested Amendments  . 

                  a.        In order to implement Consumers Union's  
                    suggested change to DOC recommendation number 1, staff  
                    suggests amending Section 23035(b) of the Financial  
                    Code (page 8, lines 14 through 16 of the bill) to  
                    read:  (b) ?It is a violation of this division for a  
                    licensee to refer or deliver a check taken in a  
                    deferred deposit transaction to a prosecutor,  
                    prosecutor's diversion program established pursuant to  
                    Penal Code Section 1001.60, or other law enforcement  
                    official for purposes of collection or criminal  
                    prosecution?.

                  b.        Among its requirements, this bill requires  
                    information to be submitted to DOC, about whether  
                    specified persons were previously found, either  
                    individually or acting as representatives of a payday  
                    loan applicant, to have violated any provision of  
                    another state's payday loan law or regulations, or  
                    "any similar laws and regulations."  The phrase "any  
                    similar laws and regulations" would benefit from  




                                               AB 377 (Mendoza), Page 17




                    clarification.  Does it mean any laws and regulations  
                    relating specifically to payday lending or its  
                    variants?  Or to any law or regulation involving  
                    lending, generally?

                  c.        Another provision would require payday loan  
                    licensees to retain copies of all advertising copy for  
                    at least two years from "the date of its use."  The  
                    "date of use" should be clarified.  Staff suggests  
                    amending the bill to require licensees to retain  
                    advertising copy for at least two years from the date  
                    of its first use, if the copy is still in use, and  
                    from the date of its final use, if the copy has been  
                    discontinued.  

                  d.        This bill requires customers to be informed,  
                    both in a separate notice, and in their payday loan  
                    agreement, that they may rescind their payday loan, if  
                    they notify the payday lender that they wish to do so  
                    no later than the end of the business day following  
                    the date on which they take out the loan, and if they  
                    return all loan proceeds.  However, in what is  
                    apparently an inadvertent drafting error, the bill  
                    lacks language requiring payday lenders to allow  
                    customers to rescind their loans, under these  
                    circumstances.  This language needs to be added, and  
                    needs to be clear on how, exactly, a customer must  
                    request such rescission (e.g., in person and in  
                    writing?  Electronically, only if the transaction was  
                    initiated electronically?).  

           
          7.  Prior and Related Legislation   

                  a.        SB 1959 (Calderon, Chapter 682, Statutes of  
                    1996):  Enacted the earliest version of a payday  
                    lending law in California.  Gave regulatory authority  
                    to the California Department of Justice. 

                  b.        SB 898 (Perata, Chapter 777, Statutes of  
                    2002).  Enacted the Deferred Deposit Transaction Law  
                    and shifted the responsibility for administering the  
                    law to DOC;

                  c.        AB 7 (Lieu, Chapter 358, Statutes of 2007):   
                    Gave DOC the authority to enforce specified federal  




                                               AB 377 (Mendoza), Page 18




                    protections granted to members of the military and  
                    their dependents under the Payday Lending Law;

                  d.        SB 1551 (Correa), 2007-08 Legislative Session:  
                     Would have implemented all or a portion of nine the  
                    twelve regulatory oversight recommendations made by  
                    DOC in its March 2008 report.  Failed passage in the  
                    Senate Judiciary Committee.

                  e.        AB 2845 (Jones), 2007-08 Legislative Session:   
                    Would have prohibited licensees from charging an  
                    annual percentage rate greater than 36% on payday  
                    loans.  Provision amended out as a condition of  
                    passing the Assembly Banking & Finance Committee.  A  
                    bill stating the intent of the Legislature to enact a  
                    35% rate cap was never moved out of the Assembly Rules  
                    Committee. 
                   
                   































                                               AB 377 (Mendoza), Page 19




          POSITIONS
          
          Support
           
          Alameda Merchant's Association
          California Financial Service Providers
          California State Conference of the National Association for the  
          Advancement of Colored People
          Check into Cash
          Check n' Go of California
           
          Oppose
               
          AARP
          Acorn
          California Conference Board of the Amalgamated Transit Union
          California Labor Federation
          California Reinvestment Coalition
          California Teamsters Public Affairs Council
          Center for Responsible Lending
          Consumers Union
          Engineers and Scientists of California
          Greenlining Institute
          International Longshore & Warehouse Union
          Professional & Technical Engineers, Local 21
          UNITE HERE!
          United Food and Commercial Workers Union, Western States Council
          Veritec


          Consultant:  Eileen Newhall (916) 651-4102