BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE JUDICIARY COMMITTEE
                           Senator Ellen M. Corbett, Chair
                              2009-2010 Regular Session


          AB 377
          Assemblymember Mendoza
          As Amended June 23, 2009
          Hearing Date: July 14, 2009
          Financial Code
          SK:jd          

                                        SUBJECT
                                           
            California Deferred Deposit Transaction Law (Payday Lending)

                                      DESCRIPTION  

          This bill would increase the maximum value of a payday loan from  
          $300 to $500 and would permit a payday loan customer to rescind  
          the transaction no later than the end of the next business day.   
          This bill would provide that a customer may elect to repay a  
          loan using an extended repayment plan which includes at least  
          four installments and specifies other related provisions, as  
          noted.  Under this bill, payday loan lenders would be required  
          to pay a five-cent fee for each payday loan transaction to the  
          Department of Corporations to be used for financial literacy  
          education programs.  

          This bill would require a lender who provides a payday loan over  
          the Internet to give the required notices and written agreement  
          to a customer electronically and would revise advertising  
          requirements to specify that the restrictions apply also to  
          advertising on the Internet.  This bill also contains provisions  
          concerning notice and licensing-related requirements.
           
                                      BACKGROUND  

          Current law, the California Deferred Deposit Transaction Law  
          (CDDTL; the Act), regulates payday loan lenders, and places a  
          number of restrictions on payday loans.  For example, the CDDTL  
          requires that payday lenders be licensed by the Department of  
          Corporations (DOC; the department) and permits lenders to charge  
          a fee of 15% of the face amount of the check which cannot have a  
          face value of more than $300.  The Act also specifies disclosure  
          and notice requirements, including that the annual percentage  
                                                                (more)



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          rate (APR) and any charges and fees be disclosed to the  
          consumer.

          DOC figures indicate, as of December 31, 2007, that there were  
          2,403 licensed payday loan locations in California.  According  
          to the California Budget Project's analysis of DOC data,  
          approximately one million Californians took out payday loans in  
          2006, averaging about 10 loans per borrower.  
          The following information was obtained from DOC's "2007 Annual  
          Report: Operation of Deferred Deposit Originators under the  
          California Deferred Deposit Transaction Law" (2007 Annual  
          Report):
               
             -------------------------------------------------------- 
            |                          |2006          |2007          |
            |--------------------------+--------------+--------------|
            |Total dollar amount of    |              |              |
            |payday loans made         |$2.55 billion |$2.97 billion |
            |--------------------------+--------------+--------------|
            |Total number of payday    |              |              |
            |loans made                |10.05 million |11.15 million |
            |--------------------------+--------------+--------------|
            |Total number of           |              |              |
            |individual customers who  |1.43 million  |1.61 million  |
            |obtained payday loans     |              |              |
            |(repeat customers counted |              |              |
            |once)                     |              |              |
             -------------------------------------------------------- 

          In addition, the 2007 Annual Report provides the following  
          information with respect to individual payday loans made: 

             --------------------------------------------------------- 
            |                                       |2006    |2007    |
            |---------------------------------------+--------+--------|
            |Average dollar amount of payday loans  |$254    |$266    |
            |made                                   |        |        |
            |---------------------------------------+--------+--------|
            |Minimum dollar amount of payday loans  |$10     |$10     |
            |made                                   |        |        |
            |---------------------------------------+--------+--------|
            |Maximum dollar amount of payday loans  |$300    |$300    |
            |made                                   |        |        |
            |---------------------------------------+--------+--------|
            |Average annual percentage rate (APR)   |429%    |424%    |
            |---------------------------------------+--------+--------|
                                                                      



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            |Average number of days of payday loan  |16      |16      |
            |transactions                           |        |        |
             --------------------------------------------------------- 

          Existing law required DOC to report to the Governor and  
          Legislature by December 1, 2007, on its implementation of the  
          payday lending law.  On March 10, 2008, DOC released two reports  
          to fulfill these statutory requirements, "California Deferred  
          Deposit Transaction Law, California Department of Corporations,  
          December 2007" (DOC Report) 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" (AMPG study).  

          In the first of these reports, DOC included 22 recommendations,  
          which it divided into those intended to improve its oversight of  
          the industry and those intended to strengthen its enforcement of  
          the CDDTL.  In addition, DOC included a number of policy options  
          for consideration. 

          The DOC report is based upon a survey of payday lenders and  
          DOC's annual report for 2005-06.  The AMPG study is based on an  
          online survey of payday lenders, a telephone survey of  
          borrowers, and five customer focus groups.  AMPG's study was  
          conducted between August and December 2007, for the 18-month  
          period between April 15, 2006 through September 11, 2007.  Both  
          reports highlight that, while a payday loan is intended to be a  
          short-term, one-time loan to meet emergency financial needs, a  
          large number of Californians use payday loans on a regular,  
          on-going basis and find that establishing a payday loan account  
          "opens the door to a repetitive cycle of borrowing that is  
          difficult if not impossible to end" (AMPG study).  The DOC  
          report made a number of regulatory oversight recommendations,  
          some of which are incorporated into AB 377 as described in the  
          Comments below.

          Last year, SB 1551 (Correa) included all or a portion of nine of  
          DOC's 12 regulatory oversight recommendations.  The measure  
          failed passage in this Committee.  This year's bill, AB 377, is  
          substantially similar. 
            
                                CHANGES TO EXISTING LAW
           
           Existing federal law  imposes a 36% APR on consumer credit,  
          including payday loans, extended to members of the military and  
          their dependents.  (10 USC Sec. 987.) 
                                                                      



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           Existing law  regulates, under the CDDTL, deferred deposit  
          transactions, defined as a transaction in which a person defers  
          depositing a customer's personal check until a specific date,  
          pursuant to a written agreement for a fee.  (Fin. Code Sec.  
          23000 et seq.)

           1.    Existing law  places the following restrictions on payday  
            lenders:  
              a.   Limits the maximum value of the check to $300; 
             b.   Permits payday lenders to defer the deposit of a  
               customer's personal check for up to 31 days; and 
             c.   Limits the maximum fee to 15% of the face amount of the  
               check.  (Fin. Code Secs. 23035(a), 23036(a).)

             Existing law  prohibits payday lenders from entering into a  
            payday loan with a customer who already has a payday loan  
            outstanding.  (Fin. Code Sec. 23036(c).)
             
             This bill  would increase the maximum value of the check from  
            $300 to $500. 

             This bill  would permit a customer to rescind a payday loan  
            transaction at no cost by notifying the payday lender that he  
            or she wishes to rescind the transaction and returning the  
            proceeds of the transaction to the payday lender no later than  
            the end of the next business day.  The payday lender must make  
            reasonable and accessible provisions for a customer to contact  
            the lender in a timely manner so that the customer may notify  
            the lender of his or her intent to rescind the transaction. 

             This bill  would require each licensee to pay to the  
            Commissioner of DOC (the commissioner) a fee of five cents for  
            each deferred deposit transaction paid in full during the  
            previous calendar year to be used for financial literacy  
            education programs regarding deferred deposit transactions in  
            California.  This bill would prohibit a licensee from passing  
            this fee on to its customers. 

             This bill  would provide that if a payday lender conducts a  
            deferred deposit transaction with a customer over the  
            Internet, the required notices and written agreement must be  
            provided to the customer electronically and shall be available  
            for the customer to download and print.  If the customer is  
            unable to download these documents, the lender shall mail the  
            notices and agreement to the customer within 24 hours of the  
                                                                      



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            Internet transaction.  This bill would require that deferred  
            deposit transactions conducted over the Internet comply with  
            the Uniform Electronic Transactions Act.

          2.    Existing law  permits 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.  (Fin. Code Sec. 23036(b).)

           This bill  would permit a payday loan customer who is unable to  
            repay the loan when due to elect once in any 12-month period  
            to repay the loan by means of an extended payment plan at no  
            additional cost. 

           This bill  would provide that 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 payday lender, the payment plan installments must  
            be substantially equal in amount.  

           This bill  would specify that a customer may prepay an extended  
            payment plan in full at any time without penalty and the  
            payday lender would be prohibited from charging any interest  
            or additional fees during the term of the extended payment  
            plan.

           This bill  would prohibit the payday lender from engaging in any  
            collection activities or making any additional payday loans to  
            the customer while the customer makes timely payments  
            according to the extended payment plan.

           This bill  would provide that customers would be limited to one  
            extended payment plan during any 12-month period, as  
            specified, and would provide that if the customer fails to pay  
            any extended payment plan installment when due, the customer  
            would be in default of the payment plan and the payday lender  
            may immediately accelerate payment on the remaining balance.   
            If the customer defaults, the payday lender would be able to  
            take action to collect all amounts due. 

          3.    Existing law  provides that a customer who enters into a  
            payday loan and offers a personal check pursuant to an  
            agreement shall not be subject to any criminal penalty for  
            failure to comply with the terms of the agreement.  (Fin. Code  
                                                                      



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            Sec. 23035(b).)  Under existing law the notice to the  
            customer, the posted notice in the business location, and the  
            payday loan agreement must all state that the customer cannot  
            be prosecuted in a criminal action or threatened with  
            prosecution.  (Fin. Code Secs. 23035(c)(3), (d)(1), (e)(9).)
           This bill  would prohibit a payday lender from referring or  
            delivering a check taken in a deferred deposit transaction to  
            a prosecutor, district attorney's diversion program, or other  
            law enforcement official for purposes of collection or  
            criminal prosecution unless the law enforcement official  
            requests the check as part of an investigation not initiated  
            by the lender.  

          4.    Existing law  prohibits a payday lender from advertising,  
            printing, displaying,      publishing, distributing, or  
            broadcasting any statement or representation that is false,  
            misleading, or deceptive, or that omits material information  
            that is necessary to make the statements not false,  
            misleading, or deceptive.  (Fin. Code Sec. 23027(a).)

           Existing law  prohibits a payday lender from placing an  
            advertisement disseminated primarily in this state unless the  
            lender discloses that the lender is licensed by the department  
            pursuant to the CDDTL.  (Fin. Code Sec. 23027(b).)

           Existing law  provides that the commissioner may require payday  
            lenders to maintain a file of all advertising copy for a  
            period of 90 days from the date of its use. (Fin. Code Sec.  
            23027(e).)  

           This bill  would revise existing law which prohibits a licensee  
            from making false, misleading, or deceptive statements in  
            advertisements to also include advertisements made on the  
            Internet.
           
           This bill  would prohibit a payday lender from placing an  
            advertisement primarily intended to reach California  
            residents, including advertisements on the Internet, without  
            disclosing that the lender is licensed by the department  
            pursuant to the CDDTL.  This bill would require this  
            disclosure to be made in the same language as the primary  
            language of the advertisement.

           This bill  would require a payday lender to maintain a file of  
            all advertising copy currently in use and retain copies for at  
            least two years from the date of its final use.
                                                                      



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          5.    Existing law  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 a listing of the borrower's rights.  (Fin. Code  
            Sec. 23035(c).)
           
           This bill  would amend the existing payday loan notice  
            requirements by:  
              a.   Requiring the notice provided by a 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; and
             c.   Adding language regarding the bill's provisions  
               concerning rescission and the repayment plan.

          6.    Existing law  requires certain notices be clearly and  
            conspicuously posted in the unobstructed view of the public by  
            all licensed payday lenders in each business location in  
            letters not less than one-half inch in height.  (Fin. Code  
            Sec. 23035(d).)   

           This bill  would require, rather than authorize, the use of a  
            specific chart posted in each business location showing the  
            fee and annual percentage rate applicable to different loan  
            amounts and loan lengths. 

           This bill  would require that the notice posted clearly and  
            conspicuously in the unobstructed view of the public include  
            specified language concerning a customer's right to an  
            extended payment plan.

          7.    Existing law  requires an agreement to enter into a deferred  
            deposit transaction to be in writing and provided to the  
            customer.  The written agreement must include specified items  
            of information including, among other things, a full  
            disclosure of the total amount of any fees charged, a clear  
            description of the customer's payment obligations, the contact  
            information of the lender, the date to which deposit of the  
            check has been deferred, and an itemization of the amount  
            financed, as specified.  (Fin. Code Sec. 23035(e).)

           Existing law  requires each payday loan agreement to be in  
            writing in a type size of 10 point or greater, written in the  
                                                                      



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            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.  (Fin. Code Sec. 23035(g).)

           This bill  would require the agreement to include notification to  
            the customer: (1) of the extended payment plan and ability to  
            rescind; and (2) 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.
              
          8.    Existing law  requires any person who offers, originates, or  
            makes a deferred deposit transaction to obtain a license from  
            the DOC and comply with specified requirements.  (Fin. Code  
            Sec. 23005.)  Existing law requires payday lender applicants  
            to submit an application for each location, pay an application  
            fee of $200 and an investigation fee of $100, and to submit to  
            various other requirements including a background check.   
            (Fin. Code Secs. 23005, 23006.)  Under existing law, licensees  
            who violate the CDDTL are subject to suspension or revocation  
            of their licenses and violations are subject to civil  
            penalties of $2,500 per violation.  (Fin. Code Secs. 23051,  
            23052.)

           This bill  would require key individuals employed by payday  
            lenders to submit fingerprints and a completed statement of  
            identity and questionnaire with their application for  
            licensure.  The bill would also require lenders to notify the  
            department within 10 days of any changes to key individuals  
            named in the original application and submit fingerprints and  
            a completed statement of identity and questionnaire for the  
            new key individual within 30 days of the change. 
           This bill  would require applicants for a payday loan license to  
            disclose whether any of the key individuals identified in its  
            application have, during the last 20 years, conducted a payday  
            loan business or similar business in any other state and, if  
            so, the relevant time period 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 lending  
            law or regulations, or any other similar laws or regulations.   
            This bill would impose notification requirements when a lender  
            or a key individual is found to have violated any applicable  
            payday loan laws and regulations, or any similar laws and  
            regulations governing lending, of any other state.   

                                                                      



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           This bill  would require an applicant for a payday loan license  
            to identify any product or service, in addition to payday  
            loans, that the applicant intends to offer in its office(s)  
            and which the applicant anticipates will generate over five  
            percent of the gross monthly revenue of any of its offices.   
            This bill would require a licensee to notify the department in  
            writing that it intends to offer a new product or service at  
            least 10 days prior to offering that product or service if the  
            licensee anticipates that it will generate more than five  
            percent of the gross monthly revenue of any office. 

                                        COMMENT
           
          1.  Stated need for the bill  
          
          The author writes:
          
            California is facing one of its most difficult economic crises  
            in decades.  While unemployment continues to rise, consumer  
            access to credit is shrinking, and in many instances, is  
            virtually unavailable.  Payday loans are a financial tool  
            which help "bridge the gap" for Californians who are banked  
            and have a regular paycheck or other source of income, yet who  
            are sometimes unable to meet their day-to-day obligations.  In  
            these tough times, unexpected auto repairs, medical expenses  
            or other financial needs can put consumers in a short-term  
            cash crunch.  

            Used responsibly, a payday loan can help a consumer pay the  
            rent or a utility bill and avoid a hefty late fee, cover a  
            doctor's visit for a sick child or pay for auto repairs in  
            order to have transportation to and from a job.  For many, a  
            payday loan is the best financial choice-or the only real  
            choice-when they don't have enough money to make it until  
            their next paycheck.  

            AB 377 is intended to engage consumer interests, the payday  
            lending industry, and the DOC in a dialogue about needed  
            changes to state law.  Using the DOC's study as a starting  
            point, AB 377 is intended to improve the product for  
            consumers, ensure that the product is used responsibly, allow  
            for consumers with repayment issues to get a payment plan that  
            helps them avoid a cycle of debt, and put additional  
            requirements on the industry.  

          2.  Is there an alternative? 
                                                                      



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          Proponents of payday lending argue that many borrowers have no  
          alternative but to take out a payday loan.  According to the  
          Community Financial Services Association of America (CFSA), an  
          association of payday lending companies, other options are too  
          costly when compared with the fee for one payday loan.  For  
          example, borrowers may be charged late fees on credit cards or a  
          non-sufficient funds fee if they bounce a check.  Late payments  
          on utility bills also may be costly to the consumer,  
          particularly if they involve a reconnection fee.  

          As noted in the DOC report, small, unsecured installment loans  
          may be made by entities licensed under the California Finance  
          Lenders Law (CFLL).  DOC notes that the rates and fees on these  
          loans are limited, however, to an APR of about 30%, compared to  
          the average APR of 429% for a payday loan.  According to DOC,  
          "[t]his by itself is a strong inducement to make small,  
          unsecured loans under the [payday loan law] as opposed to the  
          CFLL."  The DOC report also states that consumers "who do not  
                     have access to traditional sources of credit (credit cards, home  
          equity lines of credit, etc.) do have alternatives to payday  
          loans," noting that many banks and credit unions have cash  
          advance programs that provide borrowers with cash that must be  
          repaid generally within 35 days.   

          Others argue that payday loan consumers also have other options  
          ranging from borrowing money from friends or family, working out  
          a payment plan with the creditor (e.g., credit card or utility  
          company), getting an advance from an employer, obtaining  
          emergency assistance from faith-based or community  
          organizations, delaying purchases or obtaining a small consumer  
          loan.  Credit unions have small loan programs that are intended  
          to be alternatives to payday loans.  

          In addition, in February 2008 the Federal Deposit Insurance  
          Corporation (FDIC) began a nationwide "Small-Dollar Loan Pilot  
          Program" under which participating banks offer loans of up to  
          $1,000; payment periods beyond a single paycheck cycle; APRs  
          below 36%; low or no origination fees; streamlined underwriting  
          criteria; and access to financial education.  In many instances,  
          the banks indicate that loans can be processed in less than an  
          hour.  The pilot is "designed to illustrate how banks can  
          profitably offer affordable small-dollar loans as an alternative  
          to high-cost credit products, such as payday loans and fee-based  
          overdraft protection."  The FDIC recently released an evaluation  
          of the pilot after one year and found that it "has provided  
                                                                      



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          evidence that banks can offer reasonably priced alternatives to  
          high-cost, short-term credit."  Although the pilot is currently  
          limited in its scope, these initial results are encouraging.  

          Given the above arguably less expensive alternatives to a payday  
          loan, the Committee should consider whether the provisions of  
          this bill discussed below would, in fact, aid consumers  
          struggling in the present economy or instead contribute to a  
          cycle of debt. 


          3.  Increasing the maximum value of a payday loan check from $300  
            to $500 
           
          Existing law provides that a payday loan check cannot have a  
          face value of more than $300.  This bill would increase that  
          amount to $500.  These amounts include the fee that payday  
          lenders may impose; generally $45 and $75, respectively.  This  
          increase was included in the DOC report as a policy option (not  
          recommendation), and was based on the premise that payday loans  
          will continue to be available to help Californians meet  
          short-term emergency cash needs, but that longer-term  
          installment products will be available for those consumers  
          unable to pay back the full amount of their payday loans on  
          their due dates.  

          The author and industry supporters argue that California's loan  
          limit of $300 should be increased to $500 because the current  
          limit is insufficient to meet the emergency cash needs of payday  
          loan customers, has not been adjusted since it was implemented  
          13 years ago, and is out of line with the limits in other  
          states.  Despite those contentions, any increase in the loan  
          limit must be evaluated not in terms of years since the last  
          increase, but, instead, on the collateral effects of that  
          increase on struggling consumers and whether any increase makes  
          it even harder for them to pay off their debt.  Previous  
          concerns about the risks posed by payday loans are reflected in  
          the Legislature's decision to place a cap on loan amounts.

           a.Whether current limit is sufficient to meet borrower's needs  

          With respect to whether or not the current limit is sufficient  
            to meet borrower's needs, DOC attempted to evaluate unmet  
            demand due to loan limits by focusing on the number of  
            customers who obtained more than one loan at the same time  
            from different licensees.  The sample survey, which analyzed  
                                                                      



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            transactions of 72.2% of California's payday loan customers,  
            found that just 2.4%of the total customers in the sample  
            obtained more than one loan at the same time from different  
            licensees.  DOC concluded that for the borrowers sampled, "the  
            loan amount was not sufficient to meet [their] emergency  
            credit needs.  This may be due to the loan limit being too low  
            or the licensees not willing to lend the amount needed by the  
            borrower." 
           
          When the AMPG survey asked borrowers whether the amount they had  
            borrowed was the amount needed, over 60% of respondents  
            indicated that the amount they borrowed was what they needed  
            when reporting the minimum amount borrowed (79%) and the  
            maximum amount borrowed (63%).  Opponent Center for  
            Responsible Lending (CRL) argues these findings demonstrate  
            that most payday loan borrowers are satisfied with the amount  
            they received and that borrowers do not need more than the law  
            currently allows. 

          From a policy standpoint, the cap on payday loans represents a  
            decision by the Legislature that the product should only be  
            used for a short term loan of no more than $300 (arguably due  
            to the risks involved in higher loan amounts).  If, in fact,  
            the intent in enacting the CDDTL was to provide consumers with  
            sufficient funds to meet  all  emergency credit needs, there  
            would be no cap on the amount of the loan.  Accordingly, the  
            policy choice represented below is not whether the current pay  
            day loan amount is sufficient to satisfy all short-term credit  
            needs, but whether the increase would exacerbate the  
            recognized risks associated with payday loans.  Opponent  
            consumer groups argue that this bill would in fact aggravate  
            the risk to struggling consumers.  (See Comment 3(b).)

          b.   Effect of increasing loan limit to $500  

          As noted above, the AMPG study indicated that "[a]lthough most  
            borrowers report turning to payday lenders as a one-time  
            solution to an immediate financial need, most report that the  
            establishment of a payday loan account opens the door to a  
            repetitive cycle of borrowing that is difficult if not  
            impossible to end."  

          Payday lending has even been called a "business model that  
            encourages chronic borrowing."  (Michael Stegman, "Payday  
            Lending: A Business Model that Encourages Chronic Borrowing,"  
            Economic Development Quarterly, Vol. 17 No. 1, February 2003.)  
                                                                      



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             Because borrowers often cannot repay a loan and meet other  
            expenses, they must pay off their current loan with their  
            paycheck and then very soon afterwards, sometimes immediately,  
            take out another loan.  The California Budget Project notes,  
            "[l]ess than 4 percent of payday loans went to Californians  
            who took out just a single loan during the entire year.  More  
            than 170,000 Californians took out 13 or more payday loans.   
            Nearly half (48 percent) of payday loan borrowers in  
            California take out payday loans at least once per month. . .  
            "

           As a result, the public policy question raised by this bill is  
            whether increasing the loan limit to $500 will harm payday  
            loan consumers by ensuring that they are caught in a  
            repetitive cycle and by making it even more difficult for them  
            to pay off their debt. 

          Opponents California Nurses Association/National Nurses  
            Organizing Committee argue that increasing the maximum payday  
            loan amount from $300 to $500 "would simply increase the debt  
            carried by low-wage workers.  . . .  80% reported to the  
            Department of Corporations that the maximum loan of $300 was  
            the amount they needed.  Furthermore, the same consumers who  
            are struggling to pay off a $300 debt are unlikely to be able  
            to re-pay a $500 loan."  

          CRL also writes "the high cost of payday loans, together with  
            the short two-week repayment term, virtually ensures that  
            cash-strapped borrowers will not be able to meet their basic  
            expenses and pay off their loan at their next payday.  It  
            follows, then, that increasing the amount of debt payday  
            borrowers owe will only increase the likelihood that payday  
            borrowers will not be able to pay off the loan at their next  
            payday, and will be more likely to land in the debt trap."   
            Opponents also note that data from the California Budget  
            Project shows that "a typical earner taking out a payday loan  
            in California would be $148 short of the amount necessary to  
            meet all essential household expenses and pay off a payday  
            loan under current law.  The same borrower would fare worse,  
            and would be $348 short under the proposal to increase the  
            loan amount to $500."

          According to CRL, a new study recently released by the group  
            finds that 76% of borrowers, after repaying one payday loan,  
            must take out another loan before their next paycheck.  The  
            study, entitled "Phantom Demand: Short-term Due Date Generates  
                                                                      



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            Need for Repeat Payday Loans, Accounting for 76% of Total  
            Volume," found that half of all new loans are opened at the  
            borrower's first opportunity (immediately or after a 24-hour  
            or more waiting period where required).  The study, which was  
            largely based on data from Florida and Oklahoma-both states  
            with a $500 loan limit-also found that  87% of new loans are  
            opened within two weeks, or generally before the next payday,  
            and only six percent of subsequent payday loans are taken out  
            longer than a month after the previous loan was paid off.  CRL  
            notes:

               This rapid, widespread re-borrowing indicates that most  
               payday borrowers are not able to both repay one of these  
               loans and clear a monthly billing cycle before having to  
               borrow again.  In essence, the bulk of payday loan demand  
               comes from borrowers who are taking out a payday loan to  
               repay a payday loan.  AB 377 would make payday loan  
               re-borrowing even more problematic by raising the loan  
               limit from $300 to $500.  Borrowers unable to pay back $300  
               in one full payment in two weeks will find it even more  
               difficult to repay $500. 

            Given the concerns expressed above, DOES this bill's increase  
            of the loan limit to $500 ensure that payday loan consumers  
            are caught in a repetitive cycle of re-borrowing which may be  
            "difficult if not impossible to end?"

          4.  Borrowers could elect to repay their loan under a repayment  
            plan once a year 
           
          This bill partially implements DOC's Option #6 which suggested  
          requiring licensees to offer a payment plan with a minimum  
          number of six, equal monthly installment payments to a borrower  
          who is unable to repay a loan.  This bill instead 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.  According to the author, this provision  
          is key to addressing the  issue of re-borrowing, asserting that  
          it offers "a failsafe solution-a no-cost extended payment plan  
          that gives consumers longer to repay the loan and breaks the  
          loan cycle."  The author provides the following example: "If  
          borrowers take out consecutive loans because they were $150  
          short of paying the loan off in full, then a repayment plan will  
          solve this problem.  The repayment option in our bill will give  
          borrowers a two week reprieve before the four payment plan  
                                                                      



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          begins.  Even at the $500 limit, the borrower would still be  
          able to pay the loan off under the prescribed repayment plan."

          Opponent Sacramento Area Congregations Together (ACT) raises  
          concerns about the repayment plan in the bill, stating:

            [E]xperience in other states such as Florida, Oklahoma, and  
            Washington shows that payment plans do little to help end the  
            debt trap.  The average number of loans per borrower per year  
            in those states is comparable to the national average of 9.   
            Indeed, as proposed in AB 377, few borrowers would actually  
            choose the payment plan.  Today, many borrowers who are unable  
            to repay their loan take out a new loan and use the proceeds  
            to pay off the outstanding loan.  . . .  Under AB 377,  
            borrowers would be given the choice of continuing that  
            practice-which costs them $45 out of pocket-or opting for the  
            payment plan, which requires an initial payment of $75.  It is  
            easy to see that many borrowers are going to choose the option  
            that is cheaper in the short term, and simply take out a new  
            payday loan.  Few would choose the payment plan.

          CRL further explains that "[i]n states that have legislated  
          these guidelines, the debt trap persists.  Nearly two of every  
          three loans still go to borrowers with twelve or more loans per  
          year and less than one percent of transactions use the  
          'mandatory' payment plan."  The problem with these plans, CRL  
          explains, is that "there is little incentive for lenders to  
          actually provide them.  It's almost always better for the  
          lenders to get the borrower to take out a new loan than it is to  
          get them in a no-cost repayment plan."

          It is also important to note that the repayment plan in this  
          bill largely mirrors the California Financial Services  
          Association's (CFSA) Best Practices and Guidelines for Extended  
          Payment Plans, and industry representatives have indicated that  
          many in the industry, in particular CFSA members, already offer  
          this plan to customers.  

          Opponents have suggested that the payment plan provision be  
          amended to provide for six fully amortizing installment payments  
          at least 14 days apart.  Consumers Union explains, "Six  
          installment payments will bring the payments to $42.50, less  
          than the $45 required to get a new loan in California."  Also,  
          they suggest that a borrower have the right to choose a  
          repayment plan at least four times in a 12-month period.  

                                                                      



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          GIVEN THE CONCERNS EXPRESSED, DOES THE REPAYMENT PLAN IN THIS  
          BILL ACTUALLY HELP A BORROWER "BREAK THE LOAN CYCLE," AS THE  
          AUTHOR INTENDS OR ARE OPPONENTS RIGHT TO BE CONCERNED THAT THE  
          PLAN WOULD BE INEFFECTIVE BECAUSE: (1) IT WOULD BE MORE  
          EXPENSIVE TO TAKE ADVANTAGE OF A REPAYMENT PLAN THAN TO SIMPLY  
          SIGN UP FOR A NEW LOAN; AND (2) EXPERIENCE IN OTHER STATES HAS  
          SHOWN IT TO BE INEFFECTIVE? 

          5.  Bill would specifically authorize internet payday lending 
           
          This bill would implement DOC Recommendation #5 to require a  
          lender who provides a payday loan over the Internet to  
          electronically give to the customer all of the required notices  
          and the written agreement.  It would also revise existing  
          advertising requirements to specify that the restrictions apply  
          also to advertising on the Internet.  

          The author writes in support of this provision, "[t]he Internet  
          lending provisions of the bill are intended to protect consumers  
          by requiring Internet loans to meet the same standards as loans  
          provided in brick and mortar stores.  Concerns over this  
          language have been expressed to our office because opponents  
          believe that the provisions will 'legitimize' Internet lending.   
          We understand the concerns, but it is clear that Internet  
          lending is taking place in California now.  Therefore, it is  
          vital that these loans are regulated."

          Opponents raise concerns that the bill explicitly authorizes  
          Internet payday lending.  They point out that such lending is  
          not specifically authorized in California, and one might even  
          argue that the CDDTL was never intended to cover Internet  
          lending as it contained a number of requirements more  
          appropriate to a bricks-and-mortar location.  The California  
          Labor Federation, AFL-CIO writes that "[t]here are enough risks  
          in payday lending without expanding Internet lending, which  
          makes it harder for consumers to understand the terms of the  
          loan or hold a company accountable for overcharges.  Many  
          Internet lenders are based out of state, and many more are  
          tribal entities, so the applicability of any state lending laws  
          is questionable." 

          IS IT APPROPRIATE TO STATUTORILY AUTHORIZE INTERNET PAYDAY  
          LENDING? 

          6.  Bill's five-cent fee to be used for financial literacy  
            education programs 
                                                                      



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          This bill's requirement that licensees pay a five-cent fee for  
          every payday loan transaction paid in full in the previous  
          calendar year was not contained in the DOC report.  The fee,  
          which cannot be passed on to customers, must be used to support  
          financial literacy education programs regarding payday loans in  
          California.  Others have also pointed out the importance of  
          education in this area, writing "[t]oo often credit counseling  
          and financial education begin when people are already in a debt  
          crisis.  According to Federal Reserve Chairman Alan Greenspan, a  
          greater degree of financial literacy cannot only improve the  
          financial status of families, but also 'help avoid or ameliorate  
          the negative consequences of uninformed decisions.'"  (Stegman,  
          "Payday Lending: A Business Model that Encourages Chronic  
          Borrowing," supra. at 28.)

          7.  Right to rescind 
           
          This bill gives payday loan customers a right to rescind their  
          payday loans by the close of the business day following the day  
          on which the loan was taken out.  Opponents point out that this  
          language is already in the CFSA's Best Practices, and very few  
          customers rescind their payday loans.  


          8.  Other DOC recommendations included in the bill 
           
          This bill implements several other recommendations contained in  
          the DOC report, including, among others, clarifying 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, and requiring licensees to keep  
          copies of their advertising for at least two years and ensure  
          the availability of advertising records for audit purposes.   
          Other recommendations included in the bill require that the  
          notice provided to borrowers before they enter into a payday  
          loan agreement be a separate, distinct document from the written  
          agreement, and that the licensee must also have the borrower  
          initial a copy of the notice to acknowledge receipt and retain a  
          copy of that acknowledgement.  The bill also contains various  
          licensing-related provisions suggested in the DOC report. 

          9.  Opposition suggestions 
           
          CRL and others have requested that the author amend the bill to  
          incorporate DOC Option #5 which suggests that consumers be  
                                                                      



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          restricted "from having payday loans outstanding from any payday  
          lender for more than three months in the previous 12 months.   
          This would prevent borrowers from utilizing the payday loan as a  
          long-term source of credit."  This alternative is similar to the  
          guidelines issued by the FDIC in which the FDIC noted that "when  
          payday loans are used for a long period of time, the fees  
          charged can rapidly exceed the amount borrowed and can create a  
          serious financial hardship for the borrower."  

          The author has indicated that he believes these loan limits are  
          too restrictive and would have the potential to limit access to  
          payday loans.  Similarly, any call for a cap on the number of  
          loans is equally problematic. 
           

          Support  :  Alameda Merchant's Association; Brotherhood Crusade;  
          California Black Chamber of Commerce; California Financial  
          Service Providers; California Hispanic Chambers of Commerce;  
          California State Conference of the National Association for the  
          Advancement of Colored People; Check into Cash; Check n' Go of  
          California; Community Financial Services Association; Hispanic  
          Chamber of Commerce of Silicon Valley; Initiating Change in Our  
          Neighborhoods, Community Development Department; League of  
          United Latin American Citizens; Los Angeles Metropolitan  
          Hispanic Chambers of Commerce; National Hispanic Christian  
          Leadership Conference; Plaza de la Raza; Sacramento Asian and  
          Pacific Islander Chamber of Commerce; Regional Hispanic Chamber  
          of Commerce; Sacramento Hispanic Chamber of Commerce; San Diego  
          County Hispanic Chamber of Commerce; Teamsters Joint Council 42,  
          Urban League of San Diego County; Several individuals

           Opposition  :  AARP; African-American Network of Kern County;  
          Black Economic Council; California ACORN; California Association  
          of Food Banks;  California Conference Board of the Amalgamated  
          Transit Union; California Labor Federation; California Nurses  
          Association/National Nurses Organizing Committee; California  
          Reinvestment Coalition; California Teamsters Public Affairs  
          Council; Center for Responsible Lending; Christ Our Redeemer,  
          African Methodist Episcopal Church; City of Sacramento; City of  
          San Francisco, Office of the Treasurer & Tax Collector; Consumer  
          Federation of California; Consumers Union; El Futuro Credit  
          Union; Engineers and Scientists of California; Fair Housing  
          Council of Central California; Fresno Housing Alliance; Fresno  
          Metro Ministry; Fresno West Coalition for Economic Development;  
          Greenlining Institute; International Longshore & Warehouse  
          Union; Latino Issues Forum; Professional & Technical Engineers,  
                                                                      



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          Local 21; Sacramento Area Congregations Together; San Francisco  
          Asian Housing Task Force; UNITE HERE!; United Food and  
          Commercial Workers Union, West Angeles Community Development  
          Corporation; Western States Council; One individual

                                        HISTORY
           
           Source  : Author

           Related Pending Legislation  :  AB 545 (Salas) would authorize the  
          commissioner to implement a system enabling a licensee to  
          receive specified information regarding a consumer's history  
          with payday loans.  This bill was referred to the Assembly  
          Banking and Finance Committee but was never scheduled for  
          hearing. 

           Prior Legislation  :  SB 1551 (Correa, 2008) would have  
          implemented all or a portion of nine of the 12 regulatory  
          oversight recommendations made by DOC in its March 2008 report.   
          The bill failed passage in this Committee. 

           Prior Votes  :
                                                                           
          Assembly Banking and Finance Committee (Ayes 10, Noes 1)
          Assembly Appropriations Committee (Ayes 9, Noes 0)
          Assembly Floor (Ayes 53, Noes 8)
          Senate Banking, Finance and Insurance Committee (Ayes 7, Noes 1)

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