BILL ANALYSIS
AB 2511
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2511 (Skinner) - As Amended: March 25, 2010
SUBJECT : Deferred deposit transactions: recipients of
unemployment benefits.
SUMMARY : Prohibits a deferred deposit transaction (DDT) from
being made to a person receiving unemployment benefits unless
the interest charged for the ddt does not exceed a 36% annual
percentage rate (APR). Specifically, this bill :
1)Defines APR as having the same meaning as set forth in Section
1606 of Title 15 of the United States Code.
2)Defines "Interest" as all charges payable directly or
indirectly by a borrower to a deferred deposit transaction,
including any fee including a returned check fee, check
cashing fee, and any ancillary product sold in connection with
the DDT.
EXISTING FEDERAL LAW
1)Defines "APR" and provides formula for its computation.
(Title 15 USC Section 1606).
2)Imposes a 36% APR on consumer extended to members of the
military and their dependents and prohibits the use of a
personal check as a contingent requirement in a loan
transaction. (10 USC Sec. 987.)
EXISTING STATE LAW
1)Establishes the California Deferred Deposit Transaction Law
(CDDTL) (also known as the Payday Loan Law, 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,
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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;
d) Allows 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 a listing of the borrower's
rights;
e) Requires each payday loan agreement to be in writing in
the font 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,
but prohibits the lender from charging any additional fee
in connection with the extension or payment plan;
g) Requires each licensee to maintain a net worth of at
least $25,000 at all times; and,
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 ddt with a person lacking the
capacity to contract;
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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 likely to mislead
in connection with the business of DDTs;
vii) Offering, arranging, acting as an agent for,
or assisting a deferred deposit originator in any way in
the making of a DDT unless the deferred deposit
originator complies with all applicable federal and state
laws and regulations;
2)Provides that licensees who violates 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;
3)Specifies that anyone that violates any provision of Section
670 of the John Warner National Defense Authorization Act for
Fiscal Year 2007 (Public Law 109-364) or any provision of
Section 232 of Title 32 of the Code of Federal Regulations, as
published on August 31, 2007, in Volume 72 of the Federal
Register, violates the California payday loan law. (Financial
Code, Section 22345)
4)Provides that a person that refuses to offer a payday to a
member of the military is not in violation of the Military and
Veterans Code provision relating to discrimination against
members of the military. (Financial Code, Section 23038).
FISCAL EFFECT : Unknown
COMMENTS :
This bill arrives to the committee via a Los Angeles Times
article, Payday Lenders Giving Advances on Unemployment Checks,
which revealed that payday lenders have been offering payday
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advances for consumers receiving unemployment benefits.
Typically, in a payday loan transaction the borrower provides
proof of income through a recent pay stub. The LA Times article
details how payday lenders are now offering loans by accepting
unemployment checks as proof of income. Close to 1.4 million
California residents are receiving unemployment benefits, with
an average benefit of $300 per week, only 30% of the average
wage of an employed worker.
Under California law a payday loan transaction provides that the
face amount of the check presented by a borrower may not exceed
$300, and the fee charged by the licensee may not exceed 15% of
the face amount of the check ($45 on a $300 check), so the
customer nets $255. Licensees may charge one non-sufficient
funds fee, capped at $15, for checks that are returned by a
customer's bank. Licensees may not directly, or indirectly
charge any additional fees in conjunction with a payday loan.
Licensees may not enter into a payday loan with a customer who
already has a payday loan outstanding and may not allow a
customer to use one loan to pay off another, though enforcement
of this provision faces many obstacles. Licensees are also
forbidden from accepting any collateral for a payday loan or
making any payday loan contingent on the purchase of any goods
or services. Each payday loan must be made pursuant to a
written agreement. Licensees must post their fees and charges
clearly and in plain view at their business locations.
Additionally, and often a major point of confusion is that
payday loans may not be "rolled over," meaning that the borrower
could pay additional finance charges to extend the loan. In the
research of payday loans "rollovers" are often a description for
when a borrower pays off a loan and immediately takes out a new
loan.
Consumer organizations highlight that payday loans are a "debt
trap" meaning that the borrower gets stuck in a cycle of debt
leading to further deficits in personal income. For example, if
the borrower doesn't have $255 today for expenses then will the
borrower have the extra money after paying their regular bills
to pay back the loan in two weeks when the loan comes due? In
many cases, the borrower simply takes out additional loans,
back-to-back, in an attempt to make up the lack of personal
funds.
The bill currently under consideration is not the first time
that a specific class of payday loan borrowers are offered a 36%
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APR. On October 1, 2007 Section 670 of the John Warner National
Defense Authorization Act of 2007 (Public Law 109-364) became
law. Section 670 caps the interest rate on consumer loans to
members of the military to 36% and, among others things,
prohibits a creditor from using a check or other method of
access as security for a loan obligation. At the same time,
Congress was considering this change, the legislature heard and
the governor signed AB 7 (Lieu), Chapter 358, Statutes of 2007,
which modified state law to conform to the federal legislation.
The effect of the federal law was to effectively ban payday
loans to members of the military through the prohibition on
using a personal check as collateral for the loan. AB 7, in
additional to conforming changes, provided a safe harbor to
payday lenders from the state's statutes that prevent financial
service entities from discriminating against members of the
military on the basis of their membership in the armed forces.
Committee staff is not aware of any studies or other data that
demonstrate how the aforementioned state and federal laws have
changed the borrowing habits of members of the armed forces.
Payday loan alternatives.
What payday loan alternatives exist for consumers? Over the
last 30 years consumer lending has undergone a significant shift
in that most depository financial institutions moved away from
offering small dollar personal loans. It appears that in some
cases the small consumer loan business is beginning to find its
way back into the branches of banks and credit unions. However,
it would be fair to say that a major gap still exists in the
small dollar consumer loans market place. That niche is
currently dominated by payday lenders. Some of these products,
such as payday advances tied to checking or savings accounts
offered by banks and credit unions would appear to be a step in
the right direction that offer consumers a viable alternative.
Several credit unions in California have started offering payday
loan type products. For example, Patelco Credit Union in San
Francisco offers a revolving credit line of up to $750 with a
$10 fee per withdrawal which equals a 17.8% APR. This type of
loan requires at a minimum a credit check. Golden 1 Credit
Union, California's largest credit union, also has a payday loan
type product. Nationwide, several federal credit unions offer
these products varying in loan amounts from $50 to $500 with a
range of interest rates and charges. However, it is important
to note that due to differences in state and federal law, state
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chartered credit unions in California may not offer services to
non-members. Those programs that do exist in California are
limited to credit union members, so the instant nature of the
transaction with a payday lender is not similar to that of a
credit union where the borrower must be a member and go through
a loan underwriting process.
In February 2008, the Federal Deposit Insurance Corporation
(FDIC) issued guidance for financial institutions to establish
pilot programs for small dollar loan programs. The FDIC
guidelines provided for the following parameters of the program:
1)Loan amounts of up to $1,000;
2)Amortization periods longer than a single pay cycle and up to
36 months for closed-end credit, or minimum payments that
reduce principal (i.e., do not result in negative
amortization) for open-end credit;
3) APRs below 36 percent;
4)No prepayment penalties;
5)Origination and/or maintenance fees limited to the amount
necessary to cover actual costs; and,
6)An automatic savings component.
This pilot program began with 31 banks. While it is still early
to judge the success of this program, according to the FDIC, the
participating banks thus far view the program as a long-term
strategy to attract new customers and new relationships.
On the flip-side, other alternatives exist that may be far worse
than payday loans. For example, one particular California
lending entity offers a loan of $2,600 with a $75 origination
fee. The repayment schedule on this loan is 36 payments of
$298.94. That means that for a loan of $2,600 the interest
charges if paid back over 36 payments are $8161.84.
Additionally, an internet search of online payday lending sites
reveals numerous entities offering online payday loans,
headquartered out of the state's jurisdiction, offering payday
loans as high as $1500 with fees as much as $30 to $50 dollars
per hundred borrowed.
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While it is important and vital that more mainstream type
lending products become available to consumers, the typical
options for a consumer who needs cash fast are very limited if
they are not already a member of a credit union or bank that
offers some type of product. In previous debates on this issue,
some have suggested that borrowers could use credit cards,
borrower money from family or friends, or seek out local
community assistance programs. In the current economic climate,
it is reasonable to assume that consumers have little credit
balance left on their credit cards to meet their needs, or may
not even credit cards at all. Even if they do, credit card
interest rates can create debt cycles of their own.
DOC Reports .
On March 10, 2008, the DOC released two reports to fulfill its
requirements under Section 23057 of the Financial Code. The two
reports are titled, "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 report).
The key findings from the aforementioned reports:
1)California is home to 447 licensed payday lenders, which
operate 2,403 licensed payday lending stores. A total of 338
licensees indicated to AMPG that they were actively making
loans during the study period of April 15, 2006 through
September 11, 2007.
2)Over two-thirds of all payday loans are made by only twelve
licensees (AMPG). The largest 30 licensees made 82% of payday
loans by dollar volume during 2006 (DOC).
3)Over 61% of all licensees operate only one payday loan
location (AMPG).
4)Forty-nine of the state's 58 counties have at least one payday
loan location. With 166 payday loan locations, the City of
Los Angeles has the highest concentration of payday loan
locations of any city in the state. The City of Sacramento is
second, with 81 locations (AMPG).
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5)Sixteen licensees (3.5%) reported making over 115,000 payday
loans over the Internet during 2006 (DOC).
6)The average length of a payday loan is 16 days (DOC).
7)Most payday lenders advertise using large, conspicuous signage
on the outsides of their licensed locations (DOC). Many (70%)
also advertise in local telephone directories; a smaller
percentage advertise in local newspapers (29%) and Internet
directories (27%; AMPG).
8)Before agreeing to lend to a borrower, most licensees require
the borrower to provide identification, proof of some form of
income, a home address, employer's address, and checking
account information. Licensees rarely conduct a credit check
or verify whether the borrower has the ability to repay the
loan, when their other debts and expenses are considered.
Most payday loans can be obtained in under 15 minutes (DOC).
9)Most lenders accept any kind of verifiable income as proof of
income, other than unemployment checks or reports of
self-employment (AMPG). Payroll checks, government assistance
checks, retirement checks, disability checks, annuity and/or
structured settlement checks are the most common forms of
income verification accepted. Although all payday loan
customers are required to have and show proof of an active
checking account, only 5% of licensees require that borrowers
have the qualifying income deposited directly into their
checking accounts (AMPG).
10)Most licensees require borrowers to complete an application
for their first loan with that licensee. Future loans can be
obtained without the need to complete another application,
unless the applicant needs to update his or her information
(DOC).
11)Cash is the most common method of distributing loan proceeds
to borrowers, although the option of electronically depositing
the funds into customers' bank accounts is increasing in
popularity among licensees (DOC).
12)Eighty four percent of licensees' business is attributable to
repeat customers (only sixteen percent comes from customers
who take out only one loan). Nineteen percent of licensees'
business is attributable to customers who took out more than
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15 loans during the 18-month period studied by AMPG.
13)Forty one percent of licensees offer some type of bonus
(either cash or gifts) to customers who refer new business to
the licensees. Cash is much more common than other types of
gifts. Of those who offer cash bonuses, nearly one half offer
$10 or less, and just under one third offer between $20 and
$25 (AMPG).
14)Very few licensees accept personal checks for repayment (this
despite the fact that a post-dated check is required in order
to obtain a payday loan). Customers commonly pay off their
loans in cash. Nearly all lenders who do accept personal
checks for repayment charge non-sufficient funds (NSF) fees
for returned checks (DOC and AMPG).
15)Fifty seven percent of licensees require customers to borrow
at least $50. The majority of loans (63%) are between $200
and $255. Twenty lenders responded that the minimum amount
they would lend was $255 (AMPG).
16)Although lenders may charge up to $45 in loan fees to lend
the maximum amount of $300, 14% of lenders charge less than
$45 on $300 loans. The smallest amount charged on a $300 loan
was $25, corresponding to a maximum loan amount of $275
(AMPG).
17)Licensees reported making over $110 million in loans that
were not repaid. Once loans have been in default for over 91
days, most lenders (72%) write the defaulted amount off as bad
debt (AMPG).
18)Licensees charge off approximately 3% of their checks as bad
debt (DOC). This finding contrasts with AMPG's finding that
12% of all loans outstanding in an average month are over 91
days delinquent and in default.
19)To prevent the loss of revenue due to defaulted loans, most
lenders (87%) offer arrangements in which borrowers are
allowed to pay back loans at a reduced rate or based on an
agreed-upon schedule. Lenders reported that about 20% of
loans issued during the eighteen-month study period required
some type of workout arrangement (AMPG). However, less than
1% of all payday loan customers entered into formal, written
payment plan arrangements during 2006 (DOC).
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20)Seventeen percent of payday loan customers received only one
payday loan during 2006 (DOC). DOC also found that 57% of all
payday loan customers received between two and five loans
during 2006, 19% received between six and twelve loans, and 4%
received between thirteen and eighteen loans during 2006.
Customers who take out multiple loans in a year tend to do so
in a consecutive fashion (with less than five days elapsing
between paying the first one off and obtaining a second one).
21)Of those borrowers who obtained more than one payday loan in
the last eighteen months, 28% used multiple locations of the
same payday lender; 72% used multiple lenders (AMPG).
22)Borrowers were asked whether the amount borrowed was the
amount needed or the most the lender would loan. When asked
in this way, 63% of borrowers said they borrowed the amount
needed; 32% said they would have borrowed more, but the lender
wouldn't loan it; and only 3% said that the lender offered
more than the borrower needed.
23)When borrowers were asked where they obtained the rest of the
money they needed if they could not obtain all they needed
from the payday lender, 8% said they borrowed the money from
family or friends, 8% said they did not get the rest of the
money they needed, 5% waited until their next payday, 3% went
to another payday lender, and less than 1% borrowed money from
a bank.
24)Thirty-six percent of borrowers indicated they had used more
than one payday lender. When asked why, 73% said they needed
more money than one location would loan them at one time, 12%
said they needed more money before the loan with the first
company could be paid off, and 11% said they used one loan to
pay off another.
Report policy recommendations.
1)Clarify and confirm that licensees cannot refer delinquent
payday loans to a local prosecutor for collection of returned
checks
2)Enhance the regulation of electronic transactions.
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3)Improve consumer disclosures by requiring that the notice
provided to borrowers prior to entering 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. .
4)Require license applicants and existing licensees to notify
DOC of other business that would be or is being conducted at
the licensed location.
5)Expand consumer protections for payday lending conducted Over
the Internet by requiring that notices and disclosures are
provided to Internet borrowers, and that borrowers can
download the agreement, notices, and disclosures.
Alternately, if the borrower cannot download those documents,
require the licensee to mail copies to the borrower within 24
hours.
6)Require that payment plans entered into between licensees and
borrowers specify the payment dates and amounts of each
payment, be in writing, and be signed by the borrower.
7)Require a written agreement signed by the borrower in order to
extend the due date of a loan. Provide the licensee with an
option to notify the borrower by mail of the approval to
extend the due date of the loan, if the borrower elects not to
sign the extension agreement. Like the recommendation above,
this recommendation would help avoid misunderstandings between
lenders and borrowers over repayment plan terms.
8)Require licensees to prominently disclose that borrowers have
the right to request a written extension agreement and payment
plan.
9)Require that specific language be used in payday loan
advertising to disclose one's licensure by the DOC, and
require that all advertising disclosures be in the same
language as the advertising itself.
10)Require (rather than authorize) 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
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way in which the information may be presented.
11)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). 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. 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.
12)Confirm DOC's jurisdictional nexus over payday lending
activities by stating that a payday lender is subject to the
CDDTL when it conducts deferred deposit transaction business
"in this state."
13)Expand the grounds for barring, suspending, or censuring
persons managing or controlling payday lenders, and for
denying, suspending, or revoking licenses
14)Allow DOC to issue administrative orders to prevent unsafe
and injurious practices, and make these orders effective
within 30 days, if no hearing is requested by the person(s)
accused. Allow DOC to suspend or revoke a license for failing
to maintain a surety bond, as required by law, through more
expedient administrative orders.
15)Increase the civil penalty for violating the payday loan law
from $2,500 to $10,000 per violation. Allow administrative
penalties of up to $2,500 per violation to be levied and
collected through specified administrative hearing procedures.
16)Require the preparation and retention of accurate records and
reports by licensees.
17)Authorize the Commissioner to subpoena all books and records
of payday lenders.
18)Allow DOC to seek a court order to enforce any administrative
decision awarding restitution, administrative penalties other
than citations, and cost recovery, without having to file a
civil suit and motion for summary judgment.
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19)Provide that a citation is deemed final if the cited licensee
fails to request a hearing within 30 days of receiving the
citation. Allow DOC to issue a citation to assess an
administrative penalty, not to exceed $2,500 per violation
(rather than $2,500 per citation).
20)Streamline DOC's ability to void loans and order fees
forfeited. Clarify that DOC has the authority to order the
voiding of loans and the forfeiture of fees by administrative
order, rather than by pursuing a civil suit.
21)Change the payday loan origination fee from a percentage of
the face value of the check to a flat fee.
22)Increase the maximum amount of a payday loan from $300 to
another amount, such as $500 or $750.
23)Adjust fees based on the loan amount, with a sliding scale
that reduces the fee as the amount borrowed goes up.
24)Prohibit a licensee from entering into a deferred deposit
transaction with a customer during the period-of-time that the
customer has an outstanding deferred deposit transaction with
another licensee.
25)Restrict a customer from having a payday loan outstanding
with any payday lender for more than three months during a
twelve-month period.
26)Require licensees to offer a payment plan with a minimum of
six equal, monthly installment payments to all borrowers who
have had continuous (consecutive) loans for three months, and
prohibit licensees from charging customers any additional fees
or interest in connection with the payment plan.
27)Require all licensees to use a uniform database to record all
transactions in real time
What does 36% APR mean?
Obviously, rates caps for payday loans are the subject of
contentious debates between consumer advocates and payday
lending representatives. Consumer advocates contend that a 36%
APR cap will provide borrowers with an affordable product, while
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industry representatives contend that such caps will effectively
shut down business. In other states that have passed 36% caps,
payday lending has virtually disappeared, or in some cases, such
as Ohio, payday lenders have sought new licensees to offer
similar products, thereby circumventing the restrictions. Based
on a video clip found at
http://www.responsiblelending.org/payday-lending/tools-resources/
payday-lending-a-400.html , at least some on the consumer side
think and potentially hope that a 36% cap is unsustainable for
the payday loan industry. At the four minute and fifty-six
second mark of the video clip the narrator says:
"?Arizona will be the 16th state to eliminate payday
lending by enforcing an interest rate cap of 36%..."
Furthermore, a March 27, 2010 Los Angeles Times Article, "Bill
Would Cap Payday Loan Interest for Jobless", made the following
reference:
"Assemblywoman Nancy Skinner (D-Berkeley) introduced a bill
that would cap interest rates for loans to the jobless at a
percentage so low it would all but eliminate the advances."
It would appear that the goal of this legislation is not to
provide a cheaper product for unemployed borrowers, but to ban
payday lending to these borrowers entirely.
While an APR disclosure is required per federal law (Truth in
Lending Act), it may not be the best indicator of the costs with
short-term loan products. At best, it is a blunt instrument.
As mentioned earlier, the APR on a $255 payday loan plus a $45
dollar fee is 460%. What is the actual amount of charges a
borrower would pay at 36% APR? First, under current law the
face amount of the check from the borrower to the lender can not
exceed $300. Without a tweak to the face amount of the check
under current law the potential math in not as precise as it
could be, so the example will use the maximum amount of face
value of the check under the current law as the starting point.
Under this bill, a payday loan of $300 to an unemployed borrower
at 36% APR would equate to a fee of approximately $4.15. To
additionally put the APR calculation into perspective, if a
consumer goes to an ATM outside their financial institution's
network and withdraws $20 and assume a $2.50 fee (fairly
common), the APR for that transaction is 4,562%. Additionally,
if a consumer bounces a $100 check and assume that the overdraft
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fee is $36 (industry median) and that the fee is paid through
the normal cycle of the customers checking account within 30
days, the APR for that transaction is 438%.
Arguments in support.
The Center for Responsible Lending writes in support:
"Recently, the Los Angeles Times reported that "[t]he
payday loan industry has found a new and
lucrative source of business: the unemployed." According to
Department of Labor
statistics, the average Californian receiving unemployment
insurance benefits receives
$317.59 per week, or $1,270.36 per month, a mere 31.6% of the
average wage in California.
What does this mean? It means that Californians receiving
unemployment insurance
benefits have already taken a substantial cut in their take-home
pay, already need to
re-budget and prioritize their expenses and certainly are not
served by replacing that income
with debt having annual interest rates of 459%.
Given the high price of a payday loan and the short term
for payoff (2 weeks), it is almost
certain that struggling borrowers will be unable to meet their
basic expenses and pay off
their loan when the next unemployment check comes. With
unemployment income only a
third of pre-unemployed income, without a more affordable 36%
APR interest rate, the
likelihood of these borrowers being unable to pay off the payday
loan and quickly
becoming trapped in debt is all that much higher."
The California Reinvestment Coalition also writes in support:
"Our organization supports restrictions on the practices of
payday lenders because thy
industry's model of making expensive (459% APR), small-dollar,
short-term loans
virtually guarantees that customers will fall into an
inescapable cycle of debt, a
phenomenon that has been well documented through public data and
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numerous studies.
Moreover, we believe that public benefit resources should assist
people facing financial
hardships, not enable predatory payday lenders to further profit
off of peoples' adverse
circumstances."
Arguments in opposition.
The California Financial Service Providers (CFSP) write in
opposition:
"This bill would restrict the amount a licensee can charge
on a differed deposit transaction loan to
36% APR. This means a licensee would make $1.38 per $100 for a
two week deferred deposit transaction. A licensee would make
less return on a loan than would be made by
simple cashing a government check. This bill creates what
amounts to a ban on offering
deferred deposit loan transactions to anyone who is receiving
unemployment benefits because each such loan would require the
licensee to lose money. A licensee's costs,
such as paying rent, staff, borrowing money and paying utilities
and taxes, result in an average cost per loan far in excess of
what could be earned."
CFSP, as well as, Check Into Cash and Axcess Financial raise in
their opposition issues related to the federal Equal Credit
Opportunity Act (ECOA) and Regulation B (Federal Reserve
regulation that implements ECOA). ECOA prohibits discrimination
in lending based on the source of the borrowers income.
Specifically, ECOA was implemented to address discrimination
against borrower who receive some form of public assistance, as
defined, such as Social Security. The basis of this argument
is that because AB 2511 effectively prohibits the offering of a
payday loan to unemployed borrowers, payday lenders would be in
violation of ECOA because they would have to deny credit based
on the source of income.
Questions.
1)Why 36% APR? Does any data exist that provides context and
support for why a 36% APR is better than some other number?
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2)How will this be enforced? Source of income verification is
not required under current law, but instead, is an industry
practice that is not universal. Payday lenders could simply
not ask about source of income, or borrowers desperate for
cash could attempt claim income from other sources.
3)Is a 36% rate cap a ban on the product for unemployed
borrowers? If the motivation behind the bill is a ban on the
product, then the committee may wish to consider a larger
discussion and review regarding the potential ban of the
product for certain classes of borrowers or even a complete
ban?
4)If payday lenders believe that the 36% APR cap effectively
bans lending to the unemployed, and then they refuse to
provide loans to the unemployed, could they be at risk of
litigation for discriminating against borrowers based on
source of income?
5)Where will unemployed borrowers go to get the money they need?
6)If unemployed persons should be protected from payday lending,
then what about other groups, ie: those on public assistance
or social security, part-time workers, furloughed employees,
borrowers in foreclosure, borrowers in bankruptcy.
7)Are there other alternatives to provide enhanced reform and
regulation of payday lending short of a rate cap of 36%?
Technical issue.
AB 2511 also includes a definition of "interest" that includes
any fee, including a returned check fee and any ancillary
product sold in connection with the DDT transaction. For
purpose of the 36% APR calculation, interest such as the
aforementioned items would need to be included in the final APR
calculation. In requiring that a returned check fee must be
calculated as interest this bill requires the lender to assume
that every transaction conducted with an unemployed borrower
will result in a returned check, even though the lender will not
have factual knowledge of this until after the payday loan is
not paid back. Also, it may be impossible to compute a 36% APR
if a returned check fee is counted as interest because in order
to do the computation the lender must know the length of time
between events. How would the lender be able to calculate, if a
AB 2511
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check is returned, and the length of time it would take for that
to occur? Furthermore, the requirement to calculate the above
mentioned items in the computation of APR is inconsistent with
TILA.
Additionally, the definition of interest may require computation
of potential charges as interest that are already prohibited
under current law. For example, Financial Code 23037 (c)
prohibits the a payday loan transaction from being contingent on
the purchase of other goods and servicers, but the definition of
interest in this bill would require the computation of the
charges of other servicers to be included in the APR.
If the point of this legislation is to ban payday loans to the
unemployed then the issues with the definition of "interest" may
be a moot point.
Related legislation .
AB 377 (Mendoza), 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. Payday loan lenders would
be required to pay a five-cent fee for each payday loan
transaction to the DOC to be used for financial literacy
education programs.
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. Currently
located in Senate Judiciary Committee.
AB 2845 (Jones, Bass & Feuer). At one point, would have capped
the APR on payday loans at 36%. Was amended in Assembly Banking
& Finance committee to state the intent of the Legislature to
enact changes recommended in two DOC reports. Held in Assembly
Rules Committee.
SB 1551 (Correa) of 2008 Would enact various changes intended to
improve regulatory oversight of the payday lending based on
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Page 19
recommendations found in the two reports referred to in this
analysis. Failed passage in Senate Judiciary Committee.
AB 7 (Lieu, Chapter 358, Statutes of 2007): Gave DOC the
authority to enforce specified federal protections granted to
members of the military and their dependents under the Payday
Lending Law.
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.
SB 898 (Perata, Chapter 777, Statutes of 2002). Enacted the
Deferred Deposit Transaction Law and shifted the responsibility
for administering the law to DOC;
REGISTERED SUPPORT / OPPOSITION :
Support
Alliance of Californians for Community Empowerment (ACCE)
California Labor Federation
California Reinvestment Coalition (CRC)
Center for Responsible Lending (CRL)
Consumers Union
National Employment Law Project
Opposition
Axcess Financial
California Financial Service Providers (CFSP)
Check Into Cash
Community Financial Services Association of America (CFSA)
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081