BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 336
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          Date of Hearing:   May 2, 2011

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                                   Mike Eng, Chair
                AB 336 (Dickinson) - As Introduced:  February 10, 2011
           
                              AS PROPOSED TO BE AMENDED
          
          SUBJECT  :   Consumer loans.

           SUMMARY  :   Establishes standards, prohibitions and requirements 
          on lenders that provide loans collateralized by a motor vehicle 
          (Car title loans).   Specifically,  this bill  :

          1)Requires a licensee that makes a car title loan to do the 
            following:

             a)   Provide the consumer with a disclosure that informs the 
               consumer of the interest rate and any fees or other charges 
               associated with the consumer loan, the consequences for 
               defaulting on the consumer loan, and a complete 
               amortization schedule indicating the total cost to the 
               consumer over the life of the loan and samples of other 
               term options. 

             b)   Provide to the borrower a "High Interest Rate" 
               disclosure in Bold Arial in at least 16 point font, all 
               capital letters.  The disclosure must be in a separate box 
               and must be signed by the borrower and any additional 
               cosigner, if any.  The High Interest Rate Disclosure shall 
               contain the following words: THIS IS A HIGH-COST LOAN.  YOU 
               MAY BE ABLE TO OBTAIN A LOAN FROM ANOTHER SOURCE AT A LOWER 
               RATE OF FINANCE CHARGE.  THINK CAREFULLY BEFORE YOU DECIDE 
               TO ACCEPT THIS LOAN.

             c)   Prior to disbursement of loan proceeds, the licensee 
               shall offer, but not require either (A) offer a credit 
               education program or seminar to the borrower that has been 
               previously reviewed and approved by the commissioner for 
               use in complying with this section; or (B) invite the 
               borrower to a credit education program or seminar offered 
               by an independent third party that has been previously 
               reviewed and approved by the commissioner for use in 
               complying with this section. 

             d)   Underwrite each loan to determine a borrower's ability 







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               and willingness to repay the loan pursuant to the loan 
               terms, and shall not make a loan if it determines, through 
               its underwriting, that the borrower's total monthly debt 
               service payments, at the time of origination, including the 
               loan for which the borrower is being considered, and across 
               all outstanding forms of credit that can be independently 
               verified by the licensee, exceed 50 percent of the 
               borrower's gross monthly income.

             e)   Seek information and documentation pertaining to all of 
               a borrower's outstanding debt obligations during the loan 
               application and underwriting process, including loans that 
               are self-reported by the borrower but not available through 
               independent verification. 

             f)   Verify the borrower's credit information using a credit 
               report from at least one of the three major credit bureaus 
               or through other available electronic debt verification 
               services that provide reliable evidence of a borrower's 
               outstanding debt obligations.

          2)Prohibits the structuring of a car title loan as a 
            sale-lease-back transaction and provides civil penalties.

          3)Provides that if a borrower defaults on a car title loan the 
            borrower shall not owe a deficiency, nor shall the licensee 
            request a deficiency judgment to recover any outstanding 
            balance.

          4)Prohibits the use of any prepayment penalty on the car title 
            loan.

          5)Provides that if the borrower fails to perform their 
            obligations under the loan, the licensee shall not make any 
            negative report to any of the national credit reporting 
            agencies.

          6)Requires that any advertisements used for car title loans must 
            include the annual percentage rate (APR) of the loan.

           EXISTING LAW  

          1)Provides for the California Finance Lenders Law (CFLL), 
            administered by the Department of Corporations (DOC), which 
            authorizes the licensure of finance lenders, who may make secured 
            and unsecured consumer and commercial loans (Financial Code 







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            Sections 22000 et seq.).  The following are the key rules applied 
            to consumer loans made pursuant to the CFLL:  

             a)   CFLL licensees who make consumer loans under $2,500 are 
               capped at interest rates which range from 12% to 30% per year, 
               depending on the unpaid balance of the loan (Sections 22303 and 
               22304).  Administrative fees are capped at the lesser of 5% of 
               the principal amount of the loan or $50.  An administrative fee 
               of $75 may be charged for loans of $2,500 or more (Section 
               22305);  

             b)   In addition to the requirements in "a" above, CFLL licensees 
               who make consumer loans under $5,000 are prohibited from 
               imposing compound interest or charges (Section 22309); are 
               limited in the amount of delinquency fees they may impose 
               (Section 22320.5; delinquency fees are capped at a maximum of 
               $10 on loans 10 days or more delinquent and $15 on loans 15 
               days or more delinquent); are required to prominently display 
               their schedule of charges to borrowers (Section 22325); are 
               prohibited from splitting loans with other licensees (Section 
               22327); are prohibited from requiring real property collateral 
               (Section 22330), and are limited to a maximum loan term of 60 
               months plus 15 days (Section 22334);

             c)   In addition to the requirements in "a" and "b" above, CFLL 
               licensees who make consumer loans under $10,000 are limited in 
               their ability to conduct other business activities on the 
               premises where they make loans (Section 22154); must require 
               loan payments to be paid in equal, periodic installments 
               (Section 22307); and must meet certain standards before they 
               may sell various types of insurance to the borrower (Sections 
               22313 and 22314); and,

             d)   Generally speaking, the terms of loans of $10,000 or above 
               are not restricted under the CFLL.

          2)Authorizes the licensure of finance brokers under the CFLL, and 
            defines a finance broker as any person who is engaged in the 
            business of negotiating or performing any act as a broker in 
            connection with loans made by a finance lender (Section 22004). 
           
           3)Imposes a 36% APR on consumer credit extended to members of 
            the military and their dependents. (10 USC Sec. 987.)

           FISCAL EFFECT  :  unknown








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           COMMENTS  :   

          A car title loan is in where a consumer borrows money against 
          the title of their car for a specified period of time.  During 
          the loan period, the consumer continues to use their vehicle as 
          necessary.  If the consumer defaults on the loan then current 
          law authorizes the lender to repossess the car for the costs of 
          the loan.   Car title lending in California is conducted under 
          the CFLL, under which various forms of consumer lending are 
          authorized.  The CFLL does not explicitly authorize car title 
          lending, but CFL licensees may offer these types of loans.   Car 
          title loans are subject to the provisions of the CFL, which for 
          loans above $2,500 no interest rate caps exist.  A rate cap does 
          not exist for any personal loan (Auto, Auto-title, personal) 
          made under the CFLL.

          Car title lending has come under recent scrutiny due to recent 
          media coverage, specifically, an LA Times article, "Title Loans' 
          Interest Rates are Literally Out of Control"  that highlighted 
          the high interest rates on these loans and the consequences if a 
          consumer does not pay off such a loan.  The article did not 
          point to any specific egregious acts on the part of car title 
          lenders, but instead was making the point that car title loans 
          under current interest rates are inherently egregious.  For 
          example, one lender mentioned in the article charged interest 
          rates of up to 180% APR.  Proponents of a 36% rate cap make a 
          similar argument that car title lending is inherently a bad deal 
          for consumers and that any benefits are outweighed by the risk 
          and charges.  Additionally, proponents argue that because a car 
          title loan is securitized by the automobile, meaning the lender 
          has less risked involved.

          Industry representatives argue that the borrowers who use their 
          service have very low credit scores and are not likely to have 
          access to other means of credit, if at all.  Additionally, they 
          point out that while the loan may be securitized, the 
          repossession and disposition of an automobile is a costly 
          endeavor and such costs must be built into the costs of the 
          loan.

          What has been the effect of a 36% rate cap in other states?  It 
          appears that in states that have placed 36% rate caps on title 
          loans and similar products that title lending has disappeared.  
          A July 6th, 2008 from The Oregonian, "Oregon's payday lenders 
          all but gone" found that "Car title lenders, which also made 
          small, high-interest loans using car titles as collateral, have 







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          all but disappeared in Oregon."
          
           Rates:
           
          Obviously, both sides of this proposal disagree on whether a 36% 
          APR cap for car title loans.  Proponents argue that such lending 
          can still take place at such a rate, while opponents argue that 
          36% could potentially put the industry out of business.  What 
          would a 36% APR cap look like?  For a one year loan of $2,500, 
          the total interest charges would be $513.86.  On the same loan 
          at 96% APR, the interest charges would be $1,480.85.   From the 
          interest charges, the lender must cover the costs of the capital 
          (often borrowed from a bank), labor costs, property rent for the 
          business, and other overhead costs.

          An important determining factor in this discussion is the 
          default rates of these loans.  At this time, staff has been 
          unable to determine from neither industry representatives nor 
          DOC, default rates in California.  The default rate may help put 
          in context the costs associated with the loan.  Additionally, it 
          is also difficult to gauge the average car title loan amount.  
          Under the CFLL, licensees can make auto loans and car title 
          loans, but nothing in statute requires this information to be 
          categorized to determine which licensee is doing what type of 
          transaction.   In looking at CFL licensees who make secured car 
          loans (This includes car title loans and car purchase loans) 
          finds that in 2009 approximately 18,921 auto related loans were 
          made in California with APRs over 40%, for a total volume of 
          $64,204,118.  In 2009, for loans with APRs over 100%, 4,243 
          loans were made, totaling $13, 948,175.  Again, it is important 
          to note that these numbers are approximations because an 
          auto-purchase lender could be in these categories.  
          Additionally, anecdotal information suggests that most car title 
          loans are made with APRs between 90-120%.

           Discussion:

           This analysis is for a mock-up of language provided by the 
          author.  This mock-up represents discussions between the author, 
          consumer groups and some industry participants.  Committee staff 
          did not receive the mock up until late in the process.  At this 
          time, it is the understanding of staff that this mock-up may not 
          be a final version of the bill and several provisions are a 
          product of continued controversy.  It is clear that the impact 
          of this language has not been fully vetted so staff is unable to 
          provide a full analysis of the language.   







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          REGISTERED SUPPORT / OPPOSITION 

          (Letters are for the February 10, 2011 version of the bill)  :    
           
           Support 
           
          Center for Responsible Lending 
          Consumer Attorneys of California
          Consumers for Auto Reliability and Safety (CARS)
          Consumers Union
           
          Opposition 
           
          California Financial Services Association (CFSA)
          Check Into Cash
          Check 'n Go
          Community Loans of America
          Equal Access Auto Lenders of California (EAALC)
           
          Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081