BILL ANALYSIS Ó
AB 336
Page 1
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