BILL ANALYSIS Ó AB 1158 Page 1 ASSEMBLY THIRD READING AB 1158 (Calderon) As Amended April 13, 2011 Majority vote BANKING & FINANCE 7-1 APPROPRIATIONS 11-1 ----------------------------------------------------------------- |Ayes:|Achadjian, Charles |Ayes:|Fuentes, Harkey, Charles | | |Calderon, Fletcher, | |Calderon, Donnelly, | | |Fuentes, Harkey, Morrell, | |Gatto, Hall, Hill, | | |Perea | |Nielsen, Norby, Solorio, | | | | |Wagner | |-----+--------------------------+-----+--------------------------| |Nays:|Skinner |Nays:|Mitchell | | | | | | ----------------------------------------------------------------- SUMMARY : Changes the California Deferred Deposit Transaction Law (CDDTL) to allow a licensee to defer the deposit of a customer's check with a face amount of $500, up from $300. EXISTING LAW : 1)Establishes the 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, thrift, savings association, or industrial loan company; c) Requires applicants who wish to become payday lenders to submit an application for each location, an application fee of $200, and to submit to various other requirements including a background check, and, prohibits anyone from engaging in the business of payday lending without a license from the Department of Corporations (DOC); 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 AB 1158 Page 2 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 a type size of 10 point or greater, written in the same language that is used to advertise and negotiate the loan, signed by both the borrower and the lender's representative, and provided by the lender to the borrower, as specified; f) Allows payday lenders to grant borrowers an extension of time or a payment plan to repay an existing payday loan, 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 deferred deposit transaction (DDT) with a person lacking the capacity to contract; iv) Accepting any collateral or making any payday loan contingent on the purchase of insurance or any other goods or services; v) Altering the date or any other information on a check, accepting more than one check for a single payday loan, or taking any check on which blanks are left to be filled in after execution; vi) Engaging in any unfair, unlawful, or deceptive AB 1158 Page 3 conduct or making any statement that is likely to mislead in connection with the business of DDTs; or, 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 : According to information provided by the author: California is currently tied for the lowest maximum loan limit in the country even with a higher cost of living than anywhere else. In 2007, the Department of Corporations delivered a report titled "The California Deferred Deposit Transactions Law' to the Legislature. One of the key recommendations of the report was to increase the maximum loan amount to $500 or $750. They based this on the fact that California was low compared to other states and that it appeared too low to meet the need for an emergency for consumers. Taking account of inflation since 1995, an inflation adjusted maximum loan limit at the end of 2010, comparable to $300 in 1995 would be $442.05. This calculation was performed using the Annual California AB 1158 Page 4 Consumer Price Index for All Urban Consumers. Arguments in support : The Community Financial Services Association and the California Financial Service Providers' Association write in support: Quite simply, the current payday advance limit is outdated. It was put into effect nearly 16 years ago when short-term loans were established in California. Officials from the California Department of Corporations (which has jurisdiction over deferred deposit lenders) stated in their annual report that the current maximum payday advance of $300 is too low to meet the common emergency needs of many customers and should be raised between $500 and $750. As you know, California is one of the most costly states in which to live, and yet the state has one of the lowest advance limits in the nation. The $300 limit does not always meet the needs of families who have run out of financial resources, especially in these tough economic times. Arguments in opposition : A coalition of community and consumer organizations write in opposition: In November, after a landslide vote, Montana joined 15 other states and the District of Columbia in placing double-digit limits on the interest that payday lenders can charge. With shrinking profits in other states, payday lenders are turning to California in an attempt to preserve their profit margins on the backs of struggling Californians, by seeking to increase the allowable loan amount to $500. Earlier this month, the San Diego City Council unanimously voted to adopt a Council resolution against the usurious interest rates and predatory business model of the payday lenders calling on the California State Legislature to enact a 36% APR interest rate cap on payday loans. Current California law allows a borrower to write a check for a maximum of $300 to borrow $255. The high cost of payday loans (459% APR), 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, AB 1158 Page 5 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. Prior state legislation : AB 2511 (Skinner) of 2010, would have prohibited the offering of a payday loan to someone receiving unemployment benefits, unless the APR for the loan was 36%. It was held in the Assembly Banking and Finance Committee. AB 377 (Mendoza) of 2010, which provided for various changes and reforms to the DDTL. Additionally, would have raised the face value of the check amount to $500. It died in the Senate Judiciary Committee. AB 2845 (Jones, Bass, and Feuer) of 2008, at one point, the bill would have capped the annual percentage rate (APR) on payday loans at 36%. It was amended in the Assembly Banking and Finance Committee to state the intent of the Legislature to enact changes recommended in the DOC reports, but was held in the Assembly Rules Committee. SB 1959 (Calderon) Chapter 682, Statutes of 1996, enacted the earliest version of a payday lending law in California. It 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. 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 1551 (Correa) of 2008, would have enacted various changes intended to improve regulatory oversight of the payday lending based on recommendations found in the two reports referred to in this analysis. Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081 AB 1158 Page 6 FN: 0000424