BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
SB 515 (Jackson) Hearing Date: April 17,
2013
As Amended: April 1, 2013
Fiscal: Yes
Urgency: No
SUMMARY Would make several changes to the California Deferred
Deposit Transaction Law (CDDTL; Payday Loan Law), such as
increasing the minimum length of deferred deposit transactions;
requiring deferred deposit licensees to underwrite deferred
deposit transactions and offer installment plans, as specified;
capping the maximum number of deferred deposit transactions per
customer at four per year; requiring the Commissioner of
Corporations (commissioner) to develop and implement a database
to help enforce the CDDTL; and making other related changes.
DESCRIPTION
1. Would change the due date of the annual CDDTL report
required to be filed by the commissioner, authorize the
public release of information submitted by licensees to the
commissioner for the commissioner's use in compiling the
annual report, and add to the list of information required
to be included in the commissioner's annual report. Among
the additional information that would be required to be
submitted by licensees and included in the commissioner's
annual report: the total dollar amount of fees paid by
CDDTL customers; the minimum and maximum annual percentage
rates (APRs) of deferred deposits; the distribution of the
number of days of the terms of deferred deposit
transactions; the total number of, and minimum, maximum, and
average lengths of installment plans entered into by CDDTL
customers; and the number of borrowers entering into each
permissible number of deferred deposit transactions, from
one transaction to four transactions, during the prior year.
2. Would change the allowable length of deferred deposit
transactions from a maximum of 31 days to a minimum of 30
days per each $100 borrowed by a customer (thus a $100 loan
would have a minimum 30-day term; loans between $101 and
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$200 would have a minimum 60-day term; and loans between
$201 and $300 would have a minimum 90-day term).
3. Would change the schedule of charges and fees that is
required to be posted in every physical location of every
CDDTL licensee to include 30-day, 60-day, and 90-day APRs
for $100, $200, and $300 loans.
4. Would prohibit a CDDTL licensee from entering into a
deferred deposit transaction with a customer if the
transaction would result in that customer entering into more
than four deferred deposit transactions from all California
CDDTL licensees during any 12-month period.
5. Would require each CDDTL licensee to underwrite each
deferred deposit transaction, and would prohibit a licensee
from entering into a deferred deposit transaction if the
customer's total monthly debt service payments, at the time
of the transaction, across all outstanding forms of credit
that can be independently verified by the licensees,
including the amount of the deferred deposit transaction for
which the customer is being considered, exceed 50% of the
customer's gross monthly income.
6. Would provide that, if a customer notifies a CDDTL
licensee, on or before the date their account is due to be
debited, that the customer is unable or will be unable to
repay the transaction when due, the licensee must inform the
customer that he or she may convert their transaction into
an installment plan. Would further require each CDDTL
licensee to convert a deferred deposit transaction into an
installment plan, as follows:
a. Each agreement for an installment plan would have to
be in writing and acknowledged by both the customer and
the licensee.
b. The licensee would be prohibited from assessing any
fee, interest charge, or other charge on a customer, when
converting a deferred deposit transaction into an
installment plan.
c. The minimum length of an installment plan would be
90 days per each $100 borrowed (thus a $100 loan would
have a minimum 90-day installment plan; loans between
$101 and $200 would have a minimum 180-day installment
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plan; and loans between $201 and $300 would have a
minimum 270-day installment plan).
d. Customers would be allowed to prepay their
installment loans at any time, without penalty, fee, or
other charge.
e. A licensee would be allowed to accept one or more
postdated checks for installment plan payments at the
time the installment plan is entered into. However,
licensees would be prohibited from charging customers any
fee for postdated checks that are dishonored. If a
customer defaults on his or her installment plan, the
licensee would be able to charge that customer a one-time
installment plan default fee of $25.
7. Would require the commissioner, by contract with a
third-party provider or otherwise, to develop and implement
a common database with real-time access, via an Internet
connection, through which CDDTL licensees may determine
whether a prospective customer has an outstanding deferred
deposit transaction or is in an outstanding installment
plan, and whether a prospective customer has reached his or
her four loan per year limit.
8. Licensees would be responsible for doing all of the
following with respect to the database:
a. Timely and accurately submitting data required by
the commissioner before entering into a deferred deposit
transaction with a customer. At a minimum, the required
information would include the customer's name, social
security number or employment authorization alien number,
address, driver's license number, transaction amount,
transaction date, date the completed transaction is
closed, income by category established by the
commissioner, zip code where the transaction occurs, and
gender.
b. Correcting any incorrect data entered into the
database.
9. The database provider would be responsible for doing all of
the following with respect to the database:
a. Establishing and maintaining a process by which
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licensees may submit information to and obtain
information from the database during times the database
is inaccessible via the Internet due to technical
difficulties.
b. Take all reasonable measures and comply with all
applicable federal and state laws intended to prevent
identity theft.
c. Provide accurate and secure receipt, transmission,
and storage of customer data.
10. The commissioner would be responsible for adopting rules to
ensure that the database is used by licensees, in accordance
with the bill. Rules would be required to:
a. Ensure that data are retained in the database only
as required to ensure licensee compliance with the bill.
b. Ensure that borrower information is deleted from the
database on a regular and routine basis, twelve months
after a transaction is closed.
c. Require the archiving of deleted data.
d. Prohibit the database from ranking the
creditworthiness of a borrower.
e. Require that data collected within the database be
used only as prescribed by the commissioner.
f. Authorize the imposition of a fee, per transaction,
payable by a licensee to the database provider, for data
that is required to be submitted. The fee may not exceed
the reasonable costs of entering the data into the
database and may not include any costs paid by the
commissioner to the provider for operating the database.
The fee may not be passed on to a customer.
g. Allow persons to request reports and data from the
database provider, as specified.
h. Send written notification to each licensee informing
them when the database has been implemented and
specifying the date the database shall be considered
operational, for purposes of triggering licensees' duty
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to report loan data to the database.
EXISTING LAW
11. Provides for the CDDTL (Financial Code Section 23000 et
seq.), administered by the Department of Corporations (DOC).
The CDDTL:
a. Allows lenders licensed under its provisions 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 CDDTL lenders to distribute a
notice to customers prior to entering into any deferred
deposit transaction that includes information about the
loan and loan charges and a listing of the borrower's
rights.
b. Requires each CDDTL 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.
c. Allows CDDTL licensees to grant borrowers an
extension of time or a payment plan to repay an existing
deferred deposit transaction, and prohibits the lender
from charging any additional fee in connection with the
extension or payment plan.
d. Prohibits CDDTL licensees from entering into a
deferred deposit transaction with a customer who already
has a deferred deposit transaction 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 deferred deposit transaction with the
proceeds of another;
iii. Entering into a deferred deposit
transaction with a person lacking the capacity to
contract;
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iv. Accepting any collateral or making any
deferred deposit transaction 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 deferred deposit transaction, 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
deferred deposit transactions;
vii. Offering, arranging, acting as an agent
for, or assisting a deferred deposit originator in
any way in the making of a deferred deposit
transaction unless the deferred deposit originator
complies with all applicable federal and state laws
and regulations;
e. Provides that licensees who violate the CDDTL are
subject to suspension or revocation of their licenses,
and that violations of the CDDTL are subject to civil
penalties of $2,500 per violation.
COMMENTS
1. Purpose: SB 515 is intended to bring needed reforms to
payday lending in California. According to the author's
office, the bill targets the specific features of payday
loans that cause the most damage to customers, by requiring
that lenders evaluate borrowers' ability to pay back their
loans, giving borrowers more time in which to repay them,
and limiting the number of loans that lenders can make to
any one borrower. The bill is intended to bring payday
loans into alignment with their advertised purpose of
short-term loans for occasional, unexpected expenses.
2. Background: Debates over the merits and dangers of payday
loans have been waged in the California Legislature since
the state first authorized payday lending in 1996. Consumer
advocates believe that payday loans drive borrowers into a
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cycle of repeat borrowing, which harms them more than they
are helped by the infusion of borrowed cash. Industry
advocates assert that their product offers needed credit to
borrowers who have few other options, and cite high rates of
customer satisfaction from borrowers who understand the
risks and rewards of their product.
SB 515 represents a new approach by consumer advocates to the
issue of payday lending in California. Where previously,
the groups advocated on behalf of a 36% APR cap, now they
are seeking loan limit caps enforced by a payday loan
database, longer loan lengths, automatic installment plans,
and underwriting. Industry counters that these changes will
put them out of business, by significantly increasing their
costs without a commensurate increase in allowable fees, and
by changing their loans into installment products.
In 2011, the most recent year for which annual data are
available on the California payday loan industry, 12.4
million payday loans were made to 1.7 million different
customers by payday lenders licensed to operate in
California. The total dollar volume of payday loans equaled
$3.3 billion dollars. The average loan was $263 in size,
and average loan length equaled 17 days. In 2011, DOC
licensed and regulated 241 payday lenders, operating at
2,119 locations.
Online payday lending is legal in California, as long as the
lender holds a CDDTL license from DOC. Although DOC's
annual report does not provide a breakdown of payday loans
made online by licensed lenders versus those made in
licensed storefronts located in California, information
contained in recent annual reports strongly suggests that
payday loans are increasingly being made online in
California. The number of licensed storefront locations at
which payday loans can legally be made in California has
dropped each year since 2007. This trend occurred over a
time period during which the total number of loans and the
total dollar volume of loans rose steadily.
Customers who obtain payday loans often have few other borrowing
options available to them, when they seek out credit. A
study of California payday loan customers conducted during
2007 by the Applied Management and Planning Group, on behalf
of DOC, found that a significant number of payday loan
customers have not considered other options. When forced to
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consider those options, most payday loan customers said they
would turn to family or friends if they were unable to
obtain a payday loan. A smaller percentage would wait until
their next payday. Other options cited by the survey
respondents, in very low numbers, included use of pawn shops
and borrowing money from an employer.
Consistent with the responses of survey participants, short-term
installment loans in amounts below $2,500 are not
extensively used in in California. During 2011,
approximately 275,000 loans totaling $217 million were made.
The vast majority of those loans (258,000) were unsecured.
3. Payday Loan Database: SB 515 is the second bill introduced
in recent years, which proposes to establish a payday loan
database that can be used by DOC to help administer the
CDDTL. Two policy issues posed by creation of a database
are addressed immediately below. A policy discussion of the
remaining elements of the bill is left to the supporters and
opponents of this bill (see support and opposition sections
below).
a. Database funding: SB 515 is silent on a funding
mechanism for the database contemplated by the bill. The
author and sponsors indicate that they expect DOC to fund
the database through surcharges on licensees - a funding
mechanism which requires no additional statutory changes.
Financial Code Section 23016 requires each licensee to
annually pay to the commissioner its pro rata share of
all costs and expenses reasonably incurred in the
administration of the CDDTL. According to DOC, the most
recent pro rata assessment imposed on CDDTL licensees
equaled $941 per licensed lending location.
b. Database privacy: This bill requires DOC to develop
and implement a payday loan database with real-time
access, via an Internet connection, for use by payday
loan licensees in complying with this bill, and by DOC
for purposes of enforcing this bill.
To date, fourteen other states have established payday loan
databases similar to the one envisioned by this bill
(Florida, Virginia, South Carolina, Kentucky, Delaware,
New Mexico, Illinois, Michigan, Wisconsin, North Dakota,
Washington, Alabama, Indiana, and Oklahoma).
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A single company, Veritec, administers the databases in all
of those states. Committee staff reached out to
representatives of Veritec to ask how they have handled
privacy and data breach issues in those other states.
They responded that if a Veritec database is breached,
the company's responsibilities are covered by existing
state and federal data breach laws. Those laws require
that the company housing the data notify consumers of the
breach and pay for credit monitoring. Veritec's
contracts require it to adhere to applicable state and
federal laws regarding customer notification following a
data breach, and to carry insurance to cover Veritec's
costs to comply with those requirements, should Veritec
lack the funds with which to do so.
In the states in which Veritec operates, the state payday
loan regulator and Veritec are the only entities that
have access to all of the data in the database.
Typically, these states and Veritec indemnify each other
against unlawful use of the database by each of their
employees and contractors. Individual payday lenders
only have access to data they enter into the database.
According to Veritec, lenders are liable for unauthorized
access to the database via their portals.
4. Summary of Arguments in Support:
a. This bill is co-sponsored by the Center for
Responsible Lending (CRL), Public Interest Law Firm (a
program of the Law Foundation of Silicon Valley),
California Reinvestment Coalition (CRC), and National
Council of La Raza (NCLR).
CRL believes that the provisions of SB 515, taken together,
will align payday loans with their intended purpose as
short-term loans, by reducing loan-churning, ensuring
that payday borrowers can afford to repay their loans,
reducing borrowers' need for additional loans, and
otherwise alleviating the harm that payday loans cause.
CRL asserts the following four points: 1) Most payday
loans go to borrowers caught in a debt trap; 2) Most
payday borrowers are regular users of payday loans; 3)
For many payday borrowers, there is no way out of the
payday lending debt trap; and 4) Very few borrowers take
out just one payday loan. CRL believes that payday loans
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do not solve financial emergencies; instead, they leave
borrowers worse off than they were before obtaining
payday loans. SB 515 targets the problem of the debt
trap, by ensuring that borrowers are able to repay their
loans without having to borrow again before their next
payday.
In its letter of support, CRL cites data from Washington
State, which implemented an eight loan per person per
year cap in 2010, and saw the volume of payday loans made
in that state decrease by 75% in the two years since
enactment. CRL believes that this reduction reflects
loans that were going to borrowers who were churning
their payday loans, and taking out more than eight loans
per year. CRL also believes that this limit has led more
Washington State borrowers to use payday loans for truly
occasional borrowing, as they are marketed. Washington
borrowers have saved millions of dollars in fees. But,
CRL believes that a cap of eight loans per borrower per
year is still too much, and prefers the four loan limit
proposed in SB 515.
CRL also support the provisions of SB 515 that give payday
borrowers more time to repay their loans, believing that
these provisions will make it more likely that borrowers
will be able to accumulate the funds to pay off their
loans, without having to return to take out new loans.
Finally, CRL cites the underwriting requirements of the
bill as important to ensuring that families will avoid
the cycle of repeat lending, by ensuring that borrowers
are able to repay their loans, without the need to borrow
again.
CRC views SB 515 as necessary to rein in the predatory
payday loan industry and protect consumers from the
payday loan debt trap. CRC is extremely concerned about
the high APRs on payday loans, the inescapable cycle of
debt the loans create for borrowers, and the easy
accessibility of payday loans, especially to individuals
who can least afford the loans. Over the past seven
years, CRC has worked with its members, allies, and
elected officials in the cities of Oakland, San
Francisco, Oceanside, Sacramento, and San Jose to enact
local land use policies restricting the growth of payday
lenders. CRC asserts that many cities have done what
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they could to limit payday lending, but need the
leadership of state representatives to address payday
lenders' practices.
The Law Foundation of Silicon Valley, NCLR, myriad other
advocacy groups, and at least one local government and
one microlender support SB 515 for all of the reasons
cited above. These groups believe that payday loans are
harmful to the people who use them, and believe that SB
515 will help mitigate the most harmful of the impacts of
payday loans on the Californians who use these products.
5. Summary of Arguments in Opposition:
a. The California Financial Service Providers (CFSP)
and Community Financial Services Association of America
(CFSA) are opposed to the bill, because it would abolish
licensed payday lending in California, and would drive
customers to unlicensed, unregulated payday lenders.
Among its many provisions, the bill would turn a deferred
deposit into an installment product, which is not what a
deferred deposit is.
The bill would also impose significant costs on payday
lenders, related to underwriting and database support,
which would render the product unprofitable, given its
current cost structure. The underwriting requirements
would not only increase the costs of the product, but
would also create enormous liability for lenders and
would be extremely intrusive for borrowers. The
obligation to establish a database presents a threat to
customers' privacy and creates a risk of identity theft.
6. Amendments:
a. In order to address concerns that the version of the
bill before this Committee goes too far, the author and
sponsors will offer the following substantive amendments
in Committee:
i. Delete the underwriting requirements.
ii. Delete the requirement that loan
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length be increased to 30 days per $100 borrowed.
Instead, increase the minimum loan length from 14
days to 30 days. According to CRL, Oregon and
Virginia both have 30-day minimum length
requirements for their payday loans.
iii. Cap the maximum number of loans per
borrower per year at six (up from four in the
version of the bill before this committee). This
compares with a loan cap of five loans per year in
Delaware and eight loans per year in Washington
State.
iv. Strike the language which allows
borrowers to obtain an installment repayment plan if
they are unable to pay back any payday loan and
replace it with language authorizing payday
borrowers to obtain an installment repayment plan
only if they are unable to pay back their sixth loan
in any year. Require that each installment plan be
a minimum of 120 days in length, and provide for the
amount owed to be repaid over at least four
substantially equal installments, spaced at least 14
days apart, scheduled on or after a borrower's pay
date.
v. Require the DOC commissioner to ensure
that the payday loan database is fully operational
no later than July 1, 2014, and require payday loan
licensees to begin reporting to the database within
30 days after the database is certified by the DOC
commissioner as being fully operational.
vi. Make a series of technical amendments,
to clarify terms, delete superfluous language, and
authorize the database provider to charge fees to
offset its cost of providing data to people who
request it.
b. In addition to the amendments summarized above,
which were offered by the author's office and this bill's
sponsors, SB 515 requires technical amendments to achieve
its intent. The list of technical amendments recommended
by staff focuses only on the provisions of the bill that
the author is proposing to retain. It does not focus on
the provisions the author is proposing to delete from the
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bill.
i. Language is needed to provide delayed
operative dates for three provisions of the bill
that rely on the existence of an operational payday
loan database. These provisions include subdivision
(b) of Section 23035 (which applies the payday loan
cap), subdivision (b) of Section 23036 (which allows
customers to trigger an installment plan if they
cannot pay back their sixth and final payday loan of
the year), and subdivision (c) of Section 23036
(which prohibits licensees from entering into a new
payday loan with a customer who has an existing
outstanding payday loan or outstanding installment
plan).
Staff suggests the addition of language to the bill,
providing that these provisions will become
operative on the same date that licensees'
requirements to begin submitting data to the
database become operative.
ii. Staff also suggests that this bill's
author and sponsors are overly optimistic about the
ability of DOC to contract out for, test, and bring
an operational database online by July 1, 2014.
Expecting licensees to enter data into that database
within one month of the database coming online is
also highly optimistic.
DOC is in a much better position than Committee staff
to offer reasonable timeframes for contracting out,
testing, and bringing the database online, and for
requiring licensees to begin entering data into that
database. Until input from DOC can be obtained on
these issues, staff suggests an implementation date
for the database of at least one year from the
bill's operative date (January 1, 2015) and an
additional 90 day period (April 1, 2016) to give
licensees time in which to train their branch
employees in how to use the database, before
requiring data to be entered into it on a regular
basis.
iii. Technical amendments are also necessary
to address the issue of database entries by
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licensees who go out of business or have their
licenses revoked by DOC. The bill's existing
language on this topic is unclear (page 12, lines 20
through 29). Staff understands that the author's
office is working with DOC on language to clarify
this issue.
iv. The author may also wish to include
language, clarifying the liability of the
commissioner, in the event of a database data
breach, which occurs despite the existence of
policies and procedures intended to prevent it.
7. Selected Prior and Related Legislation:
a. AB 365 (Lowenthal), 2011-12 Legislative Session:
Would have directed the Commissioner of Corporations to
establish a payday loan database. Never taken up by the
author.
b. AB 7 (Lieu, Chapter 358, Statutes of 2007): Gave
DOC the authority to enforce specified federal
protections, including a 36% APR cap, which were granted
to members of the military and their dependents.
c. SB 898 (Perata, Chapter 777, Statutes of 2002).
Enacted the Deferred Deposit Transaction Law and shifted
the responsibility for administering the law to DOC.
d. 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.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Center for Responsible Lending (co-sponsor)
California Reinvestment Coalition (co-sponsor)
National Council of La Raza (co-sponsor)
Public Interest Law Firm/Law Foundation of Silicon Valley
(co-sponsor)
Opportunity Fund
Affordable Housing Network
SB 515 (Jackson), Page 15
Affordable Housing Services
Alliance of Californians for Community Empowerment
Asian Americans for Community Involvement
Asian Law Alliance
Asian Pacific Policy and Planning Council
Black Economic Council
California Association for Micro Enterprise Opportunity
California Capital Financial Development Corporation
California Church IMPACT
California Labor Federation
California/Nevada Community Action Partnership
Catholic Charities of California United
CCCS Financial Resource Center
CHAM Deliverance Ministry
Civic Center Barrio Housing Corporation
Coalition for Quality Credit Counseling
Community Housing Council of Fresno
Community HousingWorks
Community Legal services in East Palo Alto
Courage Campaign
Dennis Herrera, San Francisco City Attorney
Dolores Huerta Foundation
EARN
East L.A. Community Corporation
East Palo Alto Community Legal Services
Economic Partners in Change
Fair Housing Council of San Fernando Valley
Fair Housing Napa Valley
Faith in Community
Jose Cisneros, Treasurer, City and County of San Francisco
Housing and Economic Rights Advocates
Housing Equality Law Project/Human Equality Law Project
Housing Opportunities Collaborative
Housing Rights Center
Insight Center for Community Economic Development
Latino Business Chamber of Greater Los Angeles
League of United Latin American Citizens
Mexican American Legal Defense and Educational Fund
Mission Asset Fund
Mission Economic Development Agency
Mission San Francisco Community Financial Center
Multicultural Real Estate Alliance for Urban Change
Mutual Housing California
NAACP, San Jose Chapter
National Asian American Coalition
NEW Economics for Women
SB 515 (Jackson), Page 16
Novadebt
Nuestra Casa
Oakland Community Organizations
Opportunity Fund
Pacific Islander Initiative
Pan American Bank
PICO California
Public Counsel
Public Law Center
Sacred Heart Community Service
Santa Clara County Board of Supervisors
Santa Clara County La Raza Lawyers Association
San Diego City-County Reinvestment Task Force
Somos Mayfair
Sonoma County Housing Advocacy Group
St. Joseph's Family Center
Sunnyvale Community Service
Training Occupational Development Educating Communities Legal
Center
Valley Economic Development Center
Watts/Century Latino Organization
Western Center on Law & Poverty
Youth Leadership Institute
Opposition
California Financial Service Providers
Community Financial Services Association of America
Greater Riverside Hispanic Chamber of Commerce
Consultant: Eileen Newhall (916) 651-4102