BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
SB 526 (Calderon) Hearing Date: April 17,
2013
As Amended: April 9, 2013
Fiscal: Yes
Urgency: No
SUMMARY Would require the Commissioner of Corporations
(commissioner) to include information about the practices of
unlicensed deferred deposit lenders lending in California via
the Internet, and summarize the Department of Corporations
(DOC's) compliance efforts related to these lenders, in its
annual report. Would additionally require the commissioner to
submit a report to the Legislature on or before January 1, 2015,
with recommendations relating to enhancement of DOC's
enforcement authority over unlicensed deferred deposit lenders,
and for changes to law that would minimize adverse consumer
experiences.
DESCRIPTION
1. Would require the commissioner to include an analysis of
the practices of unlicensed deferred deposit lenders that
make or originate deferred deposit transactions through the
Internet to borrowers in California in its annual California
Deferred Deposit Transaction Law (CDDTL; Payday Loan Law)
report. The report would have to include all of the
following, at a minimum:
a. An analysis of the collection practices employed by
these lenders.
b. The rates and terms offered by these lenders.
c. The extent to which these lenders comply with the
CDDTL.
d. A summary of DOC's compliance efforts regarding
unregulated and unlicensed deferred deposit lending
through the Internet to borrowers in California.
SB 526 (Calderon), Page 2
2. Would additionally require DOC to report to the Legislature
on or before January 1, 2015, on recommendations pertaining
to the regulation and enhancement of its enforcement
authority with regard to unlicensed deferred deposit lenders
that make or originate deferred deposit transactions through
the Internet to California borrowers, and on recommendations
for changes in law that may minimize adverse consumer
experiences.
EXISTING LAW
3. Provides for the CDDTL (Financial Code Section 23000 et
seq.) and the California Finance Lenders Law (CFLL;
Financial Code Section 22000 et seq.), both of which are
administered by DOC.
4. Requires the commissioner, as part of the CDDTL, to prepare
an annual report, on or before March 15th of each year,
which aggregates data submitted to the commissioner by
licensees, summarizing their business activities during the
prior calendar year. The commissioner's annual report is
required to include the following information for the
previous calendar year, about its CDDTL licensees (Section
23026):
a. The total number and dollar amount of deferred
deposit transactions made.
b. The total number of individual customers who entered
into deferred deposit transactions.
c. The minimum, maximum, and average amount of deferred
deposit transactions.
d. The average annual percentage rate of deferred
deposits.
e. The average number of days of deferred deposit
transactions.
f. The total number and dollar amount of returned
checks.
g. The total number and dollar amount of checks
recovered.
SB 526 (Calderon), Page 3
h. The total number and dollar amount of checks charged
off.
5. Provides that if any provision of the CDDTL is willfully
violated in the making or collection of a deferred deposit
transaction, the transaction contract shall be void, and no
person shall have any right to collect or receive any amount
provided in the deferred deposit transaction, or any charges
or fees in connection with the transaction (Section 23060).
6. Requires the commissioner, as part of the CFLL, to annually
compile a report which summarizes the annual reports
submitted by CFLL licensees (Section 22160).
7. Provides that if any provision of the CFLL is willfully
violated in the making or collection of a loan, the loan
contract is void, and no person has any right to collect or
receive any principal, charges, or recompense in connection
with the transaction (Section 22750).
COMMENTS
1. Purpose: SB 526 is intended to begin characterizing the
size of the problem of unlicensed payday lending over the
Internet to Californians, and begin developing solutions to
combat this problem.
2. Background: 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 payday loan 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
SB 526 (Calderon), Page 4
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.
The growth in online payday lending in California is
exacerbating the problem of unlicensed lending into the
state. When a Californian goes online seeking quick cash,
that individual is unlikely to pay close attention to
whether the web site of the lender they select says,
"Licensed in California under the California Deferred
Deposit Transaction Law." Yet, if the individual borrows
from an unlicensed lender, they have no assurances that the
lender will comply with California law, and no assurances
that the consumer protections in California law will inure
to them. According to a recent consumer fraud alert issued
by DOC (see below), some unlicensed lenders aggressively
(and illegally) pursue Californians in small claims court,
seeking repayment of their loans. Others deposit funds into
consumers' bank accounts and begin drawing down those
consumers' accounts, before consumers agree to the loans.
3. Discussion: In August, 2012, the commissioner issued a
Payday Loan Consumer Alert
( http://www.corp.ca.gov/Press/news/2012/InternetPaydayLending
Alert_8-13-12.pdf ). From January 2012 through mid-August,
when the alert was issued, DOC issued citations and
penalties directing ten separate payday loan companies to
refrain from violating state law. Nine of those companies
were Internet-based and unlicensed in California. The nine
online payday lending companies sanctioned by DOC included
four located in other countries (Malta, St. Lucia, Canada,
and Nevis), and five located in states outside California
(Florida, Nevada, Utah, Delaware, Utah, and Missouri). In
its consumer alert, DOC strongly advised California
consumers to avoid entering personal or financial data on
Internet-based application forms, before verifying that the
firm is licensed by DOC. DOC warned that personal
information entered into the web sites of unlicensed lenders
can be misused or pirated by unlicensed lenders, with little
recourse available to borrowers who are duped.
In March, 2013, the commissioner testified about the problem of
unlicensed, online lending during an informational hearing
before the Assembly Banking and Finance Committee.
According to the commissioner, "The growth of online
SB 526 (Calderon), Page 5
financial services has been coupled with a rise in
unlicensed activity. Since 2010, we have taken enforcement
action against 31 companies for online unlicensed deferred
deposit transactions. The Department identifies unlicensed
online activity through undercover investigations, consumer
complaints and examinations. Any findings are referred for
enforcement action. The biggest obstacle facing our
enforcement team in pursuing unlicensed online lenders is
that most do not have physical locations and, if they do,
the location may be out of reach of federal and state
authorities. The department can issue an administrative
action against a foreign company, but without a physical
location, service of the order cannot be affected. We are
collaborating with other states, the federal government, and
the courts to extend our reach to all online lenders
wherever they are."
An excellent example of some of the challenges faced by DOC in
its efforts to crack down against unlicensed lending to
Californians over the Internet is the Ameriloan case.
Ameriloan operates under a variety of dbas, including US
Fast Cash, One Click Cash, United Cash Loans, Preferred Cash
Loans, and Internet Cash Advance Marketing. DOC first took
action against Ameriloan and its associated dbas in 2007,
alleging they were operating illegally in California,
because they lacked CDDTL licenses from the department. The
companies responded that they were not subject to
California's CDDTL, because they were wholly owned by
federally-recognized Indian tribes, and are thus protected
under the doctrine of tribal sovereign immunity.
When the case reached the courts, it was initially decided in
DOC's favor. Ameriloan appealed, and the appellate court
ruled at least partially in Ameriloan's favor. The case is
not completely settled, however, because the appellate court
remanded the case back to the superior court level, finding
that "the trial court did not address whether the companies,
which are not themselves Indian tribes, operate as 'arms of
the tribe' for purposes of the tribal sovereign immunity
doctrine...we direct the trial court to conduct further
proceedings to determine whether the doctrine deprives the
court of subject matter jurisdiction in this case."
Information about the department's enforcement actions
against Ameriloan, and a link to the case, is available at
http://www.corp.ca.gov/ENF/list/a/ameriloan.asp .
SB 526 (Calderon), Page 6
4. Summary of Arguments in Support: The California Financial
Service Providers support SB 526, as an important effort to
begin characterizing the size and nature of unlicensed
payday lending activity in California over the Internet.
DOC strongly urges potential Internet loan customers to be
wary of these types of loans. Many internet lenders may be
operating out of state or overseas to avoid licensing and
regulation. Consumers who use these online lenders may have
no recourse, if they run into trouble while doing business
with an unlicensed internet lender.
5. Summary of Arguments in Opposition: None received.
6. Amendments:
a. Anecdotal reports and a quick search of the Internet
suggest that a significant number of unlicensed entities
are lending in California in amounts under $2,500. The
problem of unlicensed small dollar lending via the
Internet is not limited to payday loans; it spans the
range of payday loans, installment loans, and hybrids of
the two.
In the interest of trying to characterize the full range of
small dollar loan products being marketed to Californians
over the Internet by entities that are not licensed to
make these loans in California, and to begin documenting
the size of the problem, staff suggests amending the bill
to cover all forms of unlicensed lending in California,
via the Internet, in amounts below $2,500.
Staff also suggests that the bill be amended to require DOC
to post a listing of the names and web site addresses of
unlicensed Internet lenders prominently on its own
Internet web site, with a consumer warning that alerts
Californians to the unlicensed nature of the activities
being conducted via these web sites.
To accomplish this intent, the following amendments are
recommended:
Strike the language of the bill and insert the following:
Section 22900 is added to the Financial Code:
(a) In addition to the reports required by Section 22160
SB 526 (Calderon), Page 7
and 23026, on or before March 15th of each year, the
commissioner shall report on the lending and collection
practices of unlicensed persons offering deferred deposit
transactions or installment loans in amounts under
$2,500, or both, over the Internet, to persons in
California, and on the enforcement actions taken by the
commissioner against these persons.
(b) To the extent information is available, the
commissioner's report shall include all of the following
for the prior calendar year:
(1) The number of unlicensed lenders identified by the
commissioner as lending into California during the prior
year, and the company names and web site addresses these
lenders used.
(2) The state or country in which each of these web sites
was hosted.
(3) The rates and terms offered by these lenders.
(4) The collection practices of these lenders.
(5) The extent to which these lenders complied with the
provisions of California law applicable to them.
(6) The enforcement efforts taken against each of the
unlicensed lenders identified by the commissioner during
the prior year.
(7) Recommendations for changes to law that would improve
the department's ability to identify and take enforcement
actions against unlicensed lending into California over
the Internet, and to minimize consumer harm resulting
from such lending.
(c) On an ongoing basis, on the department's Internet web
site, the commissioner shall post the company names and
web site addresses of unlicensed lenders offering
deferred deposit transactions or installment loans in
amounts under $2,500, or both, over the Internet, to
persons in California, without a required license from
DOC to engage in those activities. The commissioner
shall accompany its listing with a consumer warning that
alerts Californians to the unlicensed nature of the
activities being conducted by these lenders via these web
sites.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
SB 526 (Calderon), Page 8
California Financial Service Providers
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102