BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
SB 526 (Calderon)
As Amended April 22, 2013
Hearing Date: April 30, 2013
Fiscal: Yes
Urgency: No
TH
SUBJECT
Commissioner of Corporations: Lending Practices: Unlicensed
Activity Report
DESCRIPTION
Existing law requires the Commissioner of the Department of
Corporations to prepare an annual consolidated report on or
before March 15th of each year that aggregates data submitted by
licensees engaged in lending under the California Deferred
Deposit Transaction Law (CDDTL) (Financial Code Section 23000 et
seq.) and the California Finance Lenders Law (CFLL) (Financial
Code Section 22000 et seq.), summarizing their business
activities during the prior calendar year.
This bill would expand the scope of that annual reporting
requirement to include an analysis of the lending and collection
practices of unlicensed persons offering deferred deposit
transactions or installment loans, or both, in amounts under
$2,500, over the Internet, to persons in California, and an
analysis of the enforcement actions taken by the Commissioner
against these persons. It would also require the Commissioner
to post on the Department's Internet Web site the company names
and Internet Web site addresses of unlicensed lenders offering
these deferred deposit transactions or installment loans to
California consumers, and would require the Commissioner to
accompany this posting with a consumer warning alerting
Californians to the unlicensed nature of these activities.
BACKGROUND
(more)
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The Department of Corporations has acknowledged the existence of
a significant online unlicensed Internet deferred deposit or
payday lending market in which fee-based, high-cost, short-term
loans are offered to people who need an advance on their
paycheck. Increasingly, the Department has found that "payday
lenders are moving from storefronts to the Internet and many
fail to obtain a license with the Department of Corporations,
evading state laws and regulations designed to protect
consumers." (Internet Payday Lending Alert
[as of April 24, 2013].)
For example, state and federal truth-in-lending statutes
require lenders to disclose the true cost of credit in the form
of an Annual Percentage Rate (APR) prior to disbursing a loan.
Internet payday lenders typically advertise fees as a dollar
amount rather than an APR, which can be misleading to consumers
in determining the true total cost of the payday loan. The
Department has also found that "[m]any Internet payday lenders
may be difficult to contact by providing little or no
identifying information" on their Internet Web sites, and that
"they may be operating out of state or overseas to avoid
licensing and regulation." (Id.) Thus, "[u]nlike a bank,
credit union, or a California licensed lender, consumers may
have no recourse should they run into trouble while doing
business with an unlicensed Internet payday lender." (Id.)
The Department has also found that these unlicensed Internet
deferred deposit payday lenders are "becoming more aggressive in
their collection techniques." (Media Release: California
Department of Corporations Issues Warning on Internet Payday
Lenders [as of
April 24, 2013].) It has discovered that some lenders are
depositing funds into consumer accounts before consumers agree
to the loan, and that the lenders will begin withdrawing funds
from consumers' accounts for repayment without authorization.
This has led many consumers to close bank accounts to avoid
further unauthorized withdrawals by the payday lender. In
response, lenders have taken borrowers to small claims court
when their collection efforts fail. According to the
Commissioner of the Department of Corporations, these unlicensed
Internet payday lenders are "hiring collection agencies and
contacting employers and threatening to report to credit
agencies," even though it is likely that any loan contract they
entered into with a California consumer would be invalid, and
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thus uncollectable, under California law.<1> (Id.) While the
Department "is taking action to shut down illegal lenders and
protect consumers whenever [it] discover[s] the[se] violations,"
not much is known about the scope or extent of this online
unlicensed Internet payday lending market. (Id.)
This bill would require the Commissioner of the Department of
Corporations to include in his or her annual report to the
Legislature an analysis of the practices of these unlicensed
deferred deposit lenders making payday loans through the
Internet to borrowers in this state. The bill would require the
report to include descriptions of the rates and terms offered by
these lenders, an analysis of the collection practices employed
by these lenders, and an analysis of the extent to which these
lenders comply with, or do not comply with, applicable
California law. The report would also include a summary of the
Department's compliance efforts regarding unregulated and
unlicensed deferred deposit lending through the Internet to
borrowers in this state. This bill would also require the
Department of Corporations to make recommendations to the
Legislature 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 borrowers in this state.
This bill was heard by the Senate Banking and Financial
Institutions Committee on April 17, 2013, and passed out on a
vote of 9-0.
CHANGES TO EXISTING LAW
Existing law provides for the California Deferred Deposit
Transaction Law (CDDTL) (Fin. Code Sec. 23000 et seq.) and the
California Finance Lenders Law (CFLL) (Fin. Code Sec. 22000 et
seq.), both of which are administered by the Department of
Corporations.
Existing law provides that if any provision of the CDDTL or CFLL
is violated in the making or collection of a loan or deferred
deposit transaction, the deferred deposit transaction or loan
contract is void, and no person has any right to collect or
receive any principal, amount, charges, fees, or recompense in
connection with the transaction or loan. (Fin. Code Secs.
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<1> Deferred deposit transactions and installment loans entered
into with unlicensed lenders are likely void under California
law. (See Fin. Code Secs. 22750 and 23060.)
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22750, 23060.)
Existing law requires each licensee holding a license issued
pursuant to the CDDTL to file an annual report with the
Commissioner of the Department of Corporations. The
Commissioner is required to prepare an annual consolidated
report on or before March 15th of each year that 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 about CDDTL licensees for the previous
calendar year:
the total number and dollar amount of deferred deposit
transactions made;
the total number of individual customers who entered
into deferred deposit transactions;
the minimum, maximum, and average amount of deferred
deposit transactions;
the average annual percentage rate of deferred deposits;
the average number of days of deferred deposit
transactions;
the total number and dollar amount of returned checks;
the total number and dollar amount of checks recovered;
and
the total number and dollar amount of checks charged
off. (Fin. Code Sec. 23026.)
Existing law requires each licensee holding a license issued
pursuant to the CFLL to file an annual report with the
Commissioner of the Department of Corporations, giving relevant
information that the Commissioner reasonably requires concerning
the business and operations conducted by the licensee within the
state during the preceding calendar year. The Commissioner is
required to file as a public record a composite of the annual
reports received from licensees and any comments on the reports
that he or she deems to be in the public interest. (Fin. Code
Secs. 22159, 22160.)
This bill would, on or before March 15 annually, require the
Commissioner of the Department of Corporations to include in the
Commissioner's report filed pursuant to the CDDTL and CFLL a
section discussing the lending and collection practices of
unlicensed persons offering deferred deposit transactions or
installment loans, or both, in amounts under $2,500, over the
Internet, to persons in California, and on the enforcement
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actions taken by the Commissioner against these persons. The
Commissioner's report would address:
the number of unlicensed lenders identified by the
Commissioner as lending in California during the prior
year, and the company names and Internet Web site addresses
these lenders used;
the state or country in which each of these Internet Web
sites was hosted;
the rates and terms offered by these lenders;
the collection practices of these lenders;
the extent to which these lenders complied with the
provisions of California law applicable to them; and
the enforcement efforts taken against each of the
unlicensed lenders identified by the Commissioner during
the prior year.
This bill would require the Commissioner to post on the
Department of Corporations' Internet Web site the company names
and Internet Web site addresses of unlicensed lenders offering
deferred deposit transactions or installment loans, or both, in
amounts under $2,500, over the Internet, to persons in
California, without the required license from the Commissioner.
This bill would require the Commissioner to accompany this
posting with a consumer warning that alerts Californians to the
unlicensed nature of the activities being conducted by these
lenders via the Internet.
COMMENT
1. Stated need for the bill
The author writes:
The Department of Corporations has acknowledged the
existence of a significant online unlicensed internet
payday lending [industry] that hurts California residents.
How large of a problem the unlicensed internet deferred
deposit lenders are [is] unknown. Information and research
is the first step in resolving any problem. The Department
of Corporations is in the best position to collect such
data.
This bill would define how big the current unlicensed
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internet deferred deposit industry is and what can be done
to bring them into compliance with existing California law.
The Commissioner of Corporations would include information
about the practices of unlicensed internet deferred deposit
lenders lending in California in the Department of
Corporations annual report.
2. Public policy
The Legislature has long considered consumer protection to be a
matter of high importance. State law is replete with statutes
aimed at protecting California consumers from unfair, dishonest,
or harmful market practices. For example, the Consumer Legal
Remedies Act (Civ. Code Sec. 1750 et. seq.) was enacted "to
protect the statute's beneficiaries from deceptive and unfair
business practices," and to provide aggrieved consumers with
"strong remedial provisions for violations of the statute."
(Am. Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1,
11.) Similarly, for over 70 years, California's Unfair
Practices Act (Bus. & Prof. Code Sec. 17000 et. seq.) has
protected California consumers from "unlawful, unfair or
fraudulent business act[s] or practice[s]." (Bus. & Prof. Code
Sec. 17200.) (See also Bus. & Prof. Code Sec. 17001, "The
Legislature declares that the purpose of this chapter is to
safeguard the public against the creation or perpetuation of
monopolies and to foster and encourage competition, by
prohibiting unfair, dishonest, deceptive, destructive,
fraudulent and discriminatory practices by which fair and honest
competition is destroyed or prevented.")
Consumer protection in the banking and finance sector is no less
a matter of fundamental public policy. The California Finance
Lenders Law (Fin. Code Sec. 22000 et. seq.) declares that it
"shall be liberally construed and applied to promote its
underlying purposes and policies," which is, among other things,
"[t]o protect borrowers against unfair practices by some
lenders, having due regard for the interests of legitimate and
scrupulous lenders." (Fin. Code Sec. 22001.) The California
Deferred Deposit Transaction Law (Fin. Code Sec. 23000 et. seq.)
is similarly intended primarily to "protect the public." (Fin.
Code Sec. 23103.)
This bill would further the Legislature's longstanding public
policy of protecting California consumers from harmful business
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practices by taking the initial steps to study and define the
problem of unlicensed payday lending over the Internet to
Californians, and formulate recommendations for changes in the
law that would improve the Department of Corporations' ability
to identify and take enforcement actions against these
unlicensed lenders.
3. Impact to low-income communities
As the author notes above, little data is currently available to
assess the scope and magnitude of the online unlicensed Internet
payday lending industry. The data that does exist suggests that
this industry may disproportionately impact California's
lower-income communities and families. Nationwide, payday
lending is "blamed for trapping some Americans in a cycle of
debt." (Danielle Douglas, Regulators to rein in bank payday
lending, Washington Post
[as of April 24,
2013].) Payday lenders "market [their] products with names such
as 'Early Access' or 'Ready Advance' as short-term solutions for
emergencies," but data suggests that "borrowers often wind up
taking multiple loans that keep them mired in debt." (Id.) A
report recently released by the federal Consumer Financial
Protection Bureau (CFPB) supports this conclusion. That report
notes:
These types of credit products can be helpful for consumers
if they are structured to facilitate successful repayment
without the need to repeatedly borrow at a high cost.
However, if the cost and structure of a particular loan
make it difficult for the consumer to repay, this type of
product may further impair the consumer's finances. A
primary focus [of CFPB's report] is on what we term
"sustained use"-the long-term use of a short-term high-cost
product evidenced by a pattern of repeatedly rolling over
or consistently re-borrowing, resulting in the consumer
incurring a high level of accumulated fees. (Consumer
Financial Protection Bureau, Payday Loans and Deposit
Advance Products: A White Paper of Initial Data Findings
[as of April 24, 2013], p. 4.)
. . .
[Payday loan and deposit advance] products may become
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harmful for consumers when they are used to make up for
chronic cash flow shortages. We find that a sizable share
of payday loan and deposit advance users conduct
transactions on a long-term basis, suggesting that they are
unable to fully repay the loan and pay other expenses
without taking out a new loan shortly thereafter.
Two-thirds of payday borrowers in our sample had 7 or more
loans in a year. Most of the transactions conducted by
consumers with 7 or more loans were taken within 14 days of
a previous loan being paid back-frequently, the same day as
a previous loan was repaid. Similarly, over half of
deposit advance users in our sample took out advances
totaling over $3,000. This group of deposit advance users
tended to be indebted for over 40% of the year, with a
median break between advance balance episodes of 12 days or
less. (Id., p. 43.)
The data presented in CFPB's report clearly indicates that
payday loan products are disproportionately used by lower income
individuals and families. CFPB's study found that borrowers
patronizing physical payday loan storefront locations "have
income that is largely concentrated in income categories ranging
from $10,000 - $40,000 on an annualized basis." (Id., p. 17.)
The study data indicates that 31 percent of payday loan
customers nationwide reported an annualized income between
$10,000 and $20,000, and 25 percent had an income between
$20,000 and $30,000. (Id., p. 18.) Further, "[a] significant
share of consumers-nearly 1 in 4-reported either some form of
public assistance or other benefits (18 [percent]) or retirement
funds (4 [percent]) as an income source." (Id.) This data
reveals that the greatest demographic concentrations of payday
loan customers are those at or near the federal poverty line.<2>
To the extent the online unlicensed Internet payday lending
industry mirrors the traditional storefront payday lending
industry, it is reasonable to assume that the online unlicensed
payday industry disproportionately harms California's
lower-income communities and families. Therefore, staff
recommends that the bill be amended to include as part of the
Commissioner's annual report an analysis of the impact the
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<2> The official federal poverty line for 2012 was set at
$22,811 for a two adult, two child household. (See Kathleen
Short, The Research Supplemental Poverty Measure: 2011,
http://www.census.gov/prod/ 2012pubs/p60-244.pdf, as of April
24, 2013., p. 4.)
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online unlicensed Internet payday lending industry has on
low-income borrowers.
Suggested amendment :
On page 3, after line 19, insert:
(8) The differential impact, if any, that these deferred
deposit transactions or installment loans, or both, have on
low-income borrowers.
4. Compliance with California law
As amended, this bill requires the Commissioner's annual report
to include an analysis of the extent to which unlicensed persons
offering deferred deposit transactions or installment loans, or
both, in amounts under $2,500, over the Internet, to persons in
California, "complied with the provisions of California law
applicable to them." (See SB 526, page 3, lines 12-13.) In
preparing the report, the Commissioner should consider analyzing
compliance with, among other laws, the California Deferred
Deposit Transaction Law (Fin. Code Sec. 23000 et. seq.), the
California Finance Lenders Law (Fin. Code Sec. 22000 et. seq.),
the Uniform Electronic Transactions Act (Civ. Code Sec. 1633.1
et. seq.), and Financial Code Section 23027 governing false,
misleading, or deceptive statements concerning deferred deposit
transactions.
5. Potential logistical issue
Staff notes that, as amended, this bill could require the
Commissioner to submit his or her first report analyzing these
new subjects a mere two and one half months after enactment.
Should the bill be chaptered, it would enter into force on
January 1, 2014, and, by its terms, would require the
Commissioner to submit his or her report concerning the prior
calendar year (2013) on March 15, 2014. The author should
continue to work with the Department of Corporations to ensure
that this timeframe gives the Commissioner adequate time to meet
all new reporting requirements.
Support : California Financial Service Providers; Center for
Responsible Lending
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Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation :
SB 318 (Hill) would make changes to an existing pilot project
intended to increase the availability of loans between $300 and
$2500 to unbanked and underbanked borrowers, and thereby provide
a responsible market alternative to payday loans. This bill was
approved by the Senate Banking and Financial Institutions
Committee on April 17, 2013, by a vote of 9-0.
SB 515 (Jackson) would make several changes to the California
Deferred Deposit Transaction Law (CDDTL) including: increasing
the minimum length of deferred deposit transactions based on
total amount borrowed; requiring deferred deposit licensees to
underwrite deferred deposit transactions and offer installment
plans, as specified; capping the maximum number of deferred
deposit transactions a customer may make at four per year;
requiring the Commissioner of Corporations to develop and
implement a common database to help enforce the CDDTL; changing
the due date of the annual CDDTL report required to be filed by
the Commissioner of Corporations, adding to the list of
information required to be in the report, and authorizing the
public release of information submitted by licensees used in
compiling the Commissioner's annual report. This bill failed
passage in the Senate Banking and Financial Institutions
Committee, but has been granted reconsideration.
Prior Legislation :
AB 1980 (Hernandez, 2011) would have required lenders offering
loan products under the California Deferred Deposit Transaction
Law and the California Finance Lenders Law to include a
financial facts label with any deferred deposit transaction or
unsecured consumer loan with a principal amount that is equal to
or less than $2,500. This bill would also have required that
these lenders place the financial facts label on specified
advertisements. This bill died in the Assembly Committee on
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Banking and Finance.
AB 2845 (Jones, Bass, Feuer, 2007) would have capped the annual
percentage rate (APR) for a deferred deposit transaction at 36
percent. This bill would have also defined "interest" as all
charges payable directly or indirectly by a borrower to a
deferred deposit lender in relation to a deferred deposit loan,
including any fee, returned check fee, and any ancillary product
sold in connection with the loan. This bill died in the
Assembly Rules Committee.
AB 1534 (Nunez, Jones, 2007) would have required to the
Commissioner of the Department of Corporations to submit a
report to the Governor and the Legislature containing an
analysis of the deferred deposit loan industry and its market
base. This bill died on the Senate Inactive File.
AB 207 (Dymally, 2005) would have prohibited fees for specified
deferred deposit transactions from exceeding an effective annual
rate greater than 10 percent, would have required a check from a
customer for these deferred deposit transactions to be made
payable to the actual name of the licensee, and would have
prohibited a check held by a licensee for more than 31 days from
being presented to a bank for payment. This bill was not heard
by either the Assembly Committee on Banking and Finance or the
Assembly Committee on Business, Professions and Consumer
Protection, and was returned to the Chief Clerk pursuant to
Joint Rule 56.
SB 898 (Perata, Chapter 777, Statutes of 2002) enacted the
California Deferred Deposit Transaction Law, regulating
businesses that make payday loans and providing consumer
protections for those that enter into payday loan transactions.
SB 898 transferred authority from the Attorney General to the
Department of Corporations for the licensing, regulation and
monitoring of the payday loan industry.
Prior Vote : Senate Committee on Banking and Financial
Institutions (Ayes 9, Noes 0)
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