Amended in Senate June 6, 2016

Amended in Assembly January 4, 2016

Amended in Assembly April 15, 2015

Amended in Assembly March 26, 2015

California Legislature—2015–16 Regular Session

Assembly Bill No. 268

Introduced by Assembly Member Dababneh

February 10, 2015

An act to amend Section 22701 begin delete of end delete begin insert of, and to add Article 3.5 (commencing with Section 22350) to Chapter 2 of Division 9 of, end insert the Financial Code, relating to lending.

LEGISLATIVE COUNSEL’S DIGEST

AB 268, as amended, Dababneh. California Finance Lenders Law: begin insert unsecured consumer loans: terms and conditions: end insert violations.

Existing law, the California Finance Lenders Law, provides for the licensure and regulation of finance lenders and begin delete brokers end delete begin insert brokers, which includes any person who is engaged in the business of making consumer loans, end insert by the Commissioner of Business Oversight and makes a willful violation of its provisions a crime. Existing law authorizes the commissioner to investigate at any time the loans and business, and examine the books, accounts, records, and files used in the business of every person engaged in the business of a finance lender or broker for the purpose of discovering violations or securing information required by the commissioner in the administration and enforcement of the California Finance Lenders Law, as provided.

This bill would require the commissioner to examine at least every 48 months the affairs of every person engaged in the business of a finance lender or broker for compliance under that law, and would authorize the commissioner to examine those persons as often as the commissioner deems necessary and appropriate for those purposes.

begin insert

The California Finance Lenders Law regulates the terms and conditions under which a licensee under that law may make consumer loans, including, but not limited to, the maximum rate and administrative fee a borrower may be charged for specific loan amounts.

end insert begin insert

This bill would revise and impose additional terms and conditions under which a licensee may make unsecured consumer loans of a maximum principal balance upon origination of $3,000 or less, including, among other things, the term of the loan, maximum rates that a licensee may charge for a loan, and restrictions on refinancing, as specified. The bill would allow a licensee, with prior approval from the commissioner, to use the services of one or more referral partners with respect to those loans that the licensee may make or negotiate, if specified conditions and requirements are met.

end insert begin insert

By imposing new requirements under the California Finance Lenders Law, the violation of which would be a crime, this bill would impose a state-mandated local program.

end insert begin insert

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

end insert begin insert

This bill would provide that no reimbursement is required by this act for a specified reason.

end insert

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program:  begin delete no end delete begin insert yes end insert .

The people of the State of California do enact as follows:

begin insert

begin insert SECTION 1. end insert   

end insert

begin insert Article 3.5 (commencing with Section 22350) is
added to Chapter 2 of Division 9 of the end insert begin insert Financial Code end insert begin insert , to read: end insert

begin insert

 

Article begin insert 3.5. end insert   Small Dollar Unsecured Consumer Loans

 

begin insert 22350. end insert   

(a) This article shall apply to an unsecured consumer
loan of a maximum principal balance upon origination of three
thousand dollars ($3,000) or less. Any other sections in this
division that are in conflict with this article shall not apply to these
loans.

(b)  This article shall not apply to any loan made pursuant to
Article 3.6 (commencing with Section 22365).

begin insert 22350.5. end insert   

(a) Any unsecured consumer loan of a maximum
principal balance upon origination of three thousand dollars
($3,000) or less shall comply with all of the following
requirements:

(1) Interest on the loan accrues on a simple-interest basis,
through the application of a daily periodic rate to the actual unpaid
principal balance each day.

(2) The licensee discloses both of the following to the consumer
in writing at the time of application:

(A) The annual percentage rate, the periodic payment amount,
and the total finance charge, calculated as required by Federal
Reserve Board Regulation Z, as to a loan of an amount and term
substantially similar to the loan applied for by the consumer.

(B) That the consumer shall have the right to rescind the loan
by notifying the licensee of the consumer’s intent to rescind the
loan and returning the principal advanced by the end of the
business day following the date of the consummation of the loan.

(3) The loan shall not contain a prepayment penalty or balloon
payment.

(4) For a loan that has a minimum principal amount upon
origination of one hundred fifty dollars ($150), a term of not less
than the following:

(A) Thirty days for loans with a principal balance upon
origination of three hundred dollars ($300) or less.

(B) Sixty days for loans with a principal balance upon
origination as more than three hundred dollars ($300) but no more
than six hundred dollars ($600).

(C) Ninety days for loans with a principal balance upon
origination of more than six hundred dollars ($600) but no more
than one thousand dollars ($1,000).

(D) One hundred twenty days for loans with a principal balance
upon origination of more than one thousand dollars ($1,000) but
no more than one thousand eight hundred dollars ($1,800).

(E) One hundred eighty days for loans with a principal balance
upon origination of more than one thousand eight hundred dollars
($1,800) but no more than two thousand five hundred dollars
($2,500).

(F) Three hundred sixty-five days for loans with a principal
balance upon origination of more than two thousand five hundred
dollars ($2,500) but no more than three thousand dollars ($3,000).

(b) A licensee may contract for and receive charges for an
unsecured consumer loan up to one thousand dollars ($1,000) at
rates not exceeding the following:

(1) For loans up to three hundred dollars ($300), a charge not
to exceed 15 percent of the loan amount.

(2) For loans of more than three hundred dollars ($300) but no
more than six hundred dollars ($600), a charge not to exceed 12
percent of the loan amount.

(3) For loans of more than six hundred dollars ($600) but no
more than one thousand dollars ($1,000), a charge not to exceed
10 percent of the loan amount.

(c) A licensee may contract for and receive charges for an
unsecured consumer loan of more than one thousand dollars
($1,000) but no more than three thousand dollars ($3,000) at a
rate not exceeding the following:

(1) Twelve and one-half percent per month on that portion of
the unpaid principal balance of the loan in excess of one thousand
dollars ($1,000) but not in excess of one thousand eight hundred
dollars ($1,800).

(2) Ten percent per month on that portion of the unpaid
principal balance of the loan in excess of one thousand eight
hundred dollars ($1,800) but not in excess of three thousand
dollars ($3,000).

(d) Notwithstanding subdivision (c), for unsecured consumer
loans of more than one thousand dollars ($1,000) but no more
than three thousand dollars ($3,000) with interest rates in excess
of 8.25 percent per month, a licensee shall reduce the interest rate
after every three on-time payments until the rate is reduced to 36
percent annual percentage rate or other performance based pricing
as may be approved by the commissioner.

(e) A borrower who has made on-time payments and successfully
completed a previous loan shall receive a discounted rate for
subsequent loans.

(f) For purposes of this section, “refinance” means the
replacement or revision of an existing loan contract with a
borrower that results in an extension of additional principal to
that borrower. A licensee shall not refinance a loan subject to this
article unless all of the following conditions are met at the time
the borrower submits an application to refinance:

(1) The borrower has repaid at least 60 percent of the
outstanding principal remaining on his or her loan.

(2) The borrower is current on his or her outstanding loan.

(3) The licensee underwrites the new loan in accordance with
subdivision (l).

(4) If the loan proceeds of both the original loan and the
refinance loan are to be used for personal, family, or household
purposes, the borrower has not previously refinanced the
outstanding loan more than once.

(g) A borrower that is unable to successfully pay back a loan
of no more than six hundred dollars ($600) may request, and the
licensee shall provide, a no-cost repayment plan that converts the
loan to a minimum repayment period of at least 120 days.

(h) (1) Notwithstanding Section 22305, no administrative fee
may be imposed for a loan subject to this article except as provided
in paragraph (2).

(2) As to any loan made with a rate of less than 8.25 percent
per month, a licensee may contract for and receive an
administrative fee, which shall be fully earned immediately upon
making the loan, in an amount not in excess of either 6 percent of
the principal amount, exclusive of the administrative fee, or
seventy-five dollars ($75), whichever is less. A licensee shall not
charge the same borrower more than one administrative fee in
any six-month period. An administrative fee shall not be contracted
for or received in connection with the refinancing of a loan unless
at least eight months have elapsed since the receipt of a previous
administrative fee paid by the borrower. Only one administrative
fee shall be contracted for or received until the loan has been
repaid in full.

(i) A licensee may contract for and receive a delinquency fee
in one of the following amounts:

(1) For a period in default of not less than seven days, an
amount not in excess of twelve dollars ($12).

(2) For a period in default of not less than 14 days, an amount
not in excess of eighteen dollars ($18).

(j) If a licensee opts to impose a delinquency fee, it shall use
the delinquency fee schedule described in subdivision (i), subject
to all of the following:

(1) No more than one delinquency fee may be imposed per
delinquent payment.

(2) No more than two delinquency fees may be imposed during
any period of 30 consecutive days.

(3) No delinquency fee may be imposed on a borrower who is
180 days or more past due if that fee would result in the sum of
the borrower’s remaining unpaid principal balance, accrued
interest, and delinquency fees exceeding 180 percent of the original
principal amount of the borrower’s loan.

(4) The licensee or any of its wholly owned subsidiaries shall
attempt to collect a delinquent payment for a period of at least 30
days following the start of the delinquency before selling or
assigning that unpaid debt to an independent party for collection.

(k) The licensee shall report each borrower’s payment
performance to at least one of the national credit reporting
agencies or any alternative consumer credit reporting agency
designated by the commissioner in the United States. The licensee
shall provide each borrower with the name of the consumer
reporting agency or agencies to which it will report the borrower’s
payment history.

(l) (1) The licensee shall underwrite each loan to determine a
borrower’s ability and willingness to repay the loan pursuant to
the loan term 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.

(2) (A) In making a determination of the borrower's ability to
repay the loan, the licensee shall verify the information provided
by the borrower using a credit report from at least one of the three
major credit bureaus or through an alternative consumer credit
reporting agency approved by the commissioner. Notwithstanding
this section, a licensee may use a proprietary underwriting model,
approved by the commissioner, to determine a borrower's ability
to repay.

(B) The licensee shall not be required to consider, for purposes
of debt-to-income ratio evaluation, loans from friends or family.

(3) The licensee shall also verify the borrower’s income that
the licensee relies on to determine the borrower’s debt-to-income
ratio and shall document in the loan file the source of the
information used to make the determination.

(m) No person in connection with or incidental to the making
of any loan made pursuant to this article may require the borrower
to contract for “credit insurance” as defined in paragraph (1) of
subdivision (a) of Section 22314 or insurance on tangible personal
or real property of the type specified in Section 22313.

(n) (1) No licensee shall require, as a condition of providing
the loan, that the borrower waive any right, penalty, remedy,
forum, or procedure provided for in any law applicable to the
loan, including the right to file and pursue a civil action or file a
complaint with or otherwise communicate with the commissioner
or any court or other public entity, or that the borrower agree to
resolve disputes in a jurisdiction outside of California or to the
application of laws other than those of California, as provided by
law. Any such waiver by a borrower must be knowing, voluntary,
in writing, and expressly not made a condition of doing business
with the licensee. Any such waiver that is required as a condition
of doing business with the licensee shall be presumed involuntary,
unconscionable, against public policy, and unenforceable. The
licensee has the burden of proving that a waiver of any rights,
penalties, forums, or procedures was knowing, voluntary, and not
made a condition of the contract with the borrower.

(2) No licensee shall refuse to do business with or discriminate
against a borrower or applicant on the basis that the borrower or
applicant refuses to waive any right, penalty, remedy, forum, or
procedure, including the right to file and pursue a civil action or
complaint with, or otherwise notify, the commissioner or any court
or other public entity. The exercise of a person’s right to refuse
to waive any right, penalty, remedy, forum, or procedure, including
a rejection of a contract requiring a waiver, shall not affect any
otherwise legal terms of a contract or an agreement.

(3) This subdivision shall not apply to any agreement to waive
any right, penalty, remedy, forum, or procedure, including any
agreement to arbitrate a claim or dispute, after a claim or dispute
has arisen. Nothing in this subdivision shall affect the
enforceability or validity of any other provision of the contract.

begin insert 22351. end insert   

(a) A licensee, with prior approval from the
commissioner, may use the services of one or more referral
partners as provided in this article with respect to unsecured loans
of three thousand dollars ($3,000) or less that the licensee may
make or negotiate.

(b) For purposes of this article, a “referral partner” means an
entity that, at the referral partner’s physical location for business,
brings a licensee and a prospective borrower together for the
purpose of negotiating a loan contract.

begin insert 22351.5. end insert   

(a) A referral partner may perform one or more of
the following services for a licensee at the referral partner’s
physical location for business:

(1) Distributing, circulating, using, or publishing preprinted
brochures, flyers, factsheets, or other written materials relating
to loans that the licensee may make or negotiate and that have
been reviewed and approved in writing by the licensee prior to
their being distributed, circulated, or published.

(2) Providing written factual information about loan terms,
conditions, or qualification requirements to a prospective borrower
that has been either prepared by the licensee or reviewed and
approved in writing by the licensee. A referral partner may discuss
that information with a prospective borrower in general terms,
but may not provide counseling or advice to a prospective
borrower.

(3) Notifying a prospective borrower of the information needed
in order to complete a loan application without providing
counseling or advice to a prospective borrower.

(4) Entering information provided by the prospective borrower
on a preprinted or electronic application form or into a
preformatted computer database without providing counseling or
advice to a prospective borrower.

(5) Assembling credit applications and other materials obtained
in the course of a credit application transaction for submission to
the licensee.

(6) Contacting the licensee to determine the status of a loan
application.

(7) Communicating a response that is returned by the licensee’s
automated underwriting system to a borrower or a prospective
borrower.

(8) Obtaining a borrower’s signature on documents prepared
by the licensee and delivering final copies of the documents to the
borrower.

(b) A referral partner that is licensed or regulated pursuant to
this division, Division 1.1 (commencing with Section 1000),
Division 1.2 (commencing with Section 2000), Division 3
(commencing with Section 12000), Division 5 (commencing with
Section 14000), Division 6 (commencing with Section 17000),
Division 7 (commencing with Section 18000), Division 8
(commencing with Section 21000), Division 10 (commencing with
Section 23000), or Division 20 (commencing with Section 50000)
of this code, Chapter 5 (commencing with Section 1621) of Part
2 of Division 1 of the Insurance Code, or Chapter 1 (commencing
with Section 5000) of Division 3 of the Business and Professions
Code; is an approved agent of a person licensed pursuant to
Division 1.2 (commencing with Section 2000) of this code; or is
a federally regulated bank, thrift, or credit union, or is registered
as a referral partner in a manner and on a form as prescribed by
the commissioner may additionally provide any of the following
services on behalf of the licensee for any loan for which the referral
partner performed finding activities:

(1) (A) Disbursing loan proceeds to a borrower, if this method
of disbursement is acceptable to the borrower.

(B) Any loan disbursement made by a referral partner under
this paragraph shall be deemed made by the licensee on the date
the funds are disbursed or otherwise made available by the referral
partner to the borrower.

(C) A referral partner that disburses loan proceeds to a
borrower shall deliver or cause to be delivered to the borrower
at the time loan proceeds are disbursed a plain and complete
receipt showing all of the following:

(i) The date of disbursement.

(ii) The total amount disbursed.

(iii) The corresponding loan account identification.

(iv) The following statement, prominently displayed in a type
size equal to or greater than the type size used to display the other
items on the receipt: “If you have any questions about your loan,
now or in the future, you should direct those questions to [name
of licensee] by [insert at least two different ways in which a
borrower may contact the licensee].”

(2) (A) Receiving a loan payment or payments from the
borrower, if this method of payment is acceptable to the borrower.

(B) Any loan payment made by a borrower to a referral partner
under this paragraph shall be applied to the borrower’s loan and
deemed received by the licensee as of the date the payment is
received by the referral partner.

(C) A referral partner that receives loan payments under this
paragraph shall deliver or cause to be delivered to the borrower
at the time that the payment is made by the borrower a plain and
complete receipt showing all of the following:

(i) The name of the referral partner.

(ii) The total payment amount received.

(iii) The date of payment.

(iv) The corresponding loan account identification upon which
the payment is being applied.

(v) The loan balance prior to and following application of the
payment.

(vi) The amount of the payment that was applied to principal,
interest, and fees.

(vii) The type of payment, such as cash, automated clearing
house (ACH) transfer, check, money order, or debit card.

(viii) The following statement, prominently displayed in a type
size equal to or greater than the type size used to display the other
items on the receipt: “If you have any questions about your loan,
now or in the future, you should direct those questions to [name
of licensee] by [insert at least two different ways in which a
borrower may contact the licensee].”

(C) A borrower who submits a loan payment to a referral
partner under this paragraph shall not be liable for any failure or
delay by the referral partner in transmitting the payment to the
licensee.

(D) A referral partner that disburses or receives loan payments
pursuant to this paragraph shall maintain records of all
disbursements made and loan payments received for a period of
at least two years or until one month following the completion of
an examination of the licensee by the commissioner, whichever is
later. The commissioner shall determine when an examination is
complete.

(3) Providing any notice or disclosure required to be provided
to the borrower by the licensee, other than the notice required to
be provided by the licensee to the borrower pursuant to subdivision
(d) of Section 22373. A licensee that uses a referral partner to
provide notices or disclosures to borrowers shall maintain a record
of which notices and disclosures each referral partner provides
to borrowers on its behalf, for the purpose of facilitating the
commissioner’s examination of the licensee.

(c) A referral partner shall not engage in either of the following
activities:

(1) Providing counseling or advice to a borrower or prospective
borrower.

(2) Providing loan-related marketing material that has not
previously been approved by the licensee to a borrower or a
prospective borrower.

begin insert 22352. end insert   

(a) At the time the referral partner receives or
processes an application for a program loan, the referral partner
shall provide the following statement to the applicant, on behalf
of the licensee, in no smaller than 10-point type, and shall ask the
applicant to acknowledge receipt of the statement in writing:

“Your loan application has been referred to us by [Name of
Referral Partner]. We may pay a fee to [Name of Referral Partner]
for the successful referral of your loan application. IF YOU ARE
APPROVED FOR THE LOAN, [NAME OF LICENSEE] WILL
BECOME YOUR LENDER, AND YOU WILL BE BUILDING A
RELATIONSHIP WITH [NAME OF LICENSEE]. If you have any
questions about your loan, now or in the future, you should direct
those questions to [Name of Licensee] by [insert at least two
different ways in which a borrower may contact the licensee]. If
you wish to report a complaint about [Name of Referral Partner]
or [Name of Licensee] regarding this loan transaction, you may
contact the Department of Business Oversight at 866-275-2677
or file your complaint online at www.dbo.ca.gov.”

(b) If the loan applicant has questions about the loan that the
referral partner is not permitted to answer, the referral partner
shall make a good faith effort to assist the applicant in making
direct contact with the lender before the loan is consummated.
This good faith effort shall, at a minimum, consist of assisting the
applicant in communicating with the licensee as soon as reasonably
practicable, which shall at a minimum include a “two-way
communication.” For purposes of this section, “two-way
communication” includes telephone, electronic mail, or another
form of communication that allows the applicant to communicate
with the licensee.

(c) If the loan is consummated, the licensee shall provide the
borrower a written copy of the disclosure notice within two weeks
following the date of the loan consummation. A licensee may
include the disclosure within its loan contract, or may provide it
as a separate document to the borrower, via any means acceptable
to the borrower.

begin insert 22352.5. end insert   

(a) A referral partner may be compensated by the
licensee pursuant to the written agreement between the licensee
and the referral partner, as described in Section 22353.5.
Compensation may be paid in accordance with a compensation
schedule that is mutually agreed to by the licensee and the referral
partner.

(b) Notwithstanding subdivision (a), the compensation of a
referral partner by a licensee shall be subject to all of the following
requirements:

(1) No compensation shall be paid to a referral partner in
connection with a loan application unless that loan is
consummated.

(2) No compensation shall be paid to a referral partner based
upon the principal amount of the loan.

(3) Subject to the limitations set forth in paragraphs (1) and
(2), the total compensation paid by a licensee to a referral partner
for the services set forth in subdivision (a) of Section 22351.5 shall
not exceed sixty-five dollars ($65) per loan, on average, assessed
annually, whether paid at the time of consummation, over
installments, or in a manner otherwise agreed upon by the licensee
and the referral partner, plus two dollars ($2) per payment
received by the referral partner on behalf of the licensee for the
duration of the loan, when the referral partner receives borrower
loan payments on the licensee’s behalf in accordance with
subdivision (b) of Section 22351.5.

(4) No licensee shall, directly or indirectly, pass on to a
borrower any fee or other compensation, or any portion of any
fee or other compensation, that the licensee pays to a referral
partner in connection with that borrower’s loan.

begin insert 22353. end insert   

A licensee that utilizes the service of a referral partner
shall do all of the following:

(a) Notify the commissioner within 15 days of entering into a
contract with a referral partner, on a form acceptable to the
commissioner, regarding all of the following:

(1) The name, business address, and licensing details of the
referral partner and all locations at which the referral partner
will perform services under this article.

(2) The name and contact information for an employee of the
referral partner who is knowledgeable about, and has the authority
to execute, the contract governing the business relationship
between the referral partner and the licensee.

(3) The name and contact information for one or more
employees of the referral partner who are responsible for that
referral partner’s finding activities on behalf of the licensee.

(4) A list of the activities the referral partner shall perform on
behalf of the licensee.

(5) Any other information requested by the commissioner.

(b) Pay an annual referral partner registration fee to the
commissioner in an amount to be established by the commissioner
by regulation for each referral partner utilized by the licensee.

(c) Submit an annual report to the commissioner including any
information pertaining to each referral partner and the licensee’s
relationship and business arrangements with each referral partner
as the commissioner may by regulation require. The information
disclosed to the commissioner for the report described in this
subdivision is exempted from any requirement of public disclosure
by paragraph (2) of subdivision (d) of Section 6254 of the
Government Code.

begin insert 22353.5. end insert   

All arrangements between a licensee and a referral
partner shall be set forth in a written agreement between the
parties. The agreement shall contain a provision establishing that
the referral partner agrees to comply with all regulations that are
established by the commissioner pursuant to this article regarding
the activities of referral partner and that the commissioner shall
have access to all of the referral partner’s books and records that
pertain to the referral partner’s operations under the agreement
with the licensee.

begin insert 22354. end insert   

(a) The commissioner may examine the operations of
each licensee and each referral partner to ensure that the activities
of the licensee and the referral partner are in compliance with this
article. The costs of the commissioner’s examination of each
referral partner shall be attributed to the commissioner’s
examination of the licensee. Any violation of this article by a
referral partner or a referral partner’s employee shall be attributed
to the finance lender with whom it has entered into an agreement
for purposes of determining the licensee’s compliance with this
division.

(b) Upon a determination that a referral partner has acted in
violation of this article, or any implementing regulation, or upon
a determination that it would be warranted by the data reported
to the commissioner pursuant to subdivision (c) of Section 22353
for any referral partner, the commissioner may disqualify a referral
partner from performing services under this article, bar a referral
partner from performing services at one or more specific locations
of that referral partner, and terminate a written agreement between
a referral partner and a licensee.

(c) In addition to any other penalty allowed by law, the
commissioner may impose an administrative penalty of up to two
thousand five hundred dollars ($2,500) for violations committed
by a referral partner.

end insert

begin delete SECTION 1. end delete

begin insert SEC. 2. end insert   

Section 22701 of the Financial Code is amended to
read:

22701.  

For the purpose of discovering violations of this division
or securing information required by him or her in the administration
and enforcement of this division, the commissioner may at any
time investigate the loans and business, and examine the books,
accounts, records, and files used in the business, of every person
engaged in the business of a finance lender or broker, whether the
person acts or claims to act as principal or agent, or under or
without the authority of this division. For the purpose of
examination, the commissioner and his or her representatives shall
have free access to the offices and places of business, books,
accounts, papers, records, files, safes, and vaults of all these
persons. As often as the commissioner deems necessary and
appropriate, but at least once every 48 months, the commissioner
shall examine the affairs of every person engaged in the business
of a finance lender or broker for compliance with this division.

begin insert

begin insert SEC. 3. end insert   

end insert begin insert

No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of
the Government Code, or changes the definition of a crime within
the meaning of Section 6 of Article XIII B of the California
Constitution.

end insert