BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Steven Glazer, Chair
2015 - 2016 Regular
Bill No: AB 268 Hearing Date: June 15,
2016
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|Author: |Dababneh |
|-----------+-----------------------------------------------------|
|Version: |June 6, 2016 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: California Finance Lenders Law: violations
SUMMARY Authorizes new rates, fees, and lending practices for
unsecured, consumer-purpose installment loans made under the
California Finance Lenders Law (CFLL) in principal amounts of
$3,000 or less, as specified.
DESCRIPTION
1. Establishes a new article under the CFLL, applicable to
unsecured consumer loans with a maximum principal balance
upon origination of $3,000 or less.
2. Provides that this new article does not apply to loans made
pursuant to the Pilot Program for Increased Access to
Responsible, Small-Dollar Loans (the pilot program), and
provides that any sections of the CFLL, which are in
conflict with the new article, do not apply to loans made
pursuant to the new article.
3. Requires loans made pursuant to the new article to meet all
of the following criteria:
a. Interest must accrue on a simple-interest basis,
through the application of a daily periodic rate to the
unpaid principal balance.
b. Prepayment penalties and balloon payments are
AB 268 (Dababneh) Page 2
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prohibited.
c. Licensees must disclose the annual percentage rate
(APR), periodic payment amount, and total finance charge
to each prospective borrower in writing at the time of
loan application and must inform the consumer that he or
she has the right to rescind his or her loan by the end
of the business day following the date the loan is
consummated, as specified.
d. Loans must have minimum lengths and maximum
allowable charges, as follows:
---------------------------------------------
| Amount | Minimum |Maximum Allowable |
| Borrowed |Loan Length | Charges |
| | (days) | |
|-------------+------------+------------------|
| Up to $149 | No minimum | 15% of loan |
| | | amount |
|-------------+------------+------------------|
| $150 - $300 | 30 | 15% of loan |
| | |amount |
|-------------+------------+------------------|
| $301 - $600 | 60 | 12% of loan |
| | | amount |
|-------------+------------+------------------|
| $601 - | 90 | 10% of loan |
| $1,000 | | amount |
|-------------+------------+------------------|
| $1,001 - | 120 | 12.5% per month |
| $1,800 | | on remaining |
| | | unpaid principal |
| | | balance |
|-------------+------------+------------------|
| $1,801 - | 180 |10% per month per |
| $2,500 | | month on |
| | | remaining unpaid |
| | |principal balance |
|-------------+------------+------------------|
| $2,501 - | 365 | 10% per month on |
| $3,000 | | remaining unpaid |
| | |principal balance |
| | | |
AB 268 (Dababneh) Page 3
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---------------------------------------------
e. Licensees must reduce the interest rate on a loan
with a principal amount between $1,001 and $3,000 and a
monthly interest rate in excess of 8.25% per month after
every three on-time payments made by a borrower, until
the rate is reduced to 36% APR.
f. Licensees must give a discounted rate to a borrower
who has made on-time payments and successfully completed
a previous loan.
g. Licensees must underwrite each loan to determine a
borrower's ability and willingness to repay that loan
according to its terms. A licensee may not make a loan
if it determines through its underwriting that a
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, will
exceed 50% of the borrower's gross monthly income.
i. In making this determination, a licensee
must verify the information provided by the borrower
using a credit report from at least one of the
national credit reporting agencies or an alternative
credit reporting agency approved by the Commissioner
of Business Oversight (commissioner).
ii. Notwithstanding the aforementioned
requirements, a licensee may use a proprietary
underwriting model approved by the commissioner to
determine a borrower's ability to repay.
h. Licensees must report each borrower's payment
performance to at least one national credit reporting
agency or to an alternative credit reporting agency
designated by the commissioner. Licensees must inform
each borrower of the name of the agency or agencies to
which it will report the borrower's payment history.
i. A borrower who is unable to successfully repay a
loan of up to $600 may request, and a licensee must
provide, a no-cost repayment plan which converts the loan
AB 268 (Dababneh) Page 4
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from a minimum length of 90 days to a minimum length of
120 days.
j. Licensees may charge an administrative fee equal to
the lesser of 6% of the principal amount of a loan or
$75, on any loan whose monthly interest rate is less than
8.25% per month. Administrative fees may be charged no
more frequently than once every six months in connection
with a new loan origination and no more frequently than
once every eight months in connection with a refinanced
loan.
aa. Licensees may charge a delinquency fee of up to $12 for
a period in default not less than 7 days or up to $18 for
a period in default not less than 14 days. No more than
one delinquency fee may be imposed per delinquent
payment, no more than two delinquency fees may be imposed
during any period of 30 consecutive days, and 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% of
the original principal amount of the borrower's loan.
bb. Licensees may refinance loans, subject to restrictions
that are identical to those imposed on pilot program
lenders.
cc. Licensees may use the services of referral partners,
pursuant to rules that are similar to those imposed on
pilot program lenders with respect to their use of
finders (the pilot calls these individuals finders, while
this bill calls them referral partners). The following
represent the key differences between the provisions of
this bill applicable to referral partners and the
provisions of the pilot program with respect to finders:
i. The pilot program requires licensees to
ensure that a loan is not consummated until the
licensee has completed a two-way communication, as
defined, with a loan applicant. This bill lacks a
similar requirement.
AB 268 (Dababneh) Page 5
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ii. The pilot program requires finders who will
disburse loan proceeds, accept loan payments, or
provide loan disclosures on behalf of licensees to be
licensed, as specified. This bill includes those
licensing requirements, but additionally authorizes
the commissioner to allow licensees to use referral
partners in the aforementioned capacities, if those
referral partners register with the commissioner in a
manner and on a form prescribed by the commissioner.
iii. The pilot program caps the compensation
that may be paid by licensees to finders, and
requires licensees to calculate the compensation paid
to finders on a per loan basis, to ensure that the
total amount does not exceed $65 per loan, nor does
it exceed the sum of the origination fee plus
interest charges paid by a borrower in connection
with that loan. This bill caps the total
compensation that may be paid by a licensee to a
referral partner at $65 per loan, on average,
assessed annually, and does not prohibit the
compensation paid per loan from exceeding the sum of
the origination fee plus interest charges paid by a
borrower in connection with a loan.
dd. No person in connection with or incidental to the
making of any loan made pursuant to the bill may require
a borrower to contract for credit insurance, as defined,
or for insurance on tangible personal or real property,
as defined.
ee. Licensees are subject to identical prohibitions
regarding waivers of rights and discrimination against
borrowers as those are pilot program lenders.
EXISTING LAW
4. Provides for the CFLL (Financial Code Sections 22000 et
seq.), administered by the Department of Business Oversight
(DBO). The CFLL includes separate rules applicable to
consumer installment loans (Financial Code Sections 22200
through 22470) and commercial loans (Financial Code Sections
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22500 through 22650). The following are the key rules
applied to consumer loans made pursuant to the CFLL:
a. CFLL licensees who make unsecured or secured consumer
loans under $2,500 are capped at interest rates which range
from 12% to 30% per year, depending on the unpaid balance of
the loan (Sections 22303, 22304, and 22308). Administrative
fees are capped at the lesser of 5% of the principal amount
of the loan or $50 (Section 22305).
b. In addition to the requirements in "a" above, CFLL
licensees who make unsecured or secured consumer loans under
$5,000 are prohibited from imposing compound interest or
charges (Section 22309); limited in the amount of delinquency
fees they may impose (Section 22320.5; delinquency fees are
capped at a maximum of $10 on loans 10 days or more
delinquent or $15 on loans 15 days or more delinquent);
required to prominently display their schedule of charges to
borrowers (Section 22325); prohibited from splitting loans
with other licensees (Section 22327); prohibited from
requiring real property collateral (Section 22330), and
limited to a maximum loan term of 60 months plus 15 days
(Section 22334).
c. In addition to the requirements in "a" and "b" above,
CFLL licensees who make unsecured or secured consumer loans
under $10,000 are limited in their ability to conduct other
business activities on the premises where they make loans
(Section 22154); must require loan payments to be paid in
equal, periodic installments (Section 22307); and must meet
certain standards before they may sell various types of
insurance to the borrower (Sections 22313 and 22314);
d. Generally speaking, the terms of consumer loans of
$10,000 or above are not restricted under the CFLL.
5. In lieu of the rates and fees summarized in 1a immediately
above, CFLL licensees accepted to participate in the pilot
program may make unsecured consumer loans in amounts between
$300 and $2,500 (Financial Code Sections 22365 through 22381).
Pilot program loans are capped at interest rates that currently
range from 32.25% to 36% per year, depending on the unpaid
principal balance of the loan. Administrative fees are capped
at the lesser of 7% or $90 on the first loan made by a lender to
AB 268 (Dababneh) Page 7
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a borrower and at the lesser of 6% or $75 on the second and
subsequent loans made to a borrower by the same lender. Late
fees are capped at a maximum of $14 on loans that are at least 7
days delinquent or a maximum of $20 on loans that are at least
14 days delinquent. Lenders are required to adhere to rigorous
underwriting requirements; notify borrowers of amounts due prior
to payment due dates; offer borrower's credit education prior to
loan disbursement; report each borrower's payment performance to
at least one consumer reporting agency that compiles and
maintains files on consumers on a nationwide basis; and submit
detailed data regarding borrower performance to DBO on an annual
basis.
COMMENTS
1. Purpose: AB 268 is intended to reform the unsecured lending
provisions of the CFLL up to $3,000, by replacing the
existing provisions of the CFLL applicable to these loans
with new rates, charges, and fees.
2. Background: This bill was introduced in an attempt to
increase the small dollar credit options available to
persons who are struggling to make ends meet, and are unable
to obtain low-interest credit cards, bank or credit union
loans, or other forms of relatively low-cost credit.
Relatively few installment loans are made in California with
principal amounts under $2,500 (345,796 unsecured
installment loans of less than $2,500 were made during 2014,
relative to 12.4 million payday loans made during the same
period). The relatively small number of small dollar
installment loans made in California represents a challenge
to the significant population of people who are unable to
access affordable credit through banks and credit unions.
Californians who lack credit scores, or have very thin
credit files or damaged credit, currently have very few
affordable options when they need to borrow money. Credit
cards are often unavailable to this population, or, if
available, bear very high interest rates and fees. When
their spending needs outpace their incomes, these
Californians commonly turn to payday loans, auto title
loans, or high-interest rate, unsecured installment loans.
All three of these options come with high costs, and none
rewards timely loan repayment with a credit score increase.
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Although California created a pilot program in 2010 to increase
the number of affordable, responsible, small dollar
installment loans made in amounts of up to $2,500, that
program has been slow to grow. According to this bill's
author, "thus far, few licensees are in the pilot program
and most of the loan volume is conducted by one company
(Oportun) that helps build credit for borrowers with thin or
no credit files. Lending to this market space is vital but
does not help consumers that may have damaged credit but
still need a loan." Although the pilot program has shown
promise in helping borrowers who qualify for its loans
obtain and improve their credit scores, borrowers who cannot
qualify for pilot program loans are left without installment
loan options from licensed California lenders.
The characteristics and needs of the population on which this
bill is focused were described in a 2012 study by the Center
for Financial Services Innovation (CFSI) titled, "A Complex
Portrait: An examination of Small-Dollar Credit Consumers"
( http://www.cfsinnovation.com/CMSPages/GetFile.aspx?guid=f937
e096-abcf-46cc-84d0-1c6c3aec2d3e ). In that study, CFSI
surveyed over 1,100 small dollar credit (SDC) consumers and
an additional 500 non-SDC consumers for comparison. CFSI
defined a SDC consumer as one who had used a payday loan,
pawn loan, direct deposit advance, auto title loan, or
non-bank installment loan of $5,000 or less at least once
during the prior 12 months. Among CFSI's key findings a)
only 27% of SDC consumers had a credit card, while 61% of
non-SDC consumers had one; b) the top three uses for an SDC
product included utility bills, general living expenses, and
rent; 3) the top three reasons for funds shortage included
living expenses consistently greater than income, bill or
payment due before paycheck received, and unexpected events
such as emergency expenses or income drops; 4) users of very
short-term loans were almost twice as likely as other SDC
consumers to borrow for routine expenses such as utility
bills or general living expenses; 5) in addition to
borrowing, SDC consumers also reported cutting back on their
general spending and going without something they needed in
order to address their cash shortfalls; 6) while 66% of SDC
consumers had no savings, more than half of those with
savings chose not to use it all and preferred to rely on
credit, instead; and 7) the top three loan attributes that
AB 268 (Dababneh) Page 9
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mattered most to SDC consumers were quick access to money,
ability to qualify, and clear terms.
This bill is an attempt by the author to attract more
small-dollar credit providers to the California marketplace,
and to encourage them to responsibly offer credit to the
significant population of California consumers who are
struggling to make ends meet, and who cannot qualify for
lower-cost credit options.
3. Pending Consumer Financial Protection Bureau (CFPB)
Regulations: On June 2, 2016, the CFPB released
long-awaited draft regulations for certain short-term and
longer-term credit products
(http://files.consumerfinance.gov/f/documents/Rulemaking_Payd
ay_Vehicle_Title_Certain_High-Cost_Installment_Loans.pdf).
The CFPB's rule is intended to prohibit several practices in
the small dollar credit lending markets that the CFPB
believes have had detrimental effects on consumers. In
releasing its draft regulations, CFPB explained that it "has
serious concerns that risky lender practices in the payday,
auto title, and payday installment markets are pushing
borrowers into debt traps. Chief among these concerns is
that consumers are being set up to fail with loan payments
that they are unable to repay. Faced with unaffordable
payments, consumers must choose between defaulting,
reborrowing, or skipping other financial obligations like
rent or basic living expenses like food and medical care.
The CFPB is concerned that these practices also lead to
collateral damage in other aspects of consumers' lives such
as steep penalty fees, bank account closures, and vehicle
seizures."
The CFPB's draft regulations propose one set of rules for
short-term covered loans, as defined; a different set of
rules for longer-term covered loans, as defined; and rules
related to payment practices, loan tracking requirements,
and record retention requirements, which apply to lenders
that make covered loans of any type. Although a detailed
summary of the draft CFPB regulations is beyond the scope of
this analysis, a brief overview of the CFPB's proposal is
relevant because, as noted below, the loans covered by the
CFPB rules overlap to some extent with the loans covered by
this bill.
AB 268 (Dababneh) Page 10
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a. Covered short-term loans: The CFPB defines a
covered short-term loan under its draft proposal as one
extended for personal, family, or household purposes, in
which the consumer is required to pay substantially the
entire amount of the loan within 45 days of loan
consummation. Because this bill establishes no minimum
loan length for loans of up to $149 and a minimum loan
length of 30 days for loans of up to $300, loans of up to
$300 that are made pursuant to the provisions of this
bill also meet the CFPB's definition of covered
short-term loans. As described immediately below, if the
CFPB rules are enacted as proposed, the provisions of
this bill that apply to loans with principal amounts
below $300 will be inconsistent with those federal rules.
The draft CFPB rules prohibit a lender from making a
short-term covered loan or increasing the credit
available under a covered short-term loan, unless the
lender first makes a reasonable determination that the
consumer will have the ability to repay that loan
according to its terms. To make a reasonable
determination of a consumer's ability to repay a covered
loan, a lender must obtain the consumer's written
statement regarding the amount and timing of the
consumer's net income receipts and the amount and timing
of payments required for categories of the consumer's
major financial obligations, and must obtain independent
verification evidence, specified in the regulations,
regarding income and expenses.
Using both sets of data, the lender must make a reasonable
projection of the amount and timing of a consumer's net
income and payments for major financial obligations and
must reasonably conclude that: (1) the consumer's
residual income will be sufficient for the consumer to
make all required loan payments and meet basic living
expenses, as defined, during the contractual term of the
loan; and (2) the consumer will be able to make payments
required for major financial obligations as they fall
due, make any remaining payments under the loan, and meet
basic living expenses for 30 days after having made the
highest payment due under the loan on its due date (which
generally means for 30 days following the conclusion of
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the loan term).
The underwriting requirements contained in the draft CFPB
rules are much more expansive and detailed than those
contained in this bill. For example, the CFPB rule
requires lenders to consider certain information this
bill does not require be considered (such as a consumer's
housing expenses and major financial obligations),
requires lenders to consider a consumer's ability to meet
their basic living expenses for 30 days after having
repaid their loan (not required by this bill), and
requires lenders to presume that a borrower cannot afford
a covered short-term loan, if a borrower meets one of
three presumptions of unaffordability specified in the
draft regulations (this bill includes no such
presumptions of unaffordability).
Although the CFPB rules for short-term covered loans do
provide for limited conditional exemptions that allow
lenders to extend short-term covered loans without making
ability-to-repay determinations, the requirements
applicable to these conditional exemptions envision
determinations that are beyond the scope and requirements
of this bill.
b. Covered longer-term loans: The CFPB defines a
covered longer-term loan under its draft proposal as one
extended for personal, family, or household purposes, in
which the consumer is not required to repay substantially
the entire amount of the loan within 45 days of
consummation, the total cost of credit for the loan
exceeds a rate of 36% a year as measured at the time of
loan consummation, and the lender either obtains a
leveraged payment mechanism or vehicle security at the
same time as or within 72 hours after the consumer
receives the entire amount of funds he or she is entitled
to receive under the loan. A leveraged payment mechanism
is one in which the lender has the right to initiate a
transfer of money from a consumer's checking, savings, or
prepaid account to satisfy a loan obligation; has the
contractual right to obtain payment directly from the
consumer's employer or consumer's other source of income;
or requires the consumer to repay the loan through a
payroll deduction or deduction from another source of
AB 268 (Dababneh) Page 12
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income.
The following represent the APRs of loan subject to the
provisions of this bill, as measured at the time of loan
consummation, as well as the minimum loan lengths allowed
under this bill's provisions. As the table below shows,
any loan of over $600, which is made under this bill's
provisions, and which carries the maximum allowable
charges and minimum allowable loan length permitted by
the bill, will be considered a covered longer-term loan
by the CFPB, if the lender obtains a leveraged payment
mechanism with which to secure loan repayment. If the
CFPB rules are enacted as proposed, the provisions of
this bill that apply to those loans will be inconsistent
with the federal rules.
----------------------------------------------------------
| |$301-$600|$601-$1000|$1001-$1800| $1801 - |
| | | | | $3000 |
|-------------+---------+----------+-----------+-----------|
|APR assuming | | | | |
|minimum loan | 73% | 41% | 150% | 120% |
|length and | | | | |
|max | | | | |
|allowable | | | | |
|charges | | | | |
|-------------+---------+----------+-----------+-----------|
|Minimum loan | 60 days | 90 days | 120 days | 180 days |
|length | | | | |
|-------------+---------+----------+-----------+-----------|
|Maximum | 12% of | 10% of | 12.5% per | 10% per |
|charges a |principal|principal | month |month |
|lender may | | | | |
|impose | | | | |
----------------------------------------------------------
The CFPB's draft rule imposes nearly identical
underwriting requirements on lenders with respect to
covered longer-term loans as it imposes on lenders with
respect to covered short-term loans. For this reason,
the underwriting requirements for longer-term loan that
are contained in the draft CFPB rules are much more
expansive and detailed than the underwriting requirements
AB 268 (Dababneh) Page 13
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for these loans that are contained in this bill.
Although the CFPB rules for covered longer-term loans do
provide for limited conditional exemptions that allow
lenders to extend longer-term covered loans without
making an ability-to-repay determination, the structure,
interest rates, and allowable administrative fees for
those loans are very different than those envisioned by
this bill.
Of note, the CFPB's longer-term covered loan rules do
contemplate use of proprietary underwriting models, as is
proposed in this bill. However, the CFPB's rules limit
the use of such models to loans that carry a modified
total cost of credit of not more than 36%, not including
an origination fee that represents a reasonable
proportion of the lender's cost of underwriting loans.
In contrast, this bill allows the use of proprietary
underwriting models approved by the commissioner, without
regard to the interest rate of the loan on which that
model is being used. The CFPB's rules also require that
any proprietary underwriting model used by a lender
generate a portfolio default rate no greater than 5% per
year, a requirement that is missing from this bill.
Finally, the CFPB's rules require lenders to refund
origination fees to any borrower who is underwritten
using a proprietary underwriting model that generates a
portfolio default rate higher than 5% per year, a
requirement this bill lacks.
c. Payment Practices, Loan Tracking, and Record
Retention: The draft CFPB rules also require lenders
making covered loans to notify consumers before each
attempt to withdraw payment for a covered loan from a
consumer's checking, savings, or prepaid account; limit
the number of times that lenders making covered loans may
debit a consumer's account for payment, if an attempt to
withdraw payment fails due to insufficient funds; require
lenders to report loan performance to registered
information systems, which are defined in the CFPB rules;
require lenders to develop written policies and
procedures reasonably designed to ensure compliance with
the proposal's requirements; and require lenders to
retain evidence of compliance for 36 months following the
AB 268 (Dababneh) Page 14
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date on which a covered loan ceases to be an outstanding
loan. None of these consumer protections is contained in
this bill, although none of this bill's provisions appear
to be inconsistent with any of these rules.
4. Further Refinement: This bill's author acknowledges that
the bill before this Committee is a work in progress, which
requires a level of further revision, clarification, and
refinement that exceeds the time available to this Committee
in which to consider the bill. If this Committee wishes to
move AB 268 forward to allow its author to continue working
on the measure, with the idea of calling the bill back for a
re-hearing after it has been further refined, it may wish to
obtain a commitment from the author to address the following
issues:
a. If this bill is enacted, there will be four sets of
rules for consumer-purpose loans made under the CFLL (the
existing rate structure that applies to both secured and
unsecured loans of up to $2,500; the pilot program that
can be used in lieu of the existing rate structure on
unsecured loans of up to $2,500; the existing set of
rules applicable to both secured and unsecured loans over
$2,500; and the rules established by this bill, which
will apply to unsecured loans of up to $3,000, except
where these rules conflict with other rules). Although
this bill contains language which provides that "any
other sections in this division that are in conflict with
this article shall not apply to these loans," it would be
enormously helpful to consumers, licensees, the
commissioner, and stakeholders if this bill were explicit
regarding the sections of existing law that will and will
not apply to loans made pursuant to the article of law
being created by this bill.
This clarification would also be helpful to further the
author's stated intent to replace the existing provisions
of the CFLL applicable to unsecured loans in amounts of
up to $3,000 with the provisions of this bill. As
drafted, AB 268 appears to add its provisions as an
alternative to existing rates and fees, rather than
replace them.
b. The rate structure this bill proposes for principal
AB 268 (Dababneh) Page 15
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amounts of up to $1,000 would benefit from revision to
eliminate unintended consequences (page 4, lines 6
through 16). As shown in the table below, this bill's
step-type rate structure on principal amounts of up to
$1,000 establishes perverse incentives that impose lower
borrowing costs on borrowers that borrow more money for a
longer period of time than it imposes on borrowers that
borrow less money for a shorter period of time. For
example, a $320 loan will cost $38 and provide a borrower
access to that money for 60 days, while a $280 loan will
cost $42 and provide a borrower access to that money for
only 30 days; the same sorts of inconsistencies affect
loan amounts bracketing $600.
------------------------------------------------
| | Up to |$301 - |$601 - |
| | $300 |$600 |$1,000 |
|--------------+---------+-----------+-----------|
|Maximum | 15% of | 12% of | 10% of |
|charges a |principal| principal | principal |
|lender may | | | |
|impose | | | |
|--------------+---------+-----------+-----------|
|What the | | | |
|borrower will | Up to |$36 to $72 | $60 to |
|owe | $45 | | $100 |
|--------------+---------+-----------+-----------|
|Minimum loan | | | |
|length | 30 days | 60 days |90 |
| | | |days |
| | | | |
------------------------------------------------
c. Amendments would also be helpful to clarify whether
loans made in amounts of up to $1,000 may be paid back
over multiple installments, and, if so, the minimum and
maximum allowable frequency of those installments.
d. This bill requires lenders to "reduce the interest
rate after every three on-time payments until the rate is
reduced to 36% APR" on loan amounts between $1,000 and
$3,000, whose interest rates exceed 8.25% per month (page
4, lines 29 through 35). This language would benefit
from clarification to resolve the following questions:
AB 268 (Dababneh) Page 16
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What is the minimum frequency with which lenders must
collect payments on installment loans of this size? By
what amount must the interest rate be reduced? Must it
be reduced by the same amount after every three on-time
payments or can a lender reward longer-term successful
borrowers with larger reductions? Must the on-time
payments be consecutive (i.e., does the clock reset to
zero once a borrower experiences a late payment)? Does
the reference to interest rates in excess of 8.25% per
month refer to the initial interest rate imposed at loan
origination?
Calculating the range of full-loan costs and APRs of loans
with principal amounts above $1,000, using the rate and
fee structure proposed in this bill, will be impossible
until these questions are answered.
e. This bill provides that "a borrower who has made
on-time payments and successfully completed a previous
loan shall receive a discounted rate for subsequent
loans" (page 4, lines 36 through 38) This language would
benefit from clarification to resolve the following
questions: Is one lender is required to honor on-time
payments made by a borrower on a loan obtained from a
different lender? To which loans does this provision
apply (all loans or only loans above $1,000)? What is
meant by "on-time payments" (does this mean that all
payments due on a loan must have been made timely or
could a borrower have experienced and then cured one or
more delinquencies and remain eligible for a discounted
rate on a subsequent loan)?
f. This bill allows for an administrative fee to be
charged on any loan that is made with a rate of less than
8.25% per month (page 5, lines 21 through 26). It is
unclear whether the author intends for this provision to
apply to all loans made pursuant to the new article or
only to loans with principal amounts above $1,000. It
would also be helpful to amend this language to clarify
that the 8.25% per month threshold refers to the interest
rate upon origination.
g. Language regarding late fees refers to periods "in
default," an artifact of language in Section 22320.5 of
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the Financial Code, which was corrected in the pilot
program to refer to periods "in delinquency." An
amendment is suggested to replace the words "in default"
with "in delinquency" (page 5, lines 36 through 39).
h. This bill requires licensees to report borrower
payment performance to at least "one of the national
credit reporting agencies" (page 6, lines 17 through 20).
The pilot program more correctly refers to "a consumer
reporting agency that compiles and maintains files on
consumers on a nationwide basis" and defines such an
agency as "one that meets the definition in Section
603(p) of the federal Fair Credit Reporting Act (15 USC
Sec. 1681a(p))." This bill would benefit from the
substitution of language similar to that used in the
pilot program.
Similarly, if they wish to do so, this bill allows
licensees to report borrower payment performance to "any
alternative consumer credit reporting agency designated
by the commissioner in the United States." When
contacted by Committee staff, a representative of
Clarity, the country's largest specialty credit bureau
focusing on nonprime consumers, confirmed that his
company is also subject to the federal Fair Credit
Reporting Act (FCRA). Staff suggests clarifying the
language around alternative consumer credit reporting
agencies by requiring that any alternative agency
designated by the commissioner be subject to FCRA
requirements. Doing so will provide consumers whose data
is reported to an alternative bureau the protections
afforded by the FCRA.
i. As discussed in more detail above, the underwriting
requirements of this bill are inconsistent with the draft
CFPB regulations for covered short-term and longer-term
loans and may require revision to minimize future
potential conflict. However, if this bill's
underwriting requirements are viewed independently of the
CFPB rules (as may be appropriate given the potential for
significant changes to those rules before they are
finalized), there are issues that would benefit from
correction and clarification. The biggest of these
issues involves the language which states,
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"notwithstanding this section, a licensee may use a
proprietary underwriting model, approved by the
commissioner, to determine a borrower's ability to repay"
(page 6, lines 36 through 39).
As currently drafted, this bill provides no guidance to the
commissioner regarding what program elements or
performance requirements constitute the minimum allowable
to warrant approval of a proprietary underwriting model
by commissioner. The bill also fails to provide the
commissioner with express authority to rescind her
approval of a proprietary underwriting model, if that
model proves ill-equipped to appropriately vet the
ability and willingness of borrowers to repay their
loans. The bill is also silent on the steps that must be
taken by licensees that update and refine their approved
underwriting models. Must an underwriting model be
re-submitted for approval each time it is updated to
reflect additional performance data on a lender's
customers? Finally, this bill is silent on the extent to
which the components of a lender's proprietary model will
be subject to Public Records Act requests directed to the
commissioner. If the author intends for these
proprietary models to remain confidential, an amendment
providing for that confidentiality will be necessary.
Subdivision (l), which contains the underwriting language,
would also benefit from technical corrections (page 6,
lines 24 through 39). Paragraph (1) of subdivision (l)
refers to underwriting a borrower's ability and
willingness to repay a loan (see line 25), while
paragraph (2) refers only to underwriting a borrower's
ability to repay (see lines 32 and 33). The phrase
"notwithstanding this section" on lines 36 and 37 should
also be replaced by the phrase "notwithstanding this
paragraph."
j. The language on page 11, line 6 that refers to
subdivision (d) of Section 22373 needs correction to
refer, instead, to subdivision (c) of Section 22352.
aa. There are several elements of the pilot program
that have been excluded from this new article. This
Committee may wish to ask the author to explain why he
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has chosen to exclude all of the following
consumer-friendly elements of the pilot program from this
bill: (1) enhanced borrower disclosures at the time of
loan application; (2) an offer of free credit education
prior to loan disbursement; (3) borrower notification at
least two days prior to each payment due date regarding
the amount due and the due date, (4) requirement for
lenders to develop and implement policies and procedures
designed to respond to questions raised by applicants and
borrowers regarding their loans; (5) detail regarding
which data sources are required to verify a borrower's
gross monthly income and debt obligations; and (6)
prohibitions against offers or sales of and referrals to
persons who offer or sell credit insurance and insurance
on tangible personal or real property in connection with
loans.
It would also be helpful to understand the logic behind the
differences in this bill's referral partner provisions
relative to the finder provisions of the pilot program.
bb. Finally, this Committee may wish to ask the
author to address two questions regarding the scope of
the bill. First, what is the logic of choosing $3,000 as
this bill's upper cutoff, when both the pilot program and
Financial Code Sections 22303, 22304, and 22308 use
$2,500 as their cutoff? Second, what is the logic of
limiting this bill to unsecured loans, when the CFLL
applies to both secured and unsecured loans.
5. Summary of Arguments in Support:
a. The Online Lending Alliance (OLA) supports the
author's efforts to expand the availability of credit to
California consumers under the CFLL in the
currently-underserved $300 to $2,500 market and is
supportive of his ongoing efforts to create a regulatory
framework in that space that would be economically viable
for companies beyond those few operating under the small
dollar loan pilot program. "As regulated CFLL-licensed
lenders, our companies would very much like to lend in
this market segment. The amendment circulated June 6th,
however, present several significant problems as
drafted." OLA offers a series of concerns and
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recommendations.
OLA's recommendations: The bill should be limited to loan
amounts below $2,500 and amended to clarify that it does
not affect loans made under the Deferred Deposit
Transaction Law (payday loan law). The bill should be
clarified to ensure that proprietary underwriting
analytics remain confidential, and to ensure that any
regulatory review of underwriting standards is
outcome-based and consistent with emerging CFPB
ability-to-repay requirements. The rate structure in the
bill should be simplified significantly, and the
mandatory rate reduction concept should be limited to
subsequent loans that are obtained from the same lender.
The bill should be amended to allow for the use of online
referral partners. Finally, OLA urges the Committee to
avoid enacting legislation that is duplicative of and/or
inconsistent with pending CFPB rules for small dollar
lending, arbitration waivers, and bank overdraft
policies.
b. Although Advance America has concerns regarding the
lower loan amounts authorized by this bill, the interest
rate calculations, and the complex nature of the interest
rate reductions mandated by the bill, the company
supports the author's desire to create a viable loan
product under $3,000 that will create a more robust,
regulated marketplace in California. Advance America
believes that AB 268 is worthy of passage out of this
Committee, to allow the author to continue refining his
legislation.
6. Summary of Arguments in Opposition: A coalition of 36
consumer advocacy groups, legal aid organizations, and
economic development organizations submitted a joint letter
of opposition identifying several key concerns with the
bill, all of which serve to weaken the current protections
in the CFLL for loans between $300 and $2,500. Among the
organizations' concerns: Loans between $300 and $2,500
could have effective APRs significantly higher than what is
currently permitted by the CFLL. The ability-to-repay
underwriting criteria in the bill do not include rental
housing costs, a major omission given California's current
affordable housing crisis. The bill will allow lenders to
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use unspecified proprietary underwriting models and to
employ referral partners who are not subject to state
licensure or federal oversight, despite their ability to
perform core functions, such as disbursing loan proceeds and
taking consumers' payments. Finally, the bill will allow
lenders to offer credit insurance, an add-on product that
can inflate the cost of a loan.
The organizations also point to CFPB's draft rule to regulate
payday, car title, and installment loans. "In light of
these significant changes underway, we question whether it
is sensible to consider a major overhaul of the CFLL with AB
268 as the vehicle, which substantially weakens existing
consumer protections for these loans between $300 and
$2,500. This Committee is being asked to advance a major
piece of legislation, the substance of which has been in
print for less than a week, with barely three months left in
our current session...In the next legislative session, we
ask you to consider addressing existing problems across all
types of high-cost loans, building off of the CFPB's minimum
federal standards. By doing so, you will help level the
playing field and allow for safer, more affordable,
responsible lending alternative to emerge in California."
7. Prior and Related Legislation:
a. SB 1146 (Florez), Chapter 640, Statutes of 2010:
Authorized California's original small-dollar loan pilot
program within the CFLL, named the Pilot Program for
Affordable Credit-Building Opportunities. Allowed
lenders approved to participate in the pilot program to
charge higher interest rates and fees on loans of up to
$2,500 than those authorized under CFLL. Required pilot
program lenders to rigorously underwrite their loans,
offer credit education at no cost to their borrowers, and
report borrower payment history to at least one major
credit bureau. Required detailed reporting of loan
outcomes to DBO. Originally scheduled to sunset on
January 1, 2015, but was replaced by the Pilot Program
for Increased Access to Responsible Small Dollar Loans,
as described immediately below.
b. SB 318 (Hill), Chapter 467, Statutes of 2013:
Replaced the Pilot Program for Affordable,
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Credit-Building Opportunities with the Pilot Program for
Increased Access to Responsible Small Dollar Loans.
Retained several aspects of the original pilot, including
the underwriting requirements, offers of free credit
education, reports to at least one major credit bureau,
and detailed reporting of program loan outcomes, but
modified other aspects of the original pilot program.
These modifications increased the maximum interest rates
and fees that pilot lenders could charge, allowed pilot
lenders to originate new loans and to refinance loans
more frequently than under the original pilot, and
eliminated several administrative and licensing rules
that were serving as bureaucratic barriers to the success
of the original pilot. Scheduled to sunset on January 1,
2018.
c. SB 235 (Block), Chapter 505, Statutes of 2015:
Expanded the activities in which pilot program finders
could engage on behalf of pilot program lenders.
Authorized finders to disburse loan proceeds to
borrowers, receive loan payments from borrowers, and
provide notices and disclosures to borrowers, as
specified, and provided pilot program lenders with
greater flexibility in the ways in which they may
compensate their finders.
d. SB 984 (Hueso), 2015-16 Legislative Session:
Extends the sunset date on the pilot program to January
1, 2023.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Advance America
Online Lending Alliance
Opposition
API Legal Outreach
Asian Law Alliance
Asian Pacific Planning & Policy Council
California Capital Financial Development Corporation
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California Reinvestment Coalition
Center for Responsible Lending
Community Legal Services of East Palo Alto
Consumer Action
Consumers Union
Courage Campaign
Dreams for Change
East Bay Community Law Center
Fresno Community Development Financial Institution
Greenlining Institute
Law Foundation of Silicon Valley
Little Tokyo Service Center
Mexican American Opportunity Fund
Mission Economic Development Agency
My Path
National Council of La Raza
NEW Economics for Women
Nuestra Casa de East Palo Alto
Opportunity Fund
Presente.org
Public Counsel
Public Good Law Center
Public Law Center
Religious Action Center of Reform Judaism
Rural Community Assistance Corporation
Silicon Valley Debug
Thai Community Development Center
Valley Economic Development Center
West Valley Community Services
Working Partnerships USA
Wrigley is Going Green
Youth Leadership Institute
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