BILL ANALYSIS
AB 377
Page 1
Date of Hearing: April 13, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
AB 377 (Mendoza) - As Amended: April 2, 2009
SUBJECT : Deferred deposit transactions.
SUMMARY : Makes various changes to the California deferred
deposit transaction law (CDDTL). Specifically, this bill :
1)Authorizes a customer, who is unable to repay a deferred
deposit transaction (DDT) to elect, once in any 12-month
period, to repay the loan to the licensee pursuant to an
extended payment plan.
2)Specifies that an applicant for licensure, or an existing
licensee within 10 days of any change, shall include
fingerprints and a completed statement of identity and
questionnaire for the following:
a) Each officer, director and controlling person, if the
applicant is a corporation or trust;
b) Each general partner and controlling person, if the
applicant is a partnership; and,
c) The individual who is the sole proprietor, if the
applicant is a sole proprietorship.
3)Requires an applicant to disclose in its application whether
any person named in the application has, during the last 20
years, conducted a DDT business or similar business in any
other state, and if so, the time period in which that business
was conducted.
4)Mandates that an applicant shall identify in their
application, or an existing licensee must provide notice
within 10 days, if the applicant or licensee intends to offer
any product or service in addition to DDTs that will generate
in excess of 5% of the gross monthly revenue of any office.
5)Provides that no licensee shall place an advertisement
disseminated primarily in this state for a DDT, including
internet advertising unless in the printed or oral text of the
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advertisement it makes the following disclosure, "[Insert
licensee's name] is licensed by the Department of Corporations
pursuant to the California Deferred Deposit Transaction Law."
6)Requires that the disclosure mentioned in #5 above shall be in
the primary language of the advertisement.
7)Specifies that licensees must maintain a file of all
advertising for a period of two years from the date of its
first use.
8)Clarifies that it is a violation of the DDTL for a licensee to
refer or deliver a check taken in a DDT to a prosecutor or
other law enforcement official for purposes of collection or
criminal prosecution, unless the prosecutor or law enforcement
official requests the check as part of an investigation not
initiated by the licensee.
9)Provides that the current notice required to be disclosed to
the consumer under current law, must be disclosed to consumers
in a distinct and separate form, from the DDT agreement.
Additionally, requires that a copy of the notice must be
initialed by the borrower and retained by the borrower.
10)Requires that a DDT customer must be informed of their right
to rescind a transaction at no cost, no later than the end of
the next business day.
11)Requires that a DDT customer must be informed of the right to
request an extended payment plan, at least once in any 12
month period.
12)Provides that a notice regarding the ability to enter into a
repayment plan must be posted clearly and conspicuously in an
unobstructed view of the public.
13)Defines "controlling person" as any of the following:
a) For a corporation, trust, or association, an individual
that owns or controls, directly or indirectly, 1- percent
or more of the equity securities of the corporation, trust
or association.
b) For a partnership, an individual that owns or control,
directly or indirectly, 10 percent or more of an
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outstanding interest in the partnership.
14)Defines "supervising manager" as an individual who acts as a
direct supervisor for any person or persons who manage or
operate one or more of the licensee's office where DDT
transactions are made. Also provides that a "supervising
manager" may typically work under a title such as district
manager, regional manager, or a similar title, and has the
authority to interpret and apply policies and procedures of
the applicant.
EXISTING STATE LAW :
1)Establishes the CDDTL (also known as the Payday Loan Law,
Financial Code Section 23000 et seq.). The CDDTL:
a) Applies to any person that makes a transaction in which
the payday lender defers depositing a customer's personal
check until a specific date, pursuant to a written
agreement;
b) Does not apply to a state- or federally-chartered bank,
thrift, savings association, or industrial loan company;
c) Requires applicants who wish to become payday lenders to
submit an application for each location, an application fee
of $200, and to submit to various other requirements
including a background check, and prohibits anyone from
engaging in the business of payday lending without a
license from the DOC;
d) Allows lenders to defer the deposit of a customer's
personal check for up to 31 days; limits the maximum value
of the check to $300; limits the maximum fee to 15% of the
face amount of the check; and requires payday lenders to
distribute a notice to customers prior to entering into any
payday loan transaction that includes information about the
loan and loan charges and a listing of the borrower's
rights;
e) Requires each payday loan agreement to be in writing in
a type size of 10 point or greater, written in the same
language that is used to advertise and negotiate the loan,
signed by both the borrower and the lender's
representative, and provided by the lender to the borrower,
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as specified;
f) Allows payday lenders to grant borrowers an extension of
time or a payment plan to repay an existing payday loan,
but prohibits the lender from charging any additional fee
in connection with the extension or payment plan;
g) Requires each licensee to maintain a net worth of at
least $25,000 at all times; and,
h) Prohibits payday lenders from entering into a payday
loan with a customer who already has a payday loan
outstanding, and from doing any of the following:
i) Accepting or using the same check for a subsequent
transaction;
ii) Permitting a customer to pay off all or a
portion of one payday loan with the proceeds of another;
iii) Entering into a deferred deposit transaction
with a person lacking the capacity to contract;
iv) Accepting any collateral or making any payday
loan contingent on the purchase of insurance or any other
goods or services;
v) Altering the date or any other information on a
check, accepting more than one check for a single payday
loan, or taking any check on which blanks are left to be
filled in after execution;
vi) Engaging in any unfair, unlawful, or deceptive
conduct or making any statement that is likely to mislead
in connection with the business of DDTs; or,
vii) Offering, arranging, acting as an agent for,
or assisting a deferred deposit originator in any way in
the making of a DDT unless the deferred deposit
originator complies with all applicable federal and state
laws and regulations.
2)Provides that licensees who violates the payday loan law are
subject to suspension or revocation of their licenses, and
that violations of the payday loan law are subject to civil
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penalties of $2,500 per violation;
3)Specifies that anyone that violates any provision of Section
670 of the John Warner National Defense Authorization Act for
Fiscal Year 2007 (Public Law 109-364) or any provision of
Section 232 of Title 32 of the Code of Federal Regulations, as
published on August 31, 2007, in Volume 72 of the Federal
Register, violates the California payday loan law. [Financial
Code, Section 22345]
4)Provides that a person that refuses to offer a payday to a
member of the military is not in violation of the Military and
Veterans Code provision relating to discrimination against
members of the military. [Financial Code, Section 23038].
FISCAL EFFECT : unknown
COMMENTS :
According to the author, the intent of this bill is starting the
conversation between industry, consumers and DOC regarding the
future regulation of payday lending in the state. This bill
incorporates several recommendations (discussed later in this
analysis) that were included in two reports issued by DOC last
year.
Background : A payday loan, known more formally in California
as a DDT, is a short-term loan in which a borrower writes a
post-dated, personal check to a lender for a specified amount,
which is capped by law. The date on the check is the date on
which the parties agree that the borrower will repay the loan.
The lender advances the borrower the amount on the check, less
the fee, which is also capped by law. The lender does not cash
the check at the time the loan is made. Both parties are aware
that the borrower lacks sufficient funds to cover the check when
the check is written. The assumption underlying the loan is
that the borrower will repay the loan by the agreed-upon date,
either by depositing sufficient funds in his or her checking
account to cover the check, or by paying the lender in cash on
the loan's due date, and having the lender return the original
check to the borrower, without cashing it.
California enacted its earliest version of a payday lending law
in 1996, and gave jurisdiction over payday lenders to the
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Department of Justice (DOJ; SB 1959, Calderon, Chapter 682,
Statutes of 1996). SB 898 (Perata, Chapter 777, Statutes of
2002), enacted the CDDTL; and shifted the responsibility for
administering payday lending from DOJ to the DOC.
Under the CDDTL, any lender who makes a payday loan must be
licensed. Each licensee may defer the deposit of a customer's
personal check for up to 31 days. The face amount of the check
presented by a borrower may not exceed $300, and the fee charged
by the licensee may not exceed 15% of the face amount of the
check ($45 on a $300 check). Licensees may charge one
non-sufficient funds fee, capped at $15, for checks that are
returned by a customer's bank. Licensees may not directly, or
indirectly charge any additional fees in conjunction with a
payday loan. Licensees may not enter into a payday loan with a
customer who already has a payday loan outstanding and may not
allow a customer to use one loan to pay off another. Licensees
are also forbidden from accepting any collateral for a payday
loan or making any payday loan contingent on the purchase of any
goods of services. Each payday loan must be made pursuant to a
written agreement. Licensees must post their fees and charges
prominently at their business locations.
Costs for DOC to administer the payday loan law are borne by
licensees. For fiscal year 2005-2006, licensees were each
assessed $500 per location. DOC increased the assessment during
the 2006-07 fiscal year to $941 per location.
On March 10, 2008, the DOC released two reports to fulfill its
requirements under Section 23057 of the Financial Code. The two
reports are titled, "California Deferred Deposit Transaction
Law, California Department of Corporations, December 2007" (DOC
report) and "2007 Department of Corporations Payday Loan Study,
December 2007, submitted to the California Department of
Corporations by Applied Management Planning Group, in
conjunction with Analytic Focus" (AMPG report).
The key findings from the aforementioned reports:
California is home to 447 licensed payday lenders, which
operate 2,403 licensed payday lending stores. A total of 338
licensees indicated to AMPG that they were actively making
loans during the study period of April 15, 2006 through
September 11, 2007.
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Over two-thirds of all payday loans are made by only twelve
licensees (AMPG). The largest 30 licensees made 82% of payday
loans by dollar volume during 2006 (DOC).
Over 61% of all licensees operate only one payday loan
location (AMPG).
Forty-nine of the state's 58 counties have at least one payday
loan location. With 166 payday loan locations, the City of
Los Angeles has the highest concentration of payday loan
locations of any city in the state. The City of Sacramento is
second, with 81 locations (AMPG).
Sixteen licensees (3.5%) reported making over 115,000 payday
loans over the Internet during 2006 (DOC).
The average length of a payday loan is 16 days (DOC).
Most payday lenders advertise using large, conspicuous signage
on the outsides of their licensed locations (DOC). Many (70%)
also advertise in local telephone directories; a smaller
percentage advertise in local newspapers (29%) and Internet
directories (27%; AMPG).
Before agreeing to lend to a borrower, most licensees require
the borrower to provide identification, proof of some form of
income, a home address, employer's address, and checking
account information. Licensees rarely conduct a credit check
or verify whether the borrower has the ability to repay the
loan, when their other debts and expenses are considered.
Most payday loans can be obtained in under 15 minutes (DOC).
Most lenders accept any kind of verifiable income as proof of
income, other than unemployment checks or reports of
self-employment (AMPG). Payroll checks, government assistance
checks, retirement checks, disability checks, annuity and/or
structured settlement checks are the most common forms of
income verification accepted. Although all payday loan
customers are required to have and show proof of an active
checking account, only 5% of licensees require that borrowers
have the qualifying income deposited directly into their
checking accounts (AMPG).
Most licensees require borrowers to complete an application
for their first loan with that licensee. Future loans can be
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obtained without the need to complete another application,
unless the applicant needs to update his or her information
(DOC).
Cash is the most common method of distributing loan proceeds
to borrowers, although the option of electronically depositing
the funds into customers' bank accounts is increasing in
popularity among licensees (DOC).
Eighty four percent of licensees' business is attributable to
repeat customers (only sixteen percent comes from customers
who take out only one loan). Nineteen percent of licensees'
business is attributable to customers who took out more than
15 loans during the 18-month period studied by AMPG.
Forty one percent of licensees offer some type of bonus
(either cash or gifts) to customers who refer new business to
the licensees. Cash is much more common than other types of
gifts. Of those who offer cash bonuses, nearly one half offer
$10 or less, and just under one third offer between $20 and
$25 (AMPG).
Very few licensees accept personal checks for repayment (this
despite the fact that a post-dated check is required in order
to obtain a payday loan). Customers commonly pay off their
loans in cash. Nearly all lenders who do accept personal
checks for repayment charge non-sufficient funds (NSF) fees
for returned checks (DOC and AMPG).
Fifty seven percent of licensees require customers to borrow
at least $50. The majority of loans (63%) are between $200
and $255. Twenty lenders responded that the minimum amount
they would lend was $255 (AMPG).
Although lenders may charge up to $45 in loan fees to lend the
maximum amount of $300, 14% of lenders charge less than $45 on
$300 loans. The smallest amount charged on a $300 loan was
$25, corresponding to a maximum loan amount of $275 (AMPG).
Licensees reported making over $110 million in loans that were
not repaid. Once loans have been in default for over 91 days,
most lenders (72%) write the defaulted amount off as bad debt
(AMPG).
Licensees charge off approximately 3% of their checks as bad
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debt (DOC). This finding contrasts with AMPG's finding that
12% of all loans outstanding in an average month are over 91
days delinquent and in default.
To prevent the loss of revenue due to defaulted loans, most
lenders (87%) offer arrangements in which borrowers are
allowed to pay back loans at a reduced rate or based on an
agreed-upon schedule. Lenders reported that about 20% of
loans issued during the eighteen-month study period required
some type of workout arrangement (AMPG). However, less than
1% of all payday loan customers entered into formal, written
payment plan arrangements during 2006 (DOC).
Seventeen percent of payday loan customers received only one
payday loan during 2006 (DOC). DOC also found that 57% of all
payday loan customers received between two and five loans
during 2006, 19% received between six and twelve loans, and 4%
received between thirteen and eighteen loans during 2006.
Customers who take out multiple loans in a year tend to do so
in a consecutive fashion (with less than five days elapsing
between paying the first one off and obtaining a second one).
Of those with more than one loan, the average borrower had 2.8
loans outstanding. The most loans taken out by an individual
in the last eighteen months is 26. The most loans taken out
by a family during the last eighteen months is 47 (AMPG).
Of those borrowers who obtained more than one payday loan in
the last eighteen months, 28% used multiple locations of the
same payday lender; 72% used multiple lenders (AMPG).
Borrowers were asked whether the amount borrowed was the
amount needed or the most the lender would loan. When asked
in this way, 63% of borrowers said they borrowed the amount
needed; 32% said they would have borrowed more, but the lender
wouldn't loan it; and only 3% said that the lender offered
more than the borrower needed.
When borrowers were asked where they obtained the rest of the
money they needed if they could not obtain all they needed
from the payday lender, 8% said they borrowed the money from
family or friends, 8% said they did not get the rest of the
money they needed, 5% waited until their next payday, 3% went
to another payday lender, and less than 1% borrowed money from
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a bank.
Thirty-six percent of borrowers indicated they had used more
than one payday lender. When asked why, 73% said they needed
more money than one location would loan them at one time, 12%
said they needed more money before the loan with the first
company could be paid off, and 11% said they used one loan to
pay off another.
Report policy recommendations.
1)Clarify and confirm that licensees cannot refer delinquent
payday loans to a local prosecutor for collection of returned
checks
2)Enhance the regulation of electronic transactions.
3)Improve consumer disclosures by requiring that the notice
provided to borrowers prior to entering into a payday loan
agreement be a separate, distinct document from the written
agreement; require the licensee to have the borrower initial a
copy of the notice to acknowledge receipt; and require the
licensee to retain a copy of the notice with the borrower's
initials acknowledging receipt in the file. .
4)Require license applicants and existing licensees to notify
DOC of other business that would be or is being conducted at
the licensed location.
5)Expand consumer protections for payday lending conducted Over
the Internet by requiring that notices and disclosures are
provided to Internet borrowers, and that borrowers can
download the agreement, notices, and disclosures.
Alternately, if the borrower cannot download those documents,
require the licensee to mail copies to the borrower within 24
hours.
6)Require that payment plans entered into between licensees and
borrowers specify the payment dates and amounts of each
payment, be in writing, and be signed by the borrower.
7)Require a written agreement signed by the borrower in order to
extend the due date of a loan. Provide the licensee with an
option to notify the borrower by mail of the approval to
extend the due date of the loan, if the borrower elects not to
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sign the extension agreement. Like the recommendation above,
this recommendation would help avoid misunderstandings between
lenders and borrowers over repayment plan terms.
8)Require licensees to prominently disclose that borrowers have
the right to request a written extension agreement and payment
plan.
9)Require that specific language be used in payday loan
advertising to disclose one's licensure by the Department of
Corporations, and require that all advertising disclosures be
in the same language as the advertising itself.
10)Require (rather than authorize) the use of a specific chart
to compare payday loan fees and related cost information.
Existing law requires licensees to post a schedule of all
charges and fees, as specified, and provides an example of one
way in which the information may be presented.
11)Require license applicants to list each person in charge of a
payday lending location, and require that person to submit
fingerprint information and a historical profile through a
Statement of Identify and Questionnaire (SIQ). Require the
licensee to notify DOC within ten days of a change in the
person responsible for the location, and to submit new
fingerprint information and an SIQ for that person. Require
each licensee to notify DOC at least 60 days prior to a change
of its officers, directors, or any other persons named in the
application.
12)Confirm DOC's jurisdictional nexus over payday lending
activities by stating that a payday lender is subject to the
CDDTL when it conducts deferred deposit transaction business
"in this state."
13)Expand the grounds for barring, suspending, or censuring
persons managing or controlling payday lenders, and for
denying, suspending, or revoking licenses
14)Allow DOC to issue administrative orders to prevent unsafe
and injurious practices, and make these orders effective
within 30 days, if no hearing is requested by the person(s)
accused. Allow DOC to suspend or revoke a license for failing
to maintain a surety bond, as required by law, through more
expedient administrative orders.
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15)Increase the civil penalty for violating the payday loan law
from $2,500 to $10,000 per violation. Allow administrative
penalties of up to $2,500 per violation to be levied and
collected through specified administrative hearing procedures.
16)Require the preparation and retention of accurate records and
reports by licensees.
17)Authorize the Commissioner to subpoena all books and records
of payday lenders.
18)Allow DOC to seek a court order to enforce any administrative
decision awarding restitution, administrative penalties other
than citations, and cost recovery, without having to file a
civil suit and motion for summary judgment.
19)Provide that a citation is deemed final if the cited licensee
fails to request a hearing within 30 days of receiving the
citation. Allow DOC to issue a citation to assess an
administrative penalty, not to exceed $2,500 per violation
(rather than $2,500 per citation).
20)Streamline DOC's ability to void loans and order fees
forfeited. Clarify that DOC has the authority to order the
voiding of loans and the forfeiture of fees by administrative
order, rather than by pursuing a civil suit.
21)Change the payday loan origination fee from a percentage of
the face value of the check to a flat fee.
22)Increase the maximum amount of a payday loan from $300 to
another amount, such as $500 or $750.
23)Adjust fees based on the loan amount, with a sliding scale
that reduces the fee as the amount borrowed goes up.
24)Prohibit a licensee from entering into a deferred deposit
transaction with a customer during the period-of-time that the
customer has an outstanding deferred deposit transaction with
another licensee.
25)Restrict a customer from having a payday loan outstanding
with any payday lender for more than three months during a
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twelve-month period.
26)Require licensees to offer a payment plan with a minimum of
six equal, monthly installment payments to all borrowers who
have had continuous (consecutive) loans for three months, and
prohibit licensees from charging customers any additional fees
or interest in connection with the payment plan.
27)Require all licensees to use a uniform database to record all
transactions in real time.
As mentioned earlier, the bill currently under consideration
implements several recommendations from the aforementioned
reports. The committee may wish to consider inquiring with the
author as to other possible recommendations that may be added to
the bill, or those recommendations that have already been
reviewed and subsequently not included in the bill.
Certainly, payday lending has become a subject of some
controversy, as several states have implemented 36% APR caps on
payday loans, which in effect, eliminates the product because
the costs of lending exceed the amounts that can be collected in
fees. Another issue complicating small dollars loans is the
virtual non-existence of consumer loans between the $300 payday
limit, and $2500. Some credit unions have started short term
loan programs very similar to payday loans, but are only open to
members of the credit union, and often require direct deposit
into a checking account. Obviously, a need exists for small
consumer loans, and this issue will continue to need policy
guidance and potential legislation.
Current Federal Legislation.
HR 1424 authored U.S. Rep. Luis Gutierrez would establish
federal regulations and parameters for payday lending
nationwide. Under this bill a payday loan is defined as a
closed-end credit transaction, unsecured by any interest in the
consumer's personal property and excluding any credit card
transaction under an open end consumer credit plan, with a term
of 91 or fewer days in which the amount financed does not exceed
$2,000 with a finance charge exceeding an annual percentage rate
of 36%. Additionally, this legislation requires pay day lenders
to offer repayment plans
S. 500 (Durbin), the Protecting Consumers from Unreasonable
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Credit Rates Act, would impose a federal usury cap of 36 percent
Annual Percentage Rate (APR) on all consumer credit
transactions.
Prior State Legislation
AB 2845 (Jones, Bass & Feuer). At one point, would have capped
the APR on payday loans at 36%. Was amended in Assembly Banking
& Finance committee to state the intent of the Legislature to
enact changes recommended in the DOC reports. Held in Assembly
Rules Committee.
SB 1959 (Calderon, Chapter 682, Statutes of 1996): Enacted the
earliest version of a payday lending law in California. Gave
regulatory authority to the California Department of Justice.
SB 898 (Perata, Chapter 777, Statutes of 2002). Enacted the
Deferred Deposit Transaction Law and shifted the responsibility
for administering the law to DOC;
AB 7 (Lieu, Chapter 358, Statutes of 2007): Gave DOC the
authority to enforce specified federal protections granted to
members of the military and their dependents under the Payday
Lending Law.
SB 1551 (Correa): Would enact various changes intended to
improve regulatory oversight of the payday lending based on
recommendations found in the two reports referred to in this
analysis.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081