BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 377
Assemblymember Mendoza
As Amended June 23, 2009
Hearing Date: July 14, 2009
Financial Code
SK:jd
SUBJECT
California Deferred Deposit Transaction Law (Payday Lending)
DESCRIPTION
This bill would increase the maximum value of a payday loan from
$300 to $500 and would permit a payday loan customer to rescind
the transaction no later than the end of the next business day.
This bill would provide that a customer may elect to repay a
loan using an extended repayment plan which includes at least
four installments and specifies other related provisions, as
noted. Under this bill, payday loan lenders would be required
to pay a five-cent fee for each payday loan transaction to the
Department of Corporations to be used for financial literacy
education programs.
This bill would require a lender who provides a payday loan over
the Internet to give the required notices and written agreement
to a customer electronically and would revise advertising
requirements to specify that the restrictions apply also to
advertising on the Internet. This bill also contains provisions
concerning notice and licensing-related requirements.
BACKGROUND
Current law, the California Deferred Deposit Transaction Law
(CDDTL; the Act), regulates payday loan lenders, and places a
number of restrictions on payday loans. For example, the CDDTL
requires that payday lenders be licensed by the Department of
Corporations (DOC; the department) and permits lenders to charge
a fee of 15% of the face amount of the check which cannot have a
face value of more than $300. The Act also specifies disclosure
and notice requirements, including that the annual percentage
(more)
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rate (APR) and any charges and fees be disclosed to the
consumer.
DOC figures indicate, as of December 31, 2007, that there were
2,403 licensed payday loan locations in California. According
to the California Budget Project's analysis of DOC data,
approximately one million Californians took out payday loans in
2006, averaging about 10 loans per borrower.
The following information was obtained from DOC's "2007 Annual
Report: Operation of Deferred Deposit Originators under the
California Deferred Deposit Transaction Law" (2007 Annual
Report):
--------------------------------------------------------
| |2006 |2007 |
|--------------------------+--------------+--------------|
|Total dollar amount of | | |
|payday loans made |$2.55 billion |$2.97 billion |
|--------------------------+--------------+--------------|
|Total number of payday | | |
|loans made |10.05 million |11.15 million |
|--------------------------+--------------+--------------|
|Total number of | | |
|individual customers who |1.43 million |1.61 million |
|obtained payday loans | | |
|(repeat customers counted | | |
|once) | | |
--------------------------------------------------------
In addition, the 2007 Annual Report provides the following
information with respect to individual payday loans made:
---------------------------------------------------------
| |2006 |2007 |
|---------------------------------------+--------+--------|
|Average dollar amount of payday loans |$254 |$266 |
|made | | |
|---------------------------------------+--------+--------|
|Minimum dollar amount of payday loans |$10 |$10 |
|made | | |
|---------------------------------------+--------+--------|
|Maximum dollar amount of payday loans |$300 |$300 |
|made | | |
|---------------------------------------+--------+--------|
|Average annual percentage rate (APR) |429% |424% |
|---------------------------------------+--------+--------|
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|Average number of days of payday loan |16 |16 |
|transactions | | |
---------------------------------------------------------
Existing law required DOC to report to the Governor and
Legislature by December 1, 2007, on its implementation of the
payday lending law. On March 10, 2008, DOC released two reports
to fulfill these statutory requirements, "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 study).
In the first of these reports, DOC included 22 recommendations,
which it divided into those intended to improve its oversight of
the industry and those intended to strengthen its enforcement of
the CDDTL. In addition, DOC included a number of policy options
for consideration.
The DOC report is based upon a survey of payday lenders and
DOC's annual report for 2005-06. The AMPG study is based on an
online survey of payday lenders, a telephone survey of
borrowers, and five customer focus groups. AMPG's study was
conducted between August and December 2007, for the 18-month
period between April 15, 2006 through September 11, 2007. Both
reports highlight that, while a payday loan is intended to be a
short-term, one-time loan to meet emergency financial needs, a
large number of Californians use payday loans on a regular,
on-going basis and find that establishing a payday loan account
"opens the door to a repetitive cycle of borrowing that is
difficult if not impossible to end" (AMPG study). The DOC
report made a number of regulatory oversight recommendations,
some of which are incorporated into AB 377 as described in the
Comments below.
Last year, SB 1551 (Correa) included all or a portion of nine of
DOC's 12 regulatory oversight recommendations. The measure
failed passage in this Committee. This year's bill, AB 377, is
substantially similar.
CHANGES TO EXISTING LAW
Existing federal law imposes a 36% APR on consumer credit,
including payday loans, extended to members of the military and
their dependents. (10 USC Sec. 987.)
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Existing law regulates, under the CDDTL, deferred deposit
transactions, defined as a transaction in which a person defers
depositing a customer's personal check until a specific date,
pursuant to a written agreement for a fee. (Fin. Code Sec.
23000 et seq.)
1. Existing law places the following restrictions on payday
lenders:
a. Limits the maximum value of the check to $300;
b. Permits payday lenders to defer the deposit of a
customer's personal check for up to 31 days; and
c. Limits the maximum fee to 15% of the face amount of the
check. (Fin. Code Secs. 23035(a), 23036(a).)
Existing law prohibits payday lenders from entering into a
payday loan with a customer who already has a payday loan
outstanding. (Fin. Code Sec. 23036(c).)
This bill would increase the maximum value of the check from
$300 to $500.
This bill would permit a customer to rescind a payday loan
transaction at no cost by notifying the payday lender that he
or she wishes to rescind the transaction and returning the
proceeds of the transaction to the payday lender no later than
the end of the next business day. The payday lender must make
reasonable and accessible provisions for a customer to contact
the lender in a timely manner so that the customer may notify
the lender of his or her intent to rescind the transaction.
This bill would require each licensee to pay to the
Commissioner of DOC (the commissioner) a fee of five cents for
each deferred deposit transaction paid in full during the
previous calendar year to be used for financial literacy
education programs regarding deferred deposit transactions in
California. This bill would prohibit a licensee from passing
this fee on to its customers.
This bill would provide that if a payday lender conducts a
deferred deposit transaction with a customer over the
Internet, the required notices and written agreement must be
provided to the customer electronically and shall be available
for the customer to download and print. If the customer is
unable to download these documents, the lender shall mail the
notices and agreement to the customer within 24 hours of the
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Internet transaction. This bill would require that deferred
deposit transactions conducted over the Internet comply with
the Uniform Electronic Transactions Act.
2. Existing law permits payday lenders to grant borrowers an
extension of time or a payment plan to repay an existing
payday loan and prohibits the lender from charging any
additional fee in connection with the extension or payment
plan. (Fin. Code Sec. 23036(b).)
This bill would permit a payday loan customer who is unable to
repay the loan when due to elect once in any 12-month period
to repay the loan by means of an extended payment plan at no
additional cost.
This bill would provide that the extended payment plan would
have to include at least four installments, which would have
to be scheduled for dates on or after dates that the customer
receives regular income. Unless otherwise agreed to by the
customer and payday lender, the payment plan installments must
be substantially equal in amount.
This bill would specify that a customer may prepay an extended
payment plan in full at any time without penalty and the
payday lender would be prohibited from charging any interest
or additional fees during the term of the extended payment
plan.
This bill would prohibit the payday lender from engaging in any
collection activities or making any additional payday loans to
the customer while the customer makes timely payments
according to the extended payment plan.
This bill would provide that customers would be limited to one
extended payment plan during any 12-month period, as
specified, and would provide that if the customer fails to pay
any extended payment plan installment when due, the customer
would be in default of the payment plan and the payday lender
may immediately accelerate payment on the remaining balance.
If the customer defaults, the payday lender would be able to
take action to collect all amounts due.
3. Existing law provides that a customer who enters into a
payday loan and offers a personal check pursuant to an
agreement shall not be subject to any criminal penalty for
failure to comply with the terms of the agreement. (Fin. Code
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Sec. 23035(b).) Under existing law the notice to the
customer, the posted notice in the business location, and the
payday loan agreement must all state that the customer cannot
be prosecuted in a criminal action or threatened with
prosecution. (Fin. Code Secs. 23035(c)(3), (d)(1), (e)(9).)
This bill would prohibit a payday lender from referring or
delivering a check taken in a deferred deposit transaction to
a prosecutor, district attorney's diversion program, or other
law enforcement official for purposes of collection or
criminal prosecution unless the law enforcement official
requests the check as part of an investigation not initiated
by the lender.
4. Existing law prohibits a payday lender from advertising,
printing, displaying, publishing, distributing, or
broadcasting any statement or representation that is false,
misleading, or deceptive, or that omits material information
that is necessary to make the statements not false,
misleading, or deceptive. (Fin. Code Sec. 23027(a).)
Existing law prohibits a payday lender from placing an
advertisement disseminated primarily in this state unless the
lender discloses that the lender is licensed by the department
pursuant to the CDDTL. (Fin. Code Sec. 23027(b).)
Existing law provides that the commissioner may require payday
lenders to maintain a file of all advertising copy for a
period of 90 days from the date of its use. (Fin. Code Sec.
23027(e).)
This bill would revise existing law which prohibits a licensee
from making false, misleading, or deceptive statements in
advertisements to also include advertisements made on the
Internet.
This bill would prohibit a payday lender from placing an
advertisement primarily intended to reach California
residents, including advertisements on the Internet, without
disclosing that the lender is licensed by the department
pursuant to the CDDTL. This bill would require this
disclosure to be made in the same language as the primary
language of the advertisement.
This bill would require a payday lender to maintain a file of
all advertising copy currently in use and retain copies for at
least two years from the date of its final use.
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5. Existing law 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. (Fin. Code
Sec. 23035(c).)
This bill would amend the existing payday loan notice
requirements by:
a. Requiring the notice provided by a licensee to a
customer to be separate and distinct from the payday loan
agreement;
b. Requiring the notice to be initialed by the customer to
acknowledge receipt, and requiring that the initialed copy
by retained by the licensee; and
c. Adding language regarding the bill's provisions
concerning rescission and the repayment plan.
6. Existing law requires certain notices be clearly and
conspicuously posted in the unobstructed view of the public by
all licensed payday lenders in each business location in
letters not less than one-half inch in height. (Fin. Code
Sec. 23035(d).)
This bill would require, rather than authorize, the use of a
specific chart posted in each business location showing the
fee and annual percentage rate applicable to different loan
amounts and loan lengths.
This bill would require that the notice posted clearly and
conspicuously in the unobstructed view of the public include
specified language concerning a customer's right to an
extended payment plan.
7. Existing law requires an agreement to enter into a deferred
deposit transaction to be in writing and provided to the
customer. The written agreement must include specified items
of information including, among other things, a full
disclosure of the total amount of any fees charged, a clear
description of the customer's payment obligations, the contact
information of the lender, the date to which deposit of the
check has been deferred, and an itemization of the amount
financed, as specified. (Fin. Code Sec. 23035(e).)
Existing law requires each payday loan agreement to be in
writing in a type size of 10 point or greater, written in the
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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, as
specified. (Fin. Code Sec. 23035(g).)
This bill would require the agreement to include notification to
the customer: (1) of the extended payment plan and ability to
rescind; and (2) that, if the payday loan is being transacted
over the Internet, the customer agrees to conduct the
transaction electronically and to receive the required notices
and agreement electronically.
8. Existing law requires any person who offers, originates, or
makes a deferred deposit transaction to obtain a license from
the DOC and comply with specified requirements. (Fin. Code
Sec. 23005.) Existing law requires payday lender applicants
to submit an application for each location, pay an application
fee of $200 and an investigation fee of $100, and to submit to
various other requirements including a background check.
(Fin. Code Secs. 23005, 23006.) Under existing law, licensees
who violate the CDDTL are subject to suspension or revocation
of their licenses and violations are subject to civil
penalties of $2,500 per violation. (Fin. Code Secs. 23051,
23052.)
This bill would require key individuals employed by payday
lenders to submit fingerprints and a completed statement of
identity and questionnaire with their application for
licensure. The bill would also require lenders to notify the
department within 10 days of any changes to key individuals
named in the original application and submit fingerprints and
a completed statement of identity and questionnaire for the
new key individual within 30 days of the change.
This bill would require applicants for a payday loan license to
disclose whether any of the key individuals identified in its
application have, during the last 20 years, conducted a payday
loan business or similar business in any other state and, if
so, the relevant time period and whether the person was found,
either individually or as a representative of the applicant,
to have violated any provision of that state's payday lending
law or regulations, or any other similar laws or regulations.
This bill would impose notification requirements when a lender
or a key individual is found to have violated any applicable
payday loan laws and regulations, or any similar laws and
regulations governing lending, of any other state.
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This bill would require an applicant for a payday loan license
to identify any product or service, in addition to payday
loans, that the applicant intends to offer in its office(s)
and which the applicant anticipates will generate over five
percent of the gross monthly revenue of any of its offices.
This bill would require a licensee to notify the department in
writing that it intends to offer a new product or service at
least 10 days prior to offering that product or service if the
licensee anticipates that it will generate more than five
percent of the gross monthly revenue of any office.
COMMENT
1. Stated need for the bill
The author writes:
California is facing one of its most difficult economic crises
in decades. While unemployment continues to rise, consumer
access to credit is shrinking, and in many instances, is
virtually unavailable. Payday loans are a financial tool
which help "bridge the gap" for Californians who are banked
and have a regular paycheck or other source of income, yet who
are sometimes unable to meet their day-to-day obligations. In
these tough times, unexpected auto repairs, medical expenses
or other financial needs can put consumers in a short-term
cash crunch.
Used responsibly, a payday loan can help a consumer pay the
rent or a utility bill and avoid a hefty late fee, cover a
doctor's visit for a sick child or pay for auto repairs in
order to have transportation to and from a job. For many, a
payday loan is the best financial choice-or the only real
choice-when they don't have enough money to make it until
their next paycheck.
AB 377 is intended to engage consumer interests, the payday
lending industry, and the DOC in a dialogue about needed
changes to state law. Using the DOC's study as a starting
point, AB 377 is intended to improve the product for
consumers, ensure that the product is used responsibly, allow
for consumers with repayment issues to get a payment plan that
helps them avoid a cycle of debt, and put additional
requirements on the industry.
2. Is there an alternative?
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Proponents of payday lending argue that many borrowers have no
alternative but to take out a payday loan. According to the
Community Financial Services Association of America (CFSA), an
association of payday lending companies, other options are too
costly when compared with the fee for one payday loan. For
example, borrowers may be charged late fees on credit cards or a
non-sufficient funds fee if they bounce a check. Late payments
on utility bills also may be costly to the consumer,
particularly if they involve a reconnection fee.
As noted in the DOC report, small, unsecured installment loans
may be made by entities licensed under the California Finance
Lenders Law (CFLL). DOC notes that the rates and fees on these
loans are limited, however, to an APR of about 30%, compared to
the average APR of 429% for a payday loan. According to DOC,
"[t]his by itself is a strong inducement to make small,
unsecured loans under the [payday loan law] as opposed to the
CFLL." The DOC report also states that consumers "who do not
have access to traditional sources of credit (credit cards, home
equity lines of credit, etc.) do have alternatives to payday
loans," noting that many banks and credit unions have cash
advance programs that provide borrowers with cash that must be
repaid generally within 35 days.
Others argue that payday loan consumers also have other options
ranging from borrowing money from friends or family, working out
a payment plan with the creditor (e.g., credit card or utility
company), getting an advance from an employer, obtaining
emergency assistance from faith-based or community
organizations, delaying purchases or obtaining a small consumer
loan. Credit unions have small loan programs that are intended
to be alternatives to payday loans.
In addition, in February 2008 the Federal Deposit Insurance
Corporation (FDIC) began a nationwide "Small-Dollar Loan Pilot
Program" under which participating banks offer loans of up to
$1,000; payment periods beyond a single paycheck cycle; APRs
below 36%; low or no origination fees; streamlined underwriting
criteria; and access to financial education. In many instances,
the banks indicate that loans can be processed in less than an
hour. The pilot is "designed to illustrate how banks can
profitably offer affordable small-dollar loans as an alternative
to high-cost credit products, such as payday loans and fee-based
overdraft protection." The FDIC recently released an evaluation
of the pilot after one year and found that it "has provided
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evidence that banks can offer reasonably priced alternatives to
high-cost, short-term credit." Although the pilot is currently
limited in its scope, these initial results are encouraging.
Given the above arguably less expensive alternatives to a payday
loan, the Committee should consider whether the provisions of
this bill discussed below would, in fact, aid consumers
struggling in the present economy or instead contribute to a
cycle of debt.
3. Increasing the maximum value of a payday loan check from $300
to $500
Existing law provides that a payday loan check cannot have a
face value of more than $300. This bill would increase that
amount to $500. These amounts include the fee that payday
lenders may impose; generally $45 and $75, respectively. This
increase was included in the DOC report as a policy option (not
recommendation), and was based on the premise that payday loans
will continue to be available to help Californians meet
short-term emergency cash needs, but that longer-term
installment products will be available for those consumers
unable to pay back the full amount of their payday loans on
their due dates.
The author and industry supporters argue that California's loan
limit of $300 should be increased to $500 because the current
limit is insufficient to meet the emergency cash needs of payday
loan customers, has not been adjusted since it was implemented
13 years ago, and is out of line with the limits in other
states. Despite those contentions, any increase in the loan
limit must be evaluated not in terms of years since the last
increase, but, instead, on the collateral effects of that
increase on struggling consumers and whether any increase makes
it even harder for them to pay off their debt. Previous
concerns about the risks posed by payday loans are reflected in
the Legislature's decision to place a cap on loan amounts.
a.Whether current limit is sufficient to meet borrower's needs
With respect to whether or not the current limit is sufficient
to meet borrower's needs, DOC attempted to evaluate unmet
demand due to loan limits by focusing on the number of
customers who obtained more than one loan at the same time
from different licensees. The sample survey, which analyzed
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transactions of 72.2% of California's payday loan customers,
found that just 2.4%of the total customers in the sample
obtained more than one loan at the same time from different
licensees. DOC concluded that for the borrowers sampled, "the
loan amount was not sufficient to meet [their] emergency
credit needs. This may be due to the loan limit being too low
or the licensees not willing to lend the amount needed by the
borrower."
When the AMPG survey asked borrowers whether the amount they had
borrowed was the amount needed, over 60% of respondents
indicated that the amount they borrowed was what they needed
when reporting the minimum amount borrowed (79%) and the
maximum amount borrowed (63%). Opponent Center for
Responsible Lending (CRL) argues these findings demonstrate
that most payday loan borrowers are satisfied with the amount
they received and that borrowers do not need more than the law
currently allows.
From a policy standpoint, the cap on payday loans represents a
decision by the Legislature that the product should only be
used for a short term loan of no more than $300 (arguably due
to the risks involved in higher loan amounts). If, in fact,
the intent in enacting the CDDTL was to provide consumers with
sufficient funds to meet all emergency credit needs, there
would be no cap on the amount of the loan. Accordingly, the
policy choice represented below is not whether the current pay
day loan amount is sufficient to satisfy all short-term credit
needs, but whether the increase would exacerbate the
recognized risks associated with payday loans. Opponent
consumer groups argue that this bill would in fact aggravate
the risk to struggling consumers. (See Comment 3(b).)
b. Effect of increasing loan limit to $500
As noted above, the AMPG study indicated that "[a]lthough most
borrowers report turning to payday lenders as a one-time
solution to an immediate financial need, most report that the
establishment of a payday loan account opens the door to a
repetitive cycle of borrowing that is difficult if not
impossible to end."
Payday lending has even been called a "business model that
encourages chronic borrowing." (Michael Stegman, "Payday
Lending: A Business Model that Encourages Chronic Borrowing,"
Economic Development Quarterly, Vol. 17 No. 1, February 2003.)
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Because borrowers often cannot repay a loan and meet other
expenses, they must pay off their current loan with their
paycheck and then very soon afterwards, sometimes immediately,
take out another loan. The California Budget Project notes,
"[l]ess than 4 percent of payday loans went to Californians
who took out just a single loan during the entire year. More
than 170,000 Californians took out 13 or more payday loans.
Nearly half (48 percent) of payday loan borrowers in
California take out payday loans at least once per month. . .
"
As a result, the public policy question raised by this bill is
whether increasing the loan limit to $500 will harm payday
loan consumers by ensuring that they are caught in a
repetitive cycle and by making it even more difficult for them
to pay off their debt.
Opponents California Nurses Association/National Nurses
Organizing Committee argue that increasing the maximum payday
loan amount from $300 to $500 "would simply increase the debt
carried by low-wage workers. . . . 80% reported to the
Department of Corporations that the maximum loan of $300 was
the amount they needed. Furthermore, the same consumers who
are struggling to pay off a $300 debt are unlikely to be able
to re-pay a $500 loan."
CRL also writes "the high cost of payday loans, together with
the short two-week repayment term, virtually ensures that
cash-strapped borrowers will not be able to meet their basic
expenses and pay off their loan at their next payday. It
follows, then, that increasing the amount of debt payday
borrowers owe will only increase the likelihood that payday
borrowers will not be able to pay off the loan at their next
payday, and will be more likely to land in the debt trap."
Opponents also note that data from the California Budget
Project shows that "a typical earner taking out a payday loan
in California would be $148 short of the amount necessary to
meet all essential household expenses and pay off a payday
loan under current law. The same borrower would fare worse,
and would be $348 short under the proposal to increase the
loan amount to $500."
According to CRL, a new study recently released by the group
finds that 76% of borrowers, after repaying one payday loan,
must take out another loan before their next paycheck. The
study, entitled "Phantom Demand: Short-term Due Date Generates
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Need for Repeat Payday Loans, Accounting for 76% of Total
Volume," found that half of all new loans are opened at the
borrower's first opportunity (immediately or after a 24-hour
or more waiting period where required). The study, which was
largely based on data from Florida and Oklahoma-both states
with a $500 loan limit-also found that 87% of new loans are
opened within two weeks, or generally before the next payday,
and only six percent of subsequent payday loans are taken out
longer than a month after the previous loan was paid off. CRL
notes:
This rapid, widespread re-borrowing indicates that most
payday borrowers are not able to both repay one of these
loans and clear a monthly billing cycle before having to
borrow again. In essence, the bulk of payday loan demand
comes from borrowers who are taking out a payday loan to
repay a payday loan. AB 377 would make payday loan
re-borrowing even more problematic by raising the loan
limit from $300 to $500. Borrowers unable to pay back $300
in one full payment in two weeks will find it even more
difficult to repay $500.
Given the concerns expressed above, DOES this bill's increase
of the loan limit to $500 ensure that payday loan consumers
are caught in a repetitive cycle of re-borrowing which may be
"difficult if not impossible to end?"
4. Borrowers could elect to repay their loan under a repayment
plan once a year
This bill partially implements DOC's Option #6 which suggested
requiring licensees to offer a payment plan with a minimum
number of six, equal monthly installment payments to a borrower
who is unable to repay a loan. This bill instead requires
licensees to offer a payment plan with at least four
substantially equal payments to any borrower who requests one,
but limits the number of payment plans that may be requested to
one per calendar year. According to the author, this provision
is key to addressing the issue of re-borrowing, asserting that
it offers "a failsafe solution-a no-cost extended payment plan
that gives consumers longer to repay the loan and breaks the
loan cycle." The author provides the following example: "If
borrowers take out consecutive loans because they were $150
short of paying the loan off in full, then a repayment plan will
solve this problem. The repayment option in our bill will give
borrowers a two week reprieve before the four payment plan
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begins. Even at the $500 limit, the borrower would still be
able to pay the loan off under the prescribed repayment plan."
Opponent Sacramento Area Congregations Together (ACT) raises
concerns about the repayment plan in the bill, stating:
[E]xperience in other states such as Florida, Oklahoma, and
Washington shows that payment plans do little to help end the
debt trap. The average number of loans per borrower per year
in those states is comparable to the national average of 9.
Indeed, as proposed in AB 377, few borrowers would actually
choose the payment plan. Today, many borrowers who are unable
to repay their loan take out a new loan and use the proceeds
to pay off the outstanding loan. . . . Under AB 377,
borrowers would be given the choice of continuing that
practice-which costs them $45 out of pocket-or opting for the
payment plan, which requires an initial payment of $75. It is
easy to see that many borrowers are going to choose the option
that is cheaper in the short term, and simply take out a new
payday loan. Few would choose the payment plan.
CRL further explains that "[i]n states that have legislated
these guidelines, the debt trap persists. Nearly two of every
three loans still go to borrowers with twelve or more loans per
year and less than one percent of transactions use the
'mandatory' payment plan." The problem with these plans, CRL
explains, is that "there is little incentive for lenders to
actually provide them. It's almost always better for the
lenders to get the borrower to take out a new loan than it is to
get them in a no-cost repayment plan."
It is also important to note that the repayment plan in this
bill largely mirrors the California Financial Services
Association's (CFSA) Best Practices and Guidelines for Extended
Payment Plans, and industry representatives have indicated that
many in the industry, in particular CFSA members, already offer
this plan to customers.
Opponents have suggested that the payment plan provision be
amended to provide for six fully amortizing installment payments
at least 14 days apart. Consumers Union explains, "Six
installment payments will bring the payments to $42.50, less
than the $45 required to get a new loan in California." Also,
they suggest that a borrower have the right to choose a
repayment plan at least four times in a 12-month period.
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GIVEN THE CONCERNS EXPRESSED, DOES THE REPAYMENT PLAN IN THIS
BILL ACTUALLY HELP A BORROWER "BREAK THE LOAN CYCLE," AS THE
AUTHOR INTENDS OR ARE OPPONENTS RIGHT TO BE CONCERNED THAT THE
PLAN WOULD BE INEFFECTIVE BECAUSE: (1) IT WOULD BE MORE
EXPENSIVE TO TAKE ADVANTAGE OF A REPAYMENT PLAN THAN TO SIMPLY
SIGN UP FOR A NEW LOAN; AND (2) EXPERIENCE IN OTHER STATES HAS
SHOWN IT TO BE INEFFECTIVE?
5. Bill would specifically authorize internet payday lending
This bill would implement DOC Recommendation #5 to require a
lender who provides a payday loan over the Internet to
electronically give to the customer all of the required notices
and the written agreement. It would also revise existing
advertising requirements to specify that the restrictions apply
also to advertising on the Internet.
The author writes in support of this provision, "[t]he Internet
lending provisions of the bill are intended to protect consumers
by requiring Internet loans to meet the same standards as loans
provided in brick and mortar stores. Concerns over this
language have been expressed to our office because opponents
believe that the provisions will 'legitimize' Internet lending.
We understand the concerns, but it is clear that Internet
lending is taking place in California now. Therefore, it is
vital that these loans are regulated."
Opponents raise concerns that the bill explicitly authorizes
Internet payday lending. They point out that such lending is
not specifically authorized in California, and one might even
argue that the CDDTL was never intended to cover Internet
lending as it contained a number of requirements more
appropriate to a bricks-and-mortar location. The California
Labor Federation, AFL-CIO writes that "[t]here are enough risks
in payday lending without expanding Internet lending, which
makes it harder for consumers to understand the terms of the
loan or hold a company accountable for overcharges. Many
Internet lenders are based out of state, and many more are
tribal entities, so the applicability of any state lending laws
is questionable."
IS IT APPROPRIATE TO STATUTORILY AUTHORIZE INTERNET PAYDAY
LENDING?
6. Bill's five-cent fee to be used for financial literacy
education programs
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This bill's requirement that licensees pay a five-cent fee for
every payday loan transaction paid in full in the previous
calendar year was not contained in the DOC report. The fee,
which cannot be passed on to customers, must be used to support
financial literacy education programs regarding payday loans in
California. Others have also pointed out the importance of
education in this area, writing "[t]oo often credit counseling
and financial education begin when people are already in a debt
crisis. According to Federal Reserve Chairman Alan Greenspan, a
greater degree of financial literacy cannot only improve the
financial status of families, but also 'help avoid or ameliorate
the negative consequences of uninformed decisions.'" (Stegman,
"Payday Lending: A Business Model that Encourages Chronic
Borrowing," supra. at 28.)
7. Right to rescind
This bill gives payday loan customers a right to rescind their
payday loans by the close of the business day following the day
on which the loan was taken out. Opponents point out that this
language is already in the CFSA's Best Practices, and very few
customers rescind their payday loans.
8. Other DOC recommendations included in the bill
This bill implements several other recommendations contained in
the DOC report, including, among others, clarifying that a
licensee may not use the criminal process to collect a returned
check in conjunction with a payday loan, even if the customer is
not criminally prosecuted, and requiring licensees to keep
copies of their advertising for at least two years and ensure
the availability of advertising records for audit purposes.
Other recommendations included in the bill require that the
notice provided to borrowers before they enter into a payday
loan agreement be a separate, distinct document from the written
agreement, and that the licensee must also have the borrower
initial a copy of the notice to acknowledge receipt and retain a
copy of that acknowledgement. The bill also contains various
licensing-related provisions suggested in the DOC report.
9. Opposition suggestions
CRL and others have requested that the author amend the bill to
incorporate DOC Option #5 which suggests that consumers be
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restricted "from having payday loans outstanding from any payday
lender for more than three months in the previous 12 months.
This would prevent borrowers from utilizing the payday loan as a
long-term source of credit." This alternative is similar to the
guidelines issued by the FDIC in which the FDIC noted that "when
payday loans are used for a long period of time, the fees
charged can rapidly exceed the amount borrowed and can create a
serious financial hardship for the borrower."
The author has indicated that he believes these loan limits are
too restrictive and would have the potential to limit access to
payday loans. Similarly, any call for a cap on the number of
loans is equally problematic.
Support : Alameda Merchant's Association; Brotherhood Crusade;
California Black Chamber of Commerce; California Financial
Service Providers; California Hispanic Chambers of Commerce;
California State Conference of the National Association for the
Advancement of Colored People; Check into Cash; Check n' Go of
California; Community Financial Services Association; Hispanic
Chamber of Commerce of Silicon Valley; Initiating Change in Our
Neighborhoods, Community Development Department; League of
United Latin American Citizens; Los Angeles Metropolitan
Hispanic Chambers of Commerce; National Hispanic Christian
Leadership Conference; Plaza de la Raza; Sacramento Asian and
Pacific Islander Chamber of Commerce; Regional Hispanic Chamber
of Commerce; Sacramento Hispanic Chamber of Commerce; San Diego
County Hispanic Chamber of Commerce; Teamsters Joint Council 42,
Urban League of San Diego County; Several individuals
Opposition : AARP; African-American Network of Kern County;
Black Economic Council; California ACORN; California Association
of Food Banks; California Conference Board of the Amalgamated
Transit Union; California Labor Federation; California Nurses
Association/National Nurses Organizing Committee; California
Reinvestment Coalition; California Teamsters Public Affairs
Council; Center for Responsible Lending; Christ Our Redeemer,
African Methodist Episcopal Church; City of Sacramento; City of
San Francisco, Office of the Treasurer & Tax Collector; Consumer
Federation of California; Consumers Union; El Futuro Credit
Union; Engineers and Scientists of California; Fair Housing
Council of Central California; Fresno Housing Alliance; Fresno
Metro Ministry; Fresno West Coalition for Economic Development;
Greenlining Institute; International Longshore & Warehouse
Union; Latino Issues Forum; Professional & Technical Engineers,
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Local 21; Sacramento Area Congregations Together; San Francisco
Asian Housing Task Force; UNITE HERE!; United Food and
Commercial Workers Union, West Angeles Community Development
Corporation; Western States Council; One individual
HISTORY
Source : Author
Related Pending Legislation : AB 545 (Salas) would authorize the
commissioner to implement a system enabling a licensee to
receive specified information regarding a consumer's history
with payday loans. This bill was referred to the Assembly
Banking and Finance Committee but was never scheduled for
hearing.
Prior Legislation : SB 1551 (Correa, 2008) would have
implemented all or a portion of nine of the 12 regulatory
oversight recommendations made by DOC in its March 2008 report.
The bill failed passage in this Committee.
Prior Votes :
Assembly Banking and Finance Committee (Ayes 10, Noes 1)
Assembly Appropriations Committee (Ayes 9, Noes 0)
Assembly Floor (Ayes 53, Noes 8)
Senate Banking, Finance and Insurance Committee (Ayes 7, Noes 1)
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