BILL ANALYSIS �
AB 336
Page 1
Date of Hearing: January 9, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 336 (Dickinson) - As Amended: January 4, 2012
SUBJECT : Title Loans
SUMMARY : Establishes standards, prohibitions and requirements
on lenders that provide loans collateralized by a motor vehicle
(Car title loans). Specifically, this bill :
1)Defines "title loan" as a nonpurchase money loan where the
lender obtains a security interest in a motor vehicle, which
security interest is perfected by a first lien.
2)Requires a licensee that makes a car title loan to do the
following:
a) Provide the consumer with a disclosure that informs the
consumer of the interest rate and any fees or other charges
associated with the consumer loan, the consequences for
defaulting on the consumer loan, and a complete
amortization schedule indicating the total cost to the
consumer over the life of the loan and samples of other
term options.
b) Provide to the borrower a "High Interest Rate"
disclosure in Bold Arial in at least 16 point font, all
capital letters. The disclosure must be in a separate box
and must be signed by the borrower and any additional
cosigner, if any. The High Interest Rate Disclosure shall
contain the following words: THIS IS A HIGH-COST LOAN. YOU
MAY BE ABLE TO OBTAIN A LOAN FROM ANOTHER SOURCE AT A LOWER
RATE OF FINANCE CHARGE. THINK CAREFULLY BEFORE YOU DECIDE
TO ACCEPT THIS LOAN.
c) Underwrite each loan to determine a borrower's ability
and willingness to repay the loan pursuant to the loan
terms, and shall not make a loan if it determines, through
its underwriting, that the borrower's total monthly debt
service payments, at the time of origination, including the
loan for which the borrower is being considered, and across
all outstanding forms of credit that can be independently
verified by the licensee, exceed 50 percent of the
AB 336
Page 2
borrower's gross monthly income.
d) Seek information and documentation pertaining to all of
a borrower's outstanding debt obligations during the loan
application and underwriting process, including loans that
are self-reported by the borrower but not available through
independent verification.
e) Verify the borrower's credit information using a credit
report from at least one of the three major credit bureaus
or through other available electronic debt verification
services that provide reliable evidence of a borrower's
outstanding debt obligations.
3)Prohibits the structuring of a car title loan as a
sale-lease-back transaction and provides for civil penalties.
4)Provides that if a borrower defaults on a car title loan and
if the licensee disposes of the vehicle used as collateral for
the loan then the borrower shall not owe a deficiency, nor
shall the licensee request a deficiency judgment to recover
any outstanding balance.
5)Prohibits the use of any prepayment penalty on the car title
loan.
6)Provides that if the borrower fails to perform their
obligations under the loan, the licensee shall not make any
negative report to any of the national credit reporting
agencies.
7)Requires that any advertisements used for car title loans must
include the annual percentage rate (APR) of the loan.
8)Specifies that the lender must provide at least 30 days'
notice, via personal service or certified mail, of intent to
dispose of a repossessed or surrendered vehicle.
Additionally, notice shall inform borrower of their right to
redeem the vehicle by paying in full the indebtedness.
9)Provides that licensee shall extend redemption period for
additional 10 days if the loan is subject to a conditional
right of reinstatement.
AB 336
Page 3
10)States that unless automatically provided to the borrower,
the licensee shall provide a written accounting regarding the
disposition to any person liable on the loan within 45 days
after his or her written request. The accounting shall
provide the following:
a) The gross proceeds of the disposition.
b) The reasonable and necessary costs and fees authorized
by this division incurred in repossessing the motor
vehicle.
c) Satisfaction of other liens that may be on the vehicle.
11)Provides that in all sales of a disposed or repossessed
vehicle that results in a surplus the licensee shall furnish
an accounting and return the surplus to the borrower.
12)Allows a person to bring an action for the recovery of
damages, equitable relief, exemplary damages, and attorney's
fees and costs for any violation of this section.
13)Allows for a civil a penalty for a violation of up to $10,000
for each violation which shall be assessed and recovered in a
civil action brought in the name of the people of the State of
California by the Attorney General, a district attorney, or a
city attorney in a court of competent jurisdiction.
EXISTING LAW
1)Provides for the California Finance Lenders Law (CFLL),
administered by the Department of Corporations (DOC), which
authorizes the licensure of finance lenders, who may make secured
and unsecured consumer and commercial loans (Financial Code
Sections 22000 et seq.). The following are the key rules applied
to consumer loans made pursuant to the CFLL:
a) CFLL licensees who make 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 and
22304). Administrative fees are capped at the lesser of 5% of
the principal amount of the loan or $50. An administrative fee
of $75 may be charged for loans of $2,500 or more (Section
22305);
AB 336
Page 4
b) In addition to the requirements in "a" above, CFLL licensees
who make consumer loans under $5,000 are prohibited from
imposing compound interest or charges (Section 22309); are
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 and $15 on loans 15
days or more delinquent); are required to prominently display
their schedule of charges to borrowers (Section 22325); are
prohibited from splitting loans with other licensees (Section
22327); are prohibited from requiring real property collateral
(Section 22330), and are 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 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); and,
d) Generally speaking, the terms of loans of $10,000 or above
are not restricted under the CFLL.
2)Authorizes the licensure of finance brokers under the CFLL, and
defines a finance broker as any person who is engaged in the
business of negotiating or performing any act as a broker in
connection with loans made by a finance lender (Section 22004).
3)Imposes a 36% APR on consumer credit extended to members of
the military and their dependents. (10 USC Sec. 987.)
FISCAL EFFECT : None
COMMENTS :
A car title loan occurs when a consumer borrows money against
the title of their car for a specified period of time. During
the loan period, the consumer continues to use their vehicle as
necessary. If the consumer defaults on the loan then current
law authorizes the lender to repossess the car for the costs of
the loan. Car title lending in California is conducted under
the CFLL, under which various forms of consumer lending are
AB 336
Page 5
authorized. The CFLL does not explicitly authorize car title
lending, but CFL licensees may offer these types of loans. Car
title loans are subject to the provisions of the CFL, which for
loans above $2,500 no interest rate caps exist. A rate cap does
not exist for any personal loan (Auto, Auto-title, personal)
made under the CFLL.
Car title lending has come under recent scrutiny due to media
coverage, specifically, an LA Times article, "Title Loans'
Interest Rates are Literally Out of Control," February 11,
2011, that highlighted the high interest rates on these loans
and the consequences if a consumer does not pay off such a loan.
The article provided the following details:
One customer put up his truck as collateral for a $2,500
loan with payments of $200 per month. The customer
expected to pay off $5000-6000 by the time the loan was
finished. This particular customer was charged an APR of
108% as a return customer vs. 120% for new customers.
According to one car title lender interviewed, three
quarters of the loans were paid off typically within 8
months.
The way in which a typical loan would work, is the
customer brings in his or her vehicle to the lender for
inspection and test drive. The lender then determines what
the vehicle might fetch at auction, which could be half of
the Kelley Blue Book Value. For example, with a $6,000
Blue Book value the lender might loan $2,600 with interest
rates as much at 180% APR.
Industry representatives argue that the borrowers who use their
service have very low credit scores and are not likely to have
access to other means of credit, if at all. Additionally, they
point out that while the loan may be securitized, the
repossession and disposition of an automobile is a costly
endeavor and such costs must be built into the costs of the
loan.
In examining at CFL licensees who make secured car loans (This
includes car title loans and car purchase loans) finds that in
2009 approximately 18,921 auto related loans were made in
California with APRs over 40%, for a total volume of
$64,204,118. In 2009, for loans with APRs over 100%, 4,243
loans were made, totaling $13, 948,175. Again, it is important
to note that these numbers are approximations because an
AB 336
Page 6
auto-purchase lender could be in these categories.
Additionally, anecdotal information suggests that most car title
loans are made with APRs between 90-120%.
Sale-leaseback:
A sale-leaseback is when a lender buys property from a consumer
and then leases it back to the consumer for a "rental" payment
due at specified intervals. In effect, these transactions are
loans designed to avoid enforcement of stricter lending laws.
AB 336 would ban a sale-leaseback transaction by providing that
in sales transaction involving a motor vehicle, if the seller is
leased the vehicle then it shall be presumed it is a
sale-leaseback transaction that is attempting to avoid the
requirements and restrictions on car title loans.
In 2005, Governor Schwarzenegger vetoed SB 360 (Florez) which
would have banned sale-leaseback transactions. As part of the
veto message, DOC was tasked with developing a proposal to
address this issue. On March 1, 2006, DOC issued release No.
56-FS regarding these transactions and how the DOC would view
these transactions and released the following information:
In an effort to address these concerns, the Department of
Corporations has prepared
the following list of factors, according to California law,
that it will use to determine
whether a sale-leaseback transaction may be a loan:
The borrower seeks money and not the use of
goods or property.
The borrower receives money, followed by a
"sale" of the borrower's property to the lender, with
a provision for repayment in the form of rent or
payments to the lender.
The borrower is in possession of the goods or
property before obtaining money from the lender.
The borrower gives up title to goods or
property as security in exchange for receiving money.
There is no risk to the lender of losing
capital, other than the insolvency of the borrower.
AB 336
Page 7
The lender has the power to accelerate the
principal payment of the "loan" upon default.
The transaction includes agreements with
provisions of title reversions and "repurchase" within
specified periods.
The presence of one or more of these factors may indicate,
upon further review, the
presence of a loan transaction. The mere fact that a
sale-leaseback transaction is titled
or referred to as a "lease" or a "sale-leaseback" in the
forms and paperwork is not
determinative. It is the intent of the parties and the
economic substance of the
transaction, rather than the form of the transaction, which
determines whether the
transaction is actually a loan. Thus, the Department will
examine a so-called sale-leaseback transaction in
accordance with the above-referenced factors, in addition
to
other circumstances including the purpose and terms of the
agreement, to help
determine whether such transaction may be a loan when
enforcing the CFLL.
The existence of the aforementioned guidance issued by DOC does
not necessarily negate the need to codify a ban on sale-lease
back transactions that may attempt to circumvent the
requirements on car title lenders. However, the author may want
to consider incorporating provisions of the guidance in the ban
on sale-leaseback transactions.
Arguments in support:
The Center for Responsible Lending writes in support:
Under the California Finance Lenders Law, car title lenders
operate with no interest rate limits for loans greater than
$2,500. Car title lending is particularly usurious, with
lenders in California charging annual interest rates that
range from 72 percent to as high as 180 percent. Like
payday lenders, car title lenders target vulnerable
borrowers who need quick cash. Also, like payday lenders,
AB 336
Page 8
they have no incentive to rigorously evaluate a borrower's
ability to repay the loan because they are assured
repayment either through borrower payments or the
repossession and sale of the borrower's car. These loans
are especially risky for borrowers because they put the
borrower's car at risk. The car is likely to be the
borrower's most valuable asset, and is often the borrower's
only means of getting to work. A repossession can be
devastating if the loss of this valuable asset also means
the loss of transportation to work, and leads to
unemployment.
Car title lenders often argue that such high rates are
justified by the credit risk of the borrower. In reality,
though, the car title lenders bear little risk because the
loan is more than 100 percent secured by the value of the
automobile. This is because loan amounts are almost always
only a fraction of the full value of the car. There are,
however, a wide array of more responsible options available
for qualified, creditworthy borrowers - credit cards, banks
and credit unions, other consumer finance lenders, all of
whom offer credit to a wide swath of borrowers who can
afford to repay a loan, but rarely charge APRs in excess of
36 percent. The excessive interest rates charged for fully
secured car title loans are a core problem with car title
loans that go unaddressed in the amended version of AB 336.
Consumers for Auto Reliability and Safety write in support:
For most Californians, a motor vehicle is a necessity of
life. Citizens of our state rely on their motor vehicles to
get to work, transport their children to school, gain
access to vital medical care, and get groceries. Exorbitant
interest rates increase the risk of defaults, leading to
vehicle repossessions. When vehicles are repossessed, very
often an immediate consequence is job loss. Thus, the
practices are costing our state jobs and contributing to
unemployment.
Further exacerbating the harm, once consumers have a
repossession on their credit report, it stays on their
report for 7 years. During that time, they are subject to
being turned down for employment and housing. Existing law
in California allows employers to discriminate based on
credit histories, and someone who has a repossession on
AB 336
Page 9
their record is likely to be summarily eliminated from the
pool of eligible employees.
Consumer Attorneys of California writes in support:
Consumer Attorneys of California is pleased to support AB
336 (Dickinson), which is set to be heard before the
Assembly Banking and Finance Committee on January 9, 2012.
"Auto title lending" is the practice in which a lender makes
a loan to a consumer with the loan secured by title to the
borrower's automobile. Consumers often choose auto title
loans because they provide quick and easy access to cash,
and because credit ratings are not used to determine
eligibility. Too often, however, needy consumers utilize
these loans without understanding the intricacies of the
repayment and the default process. The repercussions of
default on these loans can be devastating (consumers can
lose their car, cash, and their good credit histories) and
legislation is needed to help protect innocent Californians.
Arguments in opposition.
California Financial Services Association writes in opposition:
22328.6 (D)(2) - Requires a creditor to "ensure" that the
borrower read and understood the disclosure. A creditor
has no way of knowing whether the borrower understands the
contract, other than the borrower's affirmation that they
do by virtue of signing the contract. Consequently, a
borrower need only assert that they did not understand the
contract in order to file suit under (h)(1) and (h)(2). We
are unaware of any other statute that provides a consumer
with a private right of action and $10,000 bounty for their
own failure to understand a contract which they signed.
22328.6 (D)(3) - Requires a creditor to "independently
verify" a borrowers total debt service and precludes a
creditor from making a loan that exceeds 50 percent of a
borrowers monthly income after debt service. Existing law
already requires a lender to consider the ability of a
borrower to repay a loan. However, by adding a requirement
to "independently verify" debt service this bill would
presumably mandate credit reports, talking to landlords,
employers, other creditors, etc. This independent
verification is impractical at best, will significantly
AB 336
Page 10
slow the lending process and will preclude anyone
(immigrants) that does not have a Social Security number
from obtaining a loan because a lender cannot obtain a
credit report. The delays in waiting for independent
verification from the afore-mentioned entities would
invariably result in heartache for consumers, many of whom
need the proceeds as quickly as possible. Additionally,
because the notion of independent verification is so vague
(i.e. does this mean a lender would have to contract with
an independent third party?), lenders would invariably be
subjected to frivolous litigation pursuant to (h).
Precluding lenders from making loans that exceed 50 percent
of a borrowers monthly income, minus existing debt service,
would effectively ban title loans for borrowers in high
cost urban areas such as Los Angeles, San Francisco, San
Jose, etc. where housing costs make up a higher percentage
of one's debt service. The provision also runs counter to
other provisions in the bill concerning a borrower's
ability to repay because it assumes that anyone with high
housing costs is a bad credit risk.
22328.6 (A) and (C) - Requires the creditor to provide a
complete amortization schedule including the "total cost"
as well as all "fees" to the consumer. As evidenced by
last year's AB 238 (Huber) concerning conditional sale
contracts, which you voted for, certain fees, especially
government assessed and third party fees, are often
difficult to calculate. Prior to the passage of AB 238
there was a thriving business for attorneys to file suit
over minor calculation errors. Given the penalty
provisions in this measure and the fact that there is no
safe harbor, these same attorneys will find a new area to
thrive and lenders would invariably be subjected to
frivolous litigation pursuant to (h)..
22328.6 (c) - Precludes creditors from obtaining deficiency
judgments from borrowers. Including a no recourse
provision would force lenders to raise rates for all
borrowers, including those who actually pay on time, in
order to make up for the deficiencies that will be
inevitably left over by the non-paying customers against
whom the lender would then have no recourse. The inclusion
of this provision would incentivize customers to mislead
lenders or abuse vehicles, would lead to an increase in
AB 336
Page 11
repossessions earlier in the delinquency cycle due to
exposure and would incentivize lenders not to repossess low
value vehicles from impound, repair shops, etc., in order
to mitigate losses, because now lenders would be better
served to sue for the entire balance.
22328.6 (d) - Precludes creditors from making negative
credit reports to national crediting agencies. Aside from
violating the Fair Credit Reporting Act and arguably being
unconstitutional, this provision conflicts with other
portions of the bill which require creditors to obtain
complete credit data on borrowers. In effect, this
provision devalues the very credit reports which this
measure wants to mandate and makes it more likely that
unqualified borrowers are able to obtain loans which they
may be unable to repay.
Issues for consideration.
1)Debt to income restriction: This bill would prohibit the
making of a loan if the borrower's debt to income ratio,
including the new loan, would exceed 50% of the borrower's
gross monthly income. It is possible that a borrower in the
need of a car title loan most likely already exceeds the 50%
DTI standard. Would this standard deny credit to those who
may need it the most? Additionally, with the underwriting
mandates and the ability to repay standard in the bill, is a
hard DTI cap necessary? Do we really have evidence of the
current DTI ratio of borrowers? Perhaps DOC could require
licensees, via regulation to collect DTI ratio information,
for future policy decisions.
2)Prohibition on negative reporting to national credit reporting
agencies if borrower defaults. While the bill requires that
the lender document outstanding debts of the consumer in the
underwriting process, the prohibition on reporting a default
to the credit bureaus is counter to the need to evaluate all
of borrower's debts. What if a borrower had more than one
vehicle and they defaulted on one title loan to only to get a
second title loan? Under this scenario the lender would have
no way of knowing (unless it was the same lender) that the
borrower was a credit risk as they had defaulted on the exact
same type of loan. Finally, opposition has provided that this
provision would violate the federal Fair Credit Reporting Act
(15 U.S.C. � 1681 et seq). Committee staff is not convinced
AB 336
Page 12
of this claim and that the previous reasons mentioned
regarding the problems of this provision are sufficient to
justify its exclusion from the bill.
3)The bill requires that the lender must ensure the borrower
"has read and understood..." the loan disclosure information.
It does not specify how one would ensure that the borrower has
read and understood the disclosures. Considering the
penalties for a violation in this bill it would be appropriate
to specify what constitutes compliance.
4)Other technical issues. The bill has other technical and
drafting issues that need to be addressed.
Based on the aforementioned issues, committee staff recommends
that amendments should be adopted in committee to address these
issues.
REGISTERED SUPPORT / OPPOSITION :
Support
Consumer Attorneys of California
Consumers for Auto Reliability and Safety (CARS)
The Center for Responsible Lending (CRL)
Opposition
California Financial Services Association (CFSA)
Community Loans of America Inc.
Equal Access Auto Lenders of California (EAALC)
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081