BILL ANALYSIS Ó
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Date of Hearing: April 23, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 1980 (Hernandez) - As Amended: March 29, 2012
SUBJECT : Loans: disclosures: financial facts label.
SUMMARY : Requires, that on or after January 1, 2014 licensees
under the California Finance Lenders Law (CFLL) and the Deferred
Deposit Transaction Law (DDTL) provide a financial facts label
accompanying every window advertisement, online advertisement,
mailer, flier, brochure or pamphlet. Specifically, this bill :
1)Requires that prior to the consummation of a California
Finance Lender (CFL) loan or a payday loan that the licensee
provide the borrower with the financial facts label
disclosure.
2)Provides that the financial facts label shall include all of
the following information:
a) The amount and the number of payments for the loan;
b) The average amount per payment;
c) A "Percent of Monthly Debt Budget" caption to inform the
consumer of how loan payments will affect his or her debt
budget and cash flow. Requires that this caption also
include a disclosure stating, "Percent of Monthly Debt
Budget value is based on the loan payment divided by the
recommended consumer debt-to-income ratio of 15 percent,
using a $3,000 after-tax monthly income level. Debt budget
will vary according to your income level.";
d) A breakdown of the monthly payment indicating how much
will be paid towards the principal, loan fees, and
interest;
e) The annual percentage rate (APR);
f) The interest rate used to calculate the loan payments;
g) Total monthly fees to be paid on the loan;
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h) Total monthly payment; and,
i) Late payment amount.
3)Requires the Department of Corporations (DOC) to adopt
regulations, by January 1, 2014 to set forth the design of the
label based upon the design of the federal Food and Drug
Administration's nutritional facts label.
4)Makes various legislative findings and declarations.
5)Sunsets the requirements to offer the label January 1, 2018.
EXISTING LAW
The CFLL applies to lenders who make consumer or commercial
loans, whether unsecured or secured by real or personal property
or both, to consumers for use primarily for personal, family, or
household purposes. The CFLL is regulated by the DOC. The CFLL
is in the California Financial Code, Division 9, commencing with
Section 22000. The regulations under the CFLL are contained in
Chapter 3, Title 10 of the California Code of Regulations,
commencing with Section 1404 (10 C.C.R. §1404, et seq.).
The CFLL was enacted by the California legislature effective on
July 1, 1995 and consolidated and replaced the Personal Property
Brokers Law, the CFLL and the Commercial Finance Lenders Law
which were previously applicable to personal property brokers,
consumer finance lenders, and commercial finance lenders. Even
though the CFLL is a relatively recent statute, it is based upon
previous statutes.
According to the DOC, Finance lenders and brokers, by number of
licensees and dollars of loans originated, are the largest group
of financial service providers regulated by DOC. A finance
lenders license provides the licensee with an exemption from the
usury provision of the California Constitution. Licensed under
the law are individuals, partnerships, associations, limited
liability companies and corporations. The law requires
applicants to have and maintain a minimum net worth of at least
$25,000 and to obtain and maintain a $25,000 surety bond. In
general, principals of the company may not have a criminal
history or a history of non-compliance with regulatory
requirements.
In addition to the lending authority provided by the law, the
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CFLL provides limited brokering authority. A "broker" is
defined in the law as "any person engaged in the business of
negotiating or performing any act as broker in connection with
loans made by a finance lender." Brokers licensed under this law
may only broker loans to lenders that hold a CFL license.
Several entities are not required to be licensed under the CFLL,
including banks and savings and loan associations, credit
unions, mortgage lenders, licensed check cashers, licensed pawn
brokers or those licensed under the DDTL. "Non-loan"
transactions, such as bona fide leases automobile sales finance
contracts and retail installment sales are also not subject to
the provisions of the CFLL.
If a business makes a one-time loan, then the business can rely
on the safe harbor of no more than one loan in a 12-month
period. However, where the safe harbor and other exemptions
under the CFLL do not apply, then the business may need to apply
for a license under the CFLL. Violating the CFLL can result in
penalties of $2,500 for each violation, imprisonment (for not
more than one year), or both, and willful violations can also be
punished by a fine of $10,000 in addition to imprisonment (for
not more than one year) or both.
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CFLL licensees constitute a class of "exempt persons" for
purposes of California's constitutional usury limitations (Cal.
Fin. Code § 22002).
Additionally, DOC licenses and regulates the DDTL, commencing
with Financial code Section 2300. A Deferred Deposit
Transaction (DDT), commonly referred to as payday loan, is a
short-term loan in which a borrower writes a post-dated,
personal check to a lender for a specified amount, capped at
$300. 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. The lender and the borrower are
aware that the borrower lacks sufficient funds to cover the
check at the time 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
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.
FISCAL EFFECT : Unknown
COMMENTS :
According to information provided by the author's office this
bill is necessary for the following reasons:
The Financial Facts Label Act of 2012 would provide clear
and transparent consumer disclosures on small dollar loans
($2,500 or under). The Financial Facts label provides a
consumer-friendly disclosure that both small-dollar lenders
and advocates can support. Low-income consumers who rely on
small-dollar loans to make ends meet need clear and
transparent disclosures; lenders need consumers who can
afford to pay back their loans. The Financial Facts label
presents key loan terms: the total amount, number and
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amount of monthly payments and fees, annual percentage
rate, late payment fee, and total cost. With distilled loan
information, borrowers can better assess for themselves, at
the moment of decision, whether they can afford to take out
a loan. Likewise, lenders can be more assured that
borrowers are considering their ability to repay a loan
before committing. The Financial Facts label presents
factual information that provides both consumers and
lenders with a tool for improving the small-dollar loan
landscape in California.
This bill sponsored by Mission Asset Fund (MAF), a non-profit
organization in San Francisco, is the result of an experiment,
conducted in 2010, regarding loan disclosure documents. This
project involved an analysis of the costs of borrowing $1,000 in
San Francisco's Mission District. MAF sought this information
from 57 different financial entities. After collecting the
information, MAF designed a financial facts label and then set
about to conduct a test to determine the benefit of the label.
In October 2011 seventy four participants were provided with
original loan documents and the financial facts label
information for the same loan products. MAF found that only 23%
of respondents correctly determined the monthly payment amount
from the original loan documents. In contrast, consumers
correctly determined the loan payment from the financial facts
label 80% of the time. MAF concluded in their report on the
study, Just the financial facts, please! A Secret Survey of
Financial Services in San Francisco's Mission District, the
following:
Our survey illustrated not only the complexity of the
marketplace, but also the futility of labeling a set of
lenders as predatory -or bad lenders- to alert clients to
steer clear. We realized that the only strategy with a
lasting impact is one that increases a borrower's
ability to assess lenders and loan products independently.
The Financial Facts labels and the Responsible Lending and
Borrowing Checklist are designed to aid consumers in their
quest for affordable and responsible loans. The Financial
Facts labels provide consumer loan information in a clear,
transparent and easy to understand format. The Responsible
Lending and Borrowing Checklist guides borrowers through a
set of questions about lenders, loans, and their own
financial circumstances in order to assess whether they can
afford to take out new loans.
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It is our hope that this report will ignite a deeper
conversation with advocates in the asset-building field,
bank-on initiatives, and other thought leaders to advocate
for a standardized, easy-to read and easy-to-access format
for disclosing critical information on installment loans,
transactional products, and other consumer financial
products.
Sample Financial Facts Label:
Discussion .
The concept of requiring a simplified loan disclosure is not
new. Federal and state regulators, consumer organizations and
other stakeholders have struggled for years to come up with a
simplified disclosure regime for lending products. This bill
builds upon those efforts in order to create a simplified
disclosure document using the Food & Drug Administration (FDA)
nutrition label as a model. The intent with this measure is
commendable, but it appears to be overly broad and may lead to
additional confusion. The following are questions or issues
that need to be addressed:
1)Will enhanced disclosure benefit borrowers in need of
short-term lending products by demonstrating the risk
associated with that product, and in turn, reduce dependency
on that product?
2)A licensee under the CFL can engage in various types of
lending activity including, unsecured personal loans,
car-title loans, auto purchase lending, auto refinance and
real estate loans. While the stated intent of this bill is to
provide the financial facts label for unsecured consumer loans
under $2,500, the provisions of the bill apply to broad range
of activity under the CFL. For example, a CFL engaged in real
estate lending activity would be required to share the label,
as would a CFL engaged in auto lending. Furthermore, it
requires CFL licensees to post the label in various forms of
advertising using a sample loan amount of $1,000. Considering
the broad range of loans that can be made or arranged under
the CFL in varying amounts, this could lead to further
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consumer confusion as the advertisement reflects a loan amount
that may not be the most common.
3)The sponsor contends that the requirement to issue the label
only applies to loans equal to, or less than $2,500. However,
the way in which the bill is drafted requires the label to be
disclosed for virtually all CFL loans. The $2,500 threshold
is only for unsecured consumer loans, but this exemption
conflicts with other sections of the bill that require
disclosure of the label for all CFL licensees.
4)The inclusion of the label does not alleviate current
disclosure requirements. Currently CFL licensees must display
a full and accurate schedule of charges in each licensed place
of business that is subject to approval by the commissioner of
DOC, as well as, provide borrowers with DOC approved
disclosures and disclosures that comply with the federal Truth
in Lending Act (TILA) requirements. This bill would require
the inclusion of two different disclosures that could lead to
greater consumer confusion.
5)The issue in #4 above also would exist for payday lenders.
The bill requires payday lenders to use the label in
disclosures to consumers before consummation of the loan and
in all advertising materials. The inclusion of these
requirements is in addition to current requirements that
public posting of rates, as well as, consumer disclosure of
rates. Will the inclusion of additional disclosures create
confusion?
6)The disclosure would require the inclusion a caption regarding
how loan payments will affect the borrower's debt budget.
This required disclosure uses an average income amount for
demonstration purposes, but could lead to consumer confusion.
Additionally, it includes a statement that the "Percent of
Monthly Debt Budget" value is calculated using a "recommended
debt-to-income ratio level of 15 percent." Is it appropriate
to codify this statement in law regarding appropriate DTI
standards? Would this statement imply that the Legislature,
DOC or some other arm of state government recommends this
threshold?
7)An additional issue for payday lending is that the terms of
payday loans are in days not months. Requiring a disclosure
concerning monthly payments, when payday loans do not have
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month long terms could create confusion. Additionally, payday
lenders are prohibited from charging a late fee, but the label
would require disclosure of a fee that doesn't exist.
8)In addition to establishing the required disclosure that are
mandatory in the label, this bill gives DOC vague guidance to
use the FDA nutritional label as a model to create the
financial facts label. However, the FDA nutritional label is
governed by detailed and complex federal regulations and
regulatory guidance dictating the size and specific placement
of the label on food products. A sample of the federal
regulations on the FDA nutrition label can be found at 21 CFR
101.18, 21 CFR 101.29, 21 CFR 101.310, 21 CFR 101.411, 21 CFR
101.912, and 21 CFR 101.105. Earlier in this analysis, a
sample financial facts label is illustrated. Based on the
general guidance in the bill, it is not guaranteed that label
envisioned will, in fact, become the label created by DOC.
9)Should the sponsor find a lender to partner with to agree to
use the label in additional to legally required disclosures to
provide greater detail on the effectiveness of the label in
the broader market? Should the sponsor work with DOC on
setting up a pilot program to measure the effectiveness of
this label. Prior to establishing a regulatory and statutory
disclosure framework, it would be helpful to have greater data
on the potential impact of such a financial facts label.
10)The sponsor's study involving 74 participants provides an
indication that this idea is worth future exploration.
However, a sample of 74 consumers in a controlled environment
is not the same as consumers using the label when applying for
an actual loan. Committee staff recommends that this idea
deserves more study and consideration prior to codifying it
into statute.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
California Financial Service Providers' Association
California Mortgage Bankers Association (CMBA)
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Community Financial Services Association
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081