BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 365 (Lowenthal) Hearing Date: April 6, 2011
As Introduced: February 15, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would require the Commissioner of Corporations to
implement a database, or contract with a third party to
implement a database, to track deferred deposit transactions
(payday loans), as specified, and would authorize the cost of
that database to be borne by both licensees and payday loan
customers. Would also add a provision to the California
Deferred Deposit Transaction Law (CDDTL; Payday Loan Law),
allowing customers to rescind their loans at no cost, if they
notify the licensees who made those loans of their desire to do
so, as specified.
DESCRIPTION
1. Would require the Commissioner of Corporations
(commissioner) to implement a common database with real-time
access through an Internet connection for CDDTL licensees.
The database would have to be accessible to the Department
of Corporations (DOC) and CDDTL licensees, to verify whether
any payday loans are outstanding for a particular person.
2. The commissioner would be authorized to develop and operate
the database or contract with a third-party provider to do
so. The commissioner could impose a fee on licensees for
the reasonable regulatory costs to administer the database,
not to exceed $3 per payday loan. Licensees would be
allowed to pass on up to one-half of the fee to their
customers.
3. The database would have to be operational on or before
September 1, 2012, unless it is financially impracticable
for the commissioner to design and operate a database by
that date, or the commissioner has not entered into a
contract with a qualified third party by that date.
SB 365 (Lowenthal), Page 2
4. One the database is operational, licensees would have to
accurately and promptly submit the following information
into the database: the customer's name, social security
number or employment authorization alien number, address,
driver's license number, amount of the transaction, date of
the transaction, date that the completed transaction is
closed, and any additional information required by the
commissioner.
5. The database would have to allow a licensee to verify
whether a customer has any open payday loans with any
licensee. Any response to an inquiry by a licensee would
have to state only whether a person is eligible or
ineligible for a new payday loan and describe the reason for
that determination. Only the person seeking the payday loan
would be able to make a direct inquiry to the database
provider to request a more detailed explanation of a
particular transaction that is the basis for the
ineligibility determination. Any information regarding a
person's transaction history would be confidential.
6. Licensees would be given authority to rely on information
contained in the database as accurate. They would not be
subject to any administrative penalty or civil liability for
relying on information in the database that proved to be
inaccurate, provided the licensee accurately and promptly
submits any required data before entering into a payday loan
with a customer.
7. The database provider would have to comply with any
applicable federal and state laws intended to prevent
identity theft, and provide accurate and secure receipt,
transmission, and storage of customer data. Any person
injured by a third party database provider's violation of
the bill would be eligible to bring a civil cause of action
against that provider and recover actual damages plus
reasonable attorney's fees and costs.
8. The commissioner would be authorized to require that a
payday loan in the database be archived within 365 days of
being closed, that any identifying customer information be
deleted from the database when data are archived, and that
archived data be deleted three years following the close of
a transaction (or later, if the transaction is the subject
of an administrative, legal, or law enforcement action).
SB 365 (Lowenthal), Page 3
9. The commissioner would be authorized to access active data
in the database only for purposes of an investigation,
examination, or enforcement action. The commissioner would
be given access to archived data in the database for
examination, investigation, or legislative or policy review.
10. In addition to the database provisions of the bill
described above, the bill would authorize a payday loan
customer to rescind his or her loan at no cost, by notifying
the licensee from whom he or she obtained the loan of his or
her desire to rescind the transaction, and by returning the
proceeds of the transaction no later than the end of the
next business day following the day on which the payday loan
was made. Each licensee would have to make reasonable and
accessible provisions for a customer to contact it in a
timely manner, to notify the licensee of his or her intent
to rescind the transaction and return the loan proceeds.
EXISTING LAW
11. Provides for the California Deferred Deposit Transaction
Law (CDDTL; Payday Loan Law, Financial Code Section 23000 et
seq.), administered by DOC. The CDDTL:
a. Allows lenders licensed under its provisions 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;
b. 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, as specified;
c. Allows 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;
SB 365 (Lowenthal), Page 4
d. 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
deferred deposit transactions;
vii. Offering, arranging, acting as an agent
for, or assisting a deferred deposit originator in
any way in the making of a deferred deposit
transaction unless the deferred deposit originator
complies with all applicable federal and state laws
and regulations;
e. Provides that licensees who violate the CDDTL are
subject to suspension or revocation of their licenses,
and that violations of the CDDTL are subject to civil
penalties of $2,500 per violation;
COMMENTS
SB 365 (Lowenthal), Page 5
1. Background and Discussion: According to the author, this
bill will give DOC one more tool to better enforce the
current "one loan at a time" requirement, and will provide
DOC with the ability, when performing audits, to reconcile
lenders' records with the statewide database, and identify
any irregularities between the two. The author is also
proposing to allow borrowers to rescind their payday loan
transactions, to make payday loan transactions more
consumer-friendly.
The bill's sponsor adds that the database is also intended to
ensure that lenders do not extend or roll over existing
loans, and that all of the terms and conditions set by
statute are enforced.
DOC's Reports: Financial Code Section 23057 required the
commissioner to submit a report on December 1, 2007
regarding implementation of the CDDTL. On March 10, 2008,
the DOC released two reports to fulfill its requirements
under Section 23057. The two reports are titled,
"California Deferred Deposit Transaction Law, California
Department of Corporations, December 2007" 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".
In the first of those reports, DOC included 22
recommendations, which it divided into those intended to
improve its oversight of the industry (twelve
recommendations) and those intended to strengthen its
enforcement of the CDDTL (ten recommendations). DOC also
included seven "options for consideration by the
Legislature."
Among the seven options for legislative consideration that
were included in DOC's first report, DOC suggested the
creation of a payday loan database, as follows: "Consider
as an option requiring all licensees to use a uniform
database to record all transactions in real time. Allow for
the cost of the system to be paid directly from the licensee
to the third party operator. The single database to record
payday loan transactions would benefit consumers by
providing for immediate enforcement of restrictions
regarding the number of loans, multiple loans, terms of
loans, rollovers, and charges. Although a database has been
SB 365 (Lowenthal), Page 6
implemented in seven other states, its benefit would need to
be weighed against any additional cost to licensees that, in
turn, could be passed along to consumers."
2. Will this bill benefit a single company? The sponsor of
this measure, Veritec, operates databases in all thirteen
states that have payday loan databases. Twelve of those
states have single databases (Florida, Oklahoma, Washington,
New Mexico, Illinois, Wisconsin, Michigan, Indiana, South
Carolina, Kentucky, North Dakota, and Virginia), all of
which are run by Veritec. Alabama has multiple databases,
one of which is run by Veritec. Veritec indicates that it
has competed for these database contracts with over half a
dozen companies, including Teletrack and Qfunds. It
believes that at least six other firms would be eligible to
bid on the California database, including Teletrack, Qfunds,
Microbilt, ODI, Tom Sawer, and Gentry Systems.
3. How safe will borrowers' personal data be? As noted
above, the bill requires any database provider (whether a
third party or DOC) to provide accurate and secure receipt,
transmission, and storage of customer data, and to comply
with any applicable federal and state laws to prevent
identity theft. Any person injured by a third-party
provider's violation of the bill could maintain a civil
cause of action against the third-party provider and recover
actual damages, plus reasonable attorney's fees and costs.
It is unclear what liability DOC would have in the event of
a data breach and the resulting theft of a customer's
personally identifiable information.
4. The need for a database: Arguments for and against this
bill have centered on use of the database to ensure
licensees' compliance with the CDDTL. Yet, in the context
of these arguments, one of the key elements of the CDDTL has
come under dispute. Specifically:
What is the law regarding simultaneous payday loans? This
bill's sponsor and author are operating under an
interpretation that the CDDTL prohibits a licensee from
making a payday loan to a borrower who has another
outstanding payday loan. This interpretation is based on a
reading of Financial Code Section 23036(c), which reads as
follows: "A licensee shall not enter into an agreement for
a deferred deposit transaction with a customer during the
period of time that an earlier written agreement for a
SB 365 (Lowenthal), Page 7
deferred deposit transaction for the same customer is in
effect." CRL's letter of opposition indicates that CRL
shares this interpretation of the law.
Members of the payday lending industry assert that the payday
loan law prohibits a licensee from lending to a borrower
when that borrower has a payday loan outstanding with that
licensee, but does not prohibit a borrower from obtaining a
payday loan from lender B while having an outstanding payday
loan from lender A. In support of their position, industry
representatives state that they were involved in the
negotiations which led to the 2002 bill that created the
existing CDDTL, and that the concept of "one loan at a time
per licensee" was agreed to at that time. They state that
no licensee has ever been disciplined by DOC for extending a
payday loan to a borrower that had an outstanding payday
loan from another lender at the same time. Finally, they
point to the language of a DOC publication, which states in
part, "A payday lender cannot make you a new loan while an
existing loan with the same lender is outstanding."
Staff was unable to obtain a definitive answer on this
question before the deadline to finalize this analysis, from
either DOC or the former consumer advocate who negotiated
large portions of the CDDTL with industry. However, in an
attempt to provide an impartial evaluation of the two
competing arguments, staff observes the following: It would
be next to impossible for either a licensee or for DOC to
know whether a borrower had two payday loans outstanding
from two different licensees at the same time, unless a
borrower volunteered that fact, or unless the two licensees
had access to each other's loan tracking systems. A plain
reading of the law appears to prohibit two or more loans at
any one time, regardless of the lender (as the author and
sponsor assert). However, as noted immediately above, it
would be extremely difficult for DOC to enforce that
interpretation, because the information necessary to do so
is not readily available at present. The only
interpretation of the law that can reasonably be enforced by
DOC at the present time is the interpretation favored by
industry.
A resolution of this question will be imperative, if a
database is created.
5. Summary of Arguments in Support: The sponsor of this
SB 365 (Lowenthal), Page 8
bill, Veritec, observes that, by implementing a payday loan
database, California will be able to ensure that no
California licensee gives multiple loans at the same time,
in violation of California law; that lenders do not extend
or roll over existing loans upon the completion of a
deferred deposit transaction; and that all of the terms and
conditions set by statute are enforced on every payday loan
made by a California licensee to a California resident.
According to Veritec, based on evidence from other states that
have implemented real-time databases, almost 20% of
transactions attempted are denied, due to an "ineligible"
status that would result in violations, such as having
multiple loans outstanding, rolling a loan, or terms and
fees that would be out of compliance.
6. Summary of Arguments in Opposition:
a. The Center for Responsible Lending (CRL) is opposed
to the bill, unless it is amended. CRL's opposition is
based on three points. First, little evidence exists to
support the creation of the database. CRL reads the law
as prohibiting a borrower from taking out more than one
payday loan at a time, regardless of whether the loans
are obtained from a single licensee or multiple
licensees. However, CRL points to one of the two 2007
DOC reports, which suggested that only 2.4% of payday
borrowers took out more than one loan simultaneously from
multiple lenders during the period of observation. Thus,
while a database would help DOC enforce the
one-loan-at-a-time provision of existing law, evidence
suggests significant compliance with this provision
already.
Second, CRL notes that SB 365 finances the database in part
on the backs of borrowers. The bill authorizes a fee of
up to $3 per transaction, half of which could be borne by
the borrower.
Third, the bill creates a new constituency for payday
lending. According to CRL, the database administrator
will have a strong incentive to preserve payday lending
in the state, and, because it will be paid on a per loan
basis, the administrator will also have a strong
incentive to maximize, rather than minimize, the number
of payday loans that are made.
SB 365 (Lowenthal), Page 9
Despite these concerns, CRL states that it would support
the bill, if it were amended to impose a six-loan limit
per household per year. Other amendments sought by CRL,
but not a requirement for CRL's support, include allowing
the public to access database data, increasing the types
of information that is tracked by the database and
included by the commissioner in his CDDTL annual report,
imposing monetary penalties on licensees that fail to
report loan data, requiring licensees to report closed
loans (CRL believes that a loan should be considered open
until and unless a licensee reports it as closed), and
modifying the third party contractor selection criteria
to avoid allowing only one company (Veritec) to be
considered.
Several other groups, including the Black Economic Council,
National Council of La Raza, and others are opposed to
the bill, unless it is amended to impose a six-loan-per
year cap. Like CRL, these groups would support the bill
with that amendment.
b. Two trade associations representing the payday
lending industry, including the Community Financial
Services Association of America (CFSA) and the California
Financial Service Providers Association (CFSP) oppose the
bill, on the basis that it will serve no real purpose for
consumers or CDDTL licensees. These payday licensees
assert that the CDDTL prohibits a licensee from entering
into a new loan with a customer that has an outstanding
loan with that same licensee. They do not believe that
the CDDTL prohibits a borrower from having two
outstanding payday loans at the same time, with different
licensees. For that reason, they question the need for a
database.
Second, CFSA and CFSP believe that the cost structure
provided for in SB 365 is too high, and is significantly
higher than transaction costs in other states that have
databases (industry cited an average cost of 20 cents per
transaction in a meeting with Committee staff).
Finally, these trade groups observe that the bill fails to
address the most pernicious problem facing consumers in
need of short-term credit - the unregulated Internet.
They assert that unlicensed Internet lenders routinely
SB 365 (Lowenthal), Page 10
violate consumer protection laws and leave consumers with
no meaningful remedies, because California has no
authority to regulate unlicensed entities that reside
outside the United States.
7. Amendments:
a. The author plans to propose several amendments in
Committee. Because these amendments were received by
this Committee after its amendment deadline, they were
not incorporated into the bill. Instead, the most
significant provisions of these amendments are summarized
briefly below. The proposed amendments would:
i. Modify the selection criteria to be
used by the commissioner, if he or she chooses to
contract with a third party for the database, by
striking the requirement that the commissioner
consider "those providers that have demonstrated
similar systems that are operational in two or
more states" (a criterion that only Veritec could
meet);
ii. Require licensees to promptly
correct any incorrect data they previously
entered into the database;
iii. Require the database provider to
immediately notify the commissioner if it is
experiencing any technical difficulties that
prevent a licensee from entering transactions
into the database;
iv. Require the database to
additionally track and monitor the number of
customers who notify DOC of violations of the
CDDTL, the number of times a licensee agreed that
a violation occurred, the number of times a
licensee did not agree that a violation occurred,
the amount of restitution paid, and any other
information the commissioner requires by rule or
order;
v. Authorize the commissioner to use
active information in the database for
legislative and policy review, and to use
SB 365 (Lowenthal), Page 11
archived information for enforcement purposes
(this amendment will allow the commissioner to
use active and archived information for the same
purposes).
vi. Require licensees to do all of the
following:
1. Immediately report any
technical difficulties that prevent the
licensee from immediately entering into the
database all transactions that occur during
the period of the technical difficulties;
2. Use the vendor's toll-free
telephone number to obtain authorization for
each transaction during this time;
3. Obtain authorization from
DOC if the licensee needs additional time to
meet the requirement to promptly enter
information into the database.
vii. Require, rather than authorize, the
commissioner to use the database to administer
and enforce the CDDTL;
viii. Inform payday loan customers of
their right to rescind their loans in an
informational notice given to prospective
borrowers before their loan is closed, on a
notice posted in each licensee location, and in
the terms of their loan contracts.
b. Additional amendments will be required to
address remaining outstanding technical issues and
more clearly spell out what information DOC is
expected to include in its database terms of use
document. Staff understands that the author and
sponsor are currently in discussions with DOC
regarding both of these issues.
8. Prior and Related Legislation:
a. SB 1959 (Calderon, Chapter 682, Statutes of
1996): Enacted the earliest version of a payday
SB 365 (Lowenthal), Page 12
lending law in California. Gave regulatory authority
to the California Department of Justice.
b. SB 898 (Perata, Chapter 777, Statutes of
2002). Enacted the Deferred Deposit Transaction Law
and shifted the responsibility for administering the
law to DOC.
c. 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.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Veritec (sponsor)
Opposition
Black Economic Council
California Council of Churches/California Church IMPACT
California Financial Service Providers Association
Center for Responsible Lending
Community Financial Services Association of America
Contra Costa Interfaith Supporting Community Organization
Dolores Huerta Foundation
Latino Congresso
National Council of La Raza
New America Foundation
Oakland Chapter, NAACP
Consultant: Eileen Newhall (916) 651-4102