BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 365 (Lowenthal) Hearing Date: April 27, 2011
As Amended: April 13, 2011
Fiscal: No
Urgency: No
SUMMARY Would state the intent of the Legislature to enact
legislation authorizing the Commissioner of Corporations to
contract with a third party to implement a deferred deposit
transaction database (payday loan database), as specified, and
would make it a violation of the California Deferred Deposit
Transaction Law (Payday Loan Law) for a licensee to extend a
payday loan to a borrower who already has a payday loan
outstanding.
DESCRIPTION
1. Would state the intent of the Legislature to enact
legislation authorizing the Commissioner of Corporations
(commissioner) to contract with a third party to implement a
common database with real-time access through an Internet
connection for Payday Loan Law licensees, to aid in the
enforcement of the Payday Loan Law.
2. Would revise the Payday Loan Law to provide that a licensee
may 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 deferred deposit
transaction for the same customer is in effect with any
licensee (language in bold type would be added by the bill).
EXISTING LAW
3. Provides for the Payday Loan Law (Financial Code Section
23000 et seq.), administered by the Department of
Corporations (DOC). The Payday Loan Law:
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
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$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. 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.
c. Provides that licensees who violate the Payday Loan
Law are subject to suspension or revocation of their
licenses, and that violations of the Payday Loan Law are
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subject to civil penalties of $2,500 per violation.
COMMENTS
1. Background and Discussion: Before recent amendments, this
bill would have authorized the creation of a database, such
as the one referenced in the intent section of the current
version of the bill. As the earlier version of the bill was
being debated, a question arose regarding the provision of
the Payday Loan Law that prohibits simultaneous outstanding
payday loans.
This bill's author and former sponsor introduced SB 365, based
on a belief that the Payday Loan Law prohibits a licensee
from making a payday loan to a borrower who has another
payday loan outstanding from any licensee. 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 deferred deposit
transaction for the same customer is in effect." Some
consumer groups shared the view held by the author and
former sponsor.
In contrast, 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 Payday Loan Law, 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."
In an effort to resolve the debate, staff consulted with
representatives of DOC, who looked through old files
retained by the Department from the time period during which
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the 2002 Payday Loan Law bill was negotiated. According to
DOC staff, the record is clear that that both parties agreed
licensees would not be required to ask potential customers
whether they had payday loans outstanding from different
licensees, before extending loans to those individuals. DOC
staff also indicate that the Department would not have
consciously agreed to a provision it could not enforce, and
that it could not enforce a "one loan at a time, regardless
of licensee" provision, because it would not have access to
the information needed to enforce such a provision. The
concept of how the law might be interpreted if a payday loan
database ever became available was reportedly not discussed
by the group that negotiated the 2002 law.
Because the only interpretation of the law that can reasonably
be enforced by DOC at the present time is the interpretation
favored by industry, DOC would look to the Legislature to
change the Payday Loan Law, if the Legislature wanted DOC to
enforce a broader "one loan at a time, regardless of
licensee" rule. The current version of SB 365 makes that
change, and states legislative intent to authorize the
creation of a database, which will allow DOC to enforce this
broader interpretation.
2. The Concept of a Database is Not New: Financial Code
Section 23057 required the commissioner to submit a report
on December 1, 2007 regarding implementation of the Payday
Loan Law. On March 10, 2008, the DOC released two reports
to fulfill its requirements under Section 23057. 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 Payday Loan
Law (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
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loans, rollovers, and charges. Although a database has been
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."
3. Is a database bill likely benefit only a single company?
Although the current version of SB 365 does not propose to
create a payday loan database, the author's desire to pursue
such a database (as indicated by the bill's intent language)
does prompt the question, "Is a database bill likely to
benefit only a single company?"
A single company (Veritec; the former sponsor of this bill)
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 a California
database, including Teletrack, Qfunds, Microbilt, ODI, Tom
Sawer, and Gentry Systems.
4. Summary of Arguments in Support: In carrying SB 365, the
author is seeking to clarify the intent of existing law by
limiting borrowers to one deferred deposit transaction at a
time, rather than to one transaction per licensee at a time,
and to allow this interpretation to be enforced by DOC.
"Under the one loan per licensee interpretation, a borrower
could technically have one payday loan outstanding from each
of the 2,187 licensees in California. I am convinced this
is not the intent of existing law. I also believe it is
important to give the Department of Corporations the tools
they need to enforce the law, by implementing a statewide
database that will provide accurate information in
real-time."
5. Summary of Arguments in Opposition:
a. Two trade associations representing the payday
lending industry, including the Community Financial
Services Association of America (CFSA) and the
California Financial Service Providers Association
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(CFSP) oppose the bill on several grounds. First,
they believe that the provision of the bill which
limits consumers to one outstanding payday loan at a
time will artificially limit access to short-term
loans that help consumers avoid more costly and
credit-damaging alternatives like bounced checks,
non-sufficient funds fees, and late payment penalties.
At a time when consumers are already struggling to
obtain access to credit, the industry trade groups
believe that it would be ill-advised to restrict the
use of a legitimate product, which is highly regulated
in California. If someone can't get the money they
need from a licensed payday lender, their need for
money doesn't simply disappear. They will turn to
other sources, which may be unlicensed or unsafe.
Second, the bill does nothing to address unregulated
Internet lending, which the industry groups believe to
be one of the most pernicious problems facing
consumers in need of short-term credit at the present
time. Unlicensed Internet lenders routinely 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.
Third, CFSA and CFSP question the need to incur the
costs associated with a database, the additional
administrative layer to the loan process that a
database would represent, and their customers'
dissatisfaction with a system for which there is no
demonstrated need in California. Customers of trade
association members have reportedly told their lenders
that they would overwhelmingly oppose having their
payday loan transactions monitored by a government-run
database. The customers are concerned about privacy,
government intervention in their finances, use of
their personal data, and potential security issues.
Finally, in its current form, Section 2 of the bill
imposes a potentially impossible duty upon licensees,
because there is no practical mechanism by which a
licensee can determine whether a prospective client
has outstanding transactions with other licensees.
The California Hispanic Chamber of Commerce and the
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California Asian Pacific Chamber of Commerce believe
that the bill creates a duplicative and unnecessary
infrastructure for the payday lending industry and are
concerned about the privacy issues the bill would pose
through establishment of a payday loan database. As
concerned as these organizations are about business,
they are also concerned with community safety. If a
database is established, millions of customer records
and personal information could be at risk.
b. The Center for Responsible Lending (CRL) and
the California Reinvestment Coalition (CRC) oppose the
bill, unless it is amended to adopt an annual six loan
limit per borrower household. If amended in this
manner, CRL and CRC would support the bill. CRL and
CRC also observe that implementing a costly new
database to enforce the one-loan-at-a-time limit is
not warranted, given the extremely limited incidence
of borrowers taking out more than one loan at a time.
DOC data indicate that only 2.4 percent of payday
borrowers took out more than one loan simultaneously
from multiple lenders.
6. Prior and Related Legislation:
a. AB 1158 (Calderon), 2011-12 Legislative
Session: Would increase the maximum amount of a check
used to obtain a deferred deposit transaction from
$300 to $500. Pending in the Assembly Banking &
Finance Committee.
b. SB 1959 (Calderon, Chapter 682, Statutes of
1996): Enacted the earliest version of a payday
lending law in California. Gave regulatory authority
to the California Department of Justice.
c. SB 898 (Perata, Chapter 777, Statutes of
2002). Enacted the Deferred Deposit Transaction Law
and shifted the responsibility for administering the
law to DOC.
d. 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.
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LIST OF REGISTERED SUPPORT/OPPOSITION
Support
None received
Opposition
California Asian Pacific Chamber of Commerce
California Financial Service Providers' Association
California Hispanic Chamber of Commerce
Community Financial Services Association of America
Latin Net
Los Angeles Metro Hispanic Chamber of Commerce
Consultant: Eileen Newhall (916) 651-4102