BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
AB 1158 (Calderon) Hearing Date: June 29, 2011
As Amended: April 13, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would increase the maximum face value of a check used
to obtain a payday loan from $300 to $500 (which has the effect
of increasing the maximum payday loan amount from $255 to $425,
assuming a payday lender charges the maximum allowable fee).
EXISTING LAW
1. Provides for the California Deferred Deposit Transaction
Law (CDDTL; Payday Loan Law, Financial Code Section 23000 et
seq.), administered by the Department of Corporations (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;
AB 1158 (Calderon), Page 2
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
1. Background and Discussion: The maximum value of a check
AB 1158 (Calderon), Page 3
used to obtain a payday loan was originally set at $300,
when California's first version of a payday loan law was
enacted in 1996. It has remained at that level since that
time. Assemblyman Calderon is sponsoring AB 1158, to
address cost of living issues experienced by consumers who
seek out payday loans, and to make California's payday loan
amounts more competitive with those of other states.
In 2007, DOC issued two reports summarizing implementation of
the 2002 Payday Loan Law bill. In the first of those
reports, DOC included 22 recommendations, which it divided
into those intended to improve its oversight of the industry
(12 recommendations) and those intended to strengthen its
enforcement of the CDDTL (10 recommendations). DOC also
included seven "options for consideration by the
Legislature." One of the seven options is similar to what
is being proposed in AB 1158, as follows: "The current
maximum amount of the payday loan could be increased from
$300 to another amount such as $500 or $750. In comparison,
California's maximum loan amount is less than most other
states. For example, most states with payday loan laws have
limits of $500 or more. Also, the current maximum loan
amount in California may be too low for meeting emergency
cash needs since some borrowers appear to be obtaining
payday loans from multiple payday lenders. In addition, the
CDDTL could be amended to provide that the face amount of
the check shall not exceed that maximum amount plus the fee.
Current law limits the maximum amount of the payday loan to
$300, which includes the maximum fee of $45 (15% of the face
amount of the check). Thus, if the maximum fee is charged,
the borrower only receives $255."
According to available information, nineteen states do not
authorize payday lending or authorize it at such low annual
percentage rates (APRs) that payday lenders do not operate
in those states. Of the states in which licensed payday
lending is conducted, California has the lowest loan cap.
States with the next highest loan caps (Louisiana and
Minnesota) authorize loans of up to $350. Mississippi
authorizes loans of up to $400 (though this amount will
increase to $500 on January 1, 2012, pursuant to a law
enacted in February 2011). All of the other states have
loan caps that are currently $500 or above, or base their
maximum loan amounts on the borrower's gross monthly income.
AB 1158 (Calderon), Page 4
States also vary in the number of loans they allow to be
outstanding to the same borrower at any given time. Some
states cap the maximum number of outstanding loans per
borrower at any one time to two; others, such as California,
do not cap the number of outstanding loans at any given time
(though California prohibits a borrower from obtaining more
than one payday loan at a time from any single lender; see
discussion in Number 2, immediately below).
2. How Many Payday Loans Can A California Borrower Have
Outstanding At Any One Time? California's law is somewhat
vague on this point, but, as discussed below, DOC interprets
existing law as capping at one the number of outstanding
payday loans that an individual may have outstanding from a
single licensee at any given time. Under DOC's
interpretation of the law, an individual in California may
obtain multiple payday loans at the same time, as long as
each loan is obtained from a different licensee.
California's law on this topic (Financial Code Section 23036(c))
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 interested parties interpret that wording
as prohibiting the issuance of a payday loan to a consumer
who already has an existing payday loan outstanding.
Others, including 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
AB 1158 (Calderon), Page 5
representatives of DOC, who looked through old files
retained by the Department from the time period during which
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 such
information was available to DOC 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.
3. Summary of Arguments in Support:
a. The Community Financial Services Association (CFSA)
and California Financial Service Providers' Association
(CFSP), two payday lender industry trade groups, support
AB 1158. "The current payday advance limit is outdated;
it was put into effect nearly 16 years ago when
short-term loans were established in
California...California is one of the most costly states
in which to live, and yet the state has one of the lowest
advance limits in the nation. The $300 limit does not
always meet the needs of families who have run out of
financial resources, especially in these tough economic
times...Raising the transaction limit to $500 to reflect
California's high cost of living will be more responsive
to the real world short-term credit needs of consumers."
b. Academia Advance, a public charter school located in
the Northeast Los Angeles neighborhood of Highland Park,
supports the bill, because it provides an immediate and
effective solution for families struggling to meet their
financial obligations. "AB 1158 expands a viable option.
AB 1158 (Calderon), Page 6
We know that many in our neighborhood see deferred
deposit transactions as a way to obtain short-term
financing that is safe, legal, and regulated."
Brotherhood Crusade works every day with Los Angelenos on a
variety of issues, including financial literacy. The
organization strongly supports legislation that will
assist families in meeting their financial needs. "It is
important to continue to provide the hard working people
of Los Angeles and California with a range of
state-regulated, financial products and protections in
the marketplace."
4. Summary of Arguments in Opposition:
a. The Center for Responsible Lending (CRL) is opposed
to the bill, based on the belief that larger payday loans
will be more damaging to payday loan customers than the
payday loan amounts allowable under current law. CRL
asserts that borrowers do not want or need larger payday
loan amounts. If borrowers wanted larger loans, the
easiest solution would be to take out a second payday
loan from a different payday lender. Yet, a sampling of
data from the 23 largest licensees, which was conducted
by DOC, found that only 2.4 percent of payday loan
customers obtained more than one loan at the same time
from different licensees. If borrower demand for larger
amounts of money were a reality, far more than 2.4
percent of borrowers would have multiple outstanding
payday loans.
CRL also believes that larger loan amounts will lead to
more repeat borrowing. According to CRL, most payday
borrowers are forced to borrow repeatedly. Borrowers who
cannot afford to repay $300 after two weeks will most
certainly be unable to pay back $500.
Larger loans will also lead to a proliferation of payday
lending stores. With higher profit margins, the number
of payday lending stores will grow rapidly. CRL believes
that the real reason the payday lending industry is
seeking a larger payday loan maximum is the opportunity
to increase their profit per transaction. The difference
between a $300 loan and a $500 loan is almost total
profit, because fees on the $500 loan are 67% greater,
but operational costs are relatively fixed.
AB 1158 (Calderon), Page 7
CRL is seeking three amendments to the bill, and would
remove its opposition, if those amendments are accepted
by the author. These amendments include: 1) Impose a
household cap of six payday loans per year; 2) Give
families more time to repay payday loans without having
to borrow again, by extending the minimum loan term to 31
days; and 3) Adopt an ability to repay standard.
b. A coalition of consumer groups, organized labor
organizations, faith-based organizations, and
organizations representing minorities signed onto a joint
letter in which they request the same three amendments as
CRL. These groups write, "We understand that families
living paycheck to paycheck have cash shortfalls and
financial emergencies. But we do not think it is fair
that payday lenders are allowed to gouge families...It
costs a typical borrower $570 to pay back a single $255
loan; with a larger loan, the same borrower would
typically pay at least $950 for a $425 loan."
5. Prior and Related Legislation:
a. SB 365 (Lowenthal), 2011-12 Legislative Session:
Would cap the number of outstanding payday loans
obtainable by a California consumer at one, and would
state the intent of the Legislature to authorize a payday
loan database. Pending in the Senate Banking and
Financial Institutions Committee.
b. AB 377 (Mendoza), 2009-10 Legislative Session:
Contained several provisions to amend the CDDTL,
including a proposal to increase the face value of a
check used to obtain a payday loan from $300 to $500.
That increase was added to the bill after it passed the
Assembly. The bill passed the Senate Banking, Finance
and Insurance Committee with that provision, but failed
to pass the Senate Judiciary Committee.
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.
d. SB 898 (Perata), Chapter 777, Statutes of 2002:
Enacted the Deferred Deposit Transaction Law and shifted
AB 1158 (Calderon), Page 8
the responsibility for administering the law to DOC.
e. 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.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Academia Advance
Brotherhood Crusade
Community Financial Services Association
California Financial Service Providers' Association
Opposition
AARP California
African American Network of Kern County
Alliance of Californians for Community Empowerment
Black Economic Council
BAME Renaissance Community Development Corporation
California Association for Micro Enterprise Opportunity
California Budget Project
California Labor Federation - AFL/CIO
California Reinvestment Coalition
California Rural Legal Assistance Foundation
California Teamsters Public Affairs Council
Catholic Charities of California United
Center for Responsible Lending
Center on Policy Initiatives
City Heights Community Development Corporation
City and County of San Francisco
Coalition for Quality Credit Counseling
Community HousingWorks
Community Legal Services, East Palo Alto
Consumers Union
Council of Mexican Federations
Dolores Huerta Foundation
East Los Angeles Community Corporation
Greenlining Institute
Housing Opportunities Collaborative
Insight Center
JERICHO
Jose Cisneros, Treasurer, City and County of San Francisco
AB 1158 (Calderon), Page 9
Korean Churches for Community Development
Latino Congreso
Los Angeles Metropolitan Churches
LULAC - CA Council 3120
Maximizing Access to Advance our Communities
National American Indican Veterans Inc.
National Asian American Coalition
National Council of La Raza - CA
New America Foundation
Opportunity Fund Northern California
Public Interest Law Firm
San Diego City-County Reinvestment Task Force
Santa Clara County Board of Supervisors
Silicon Valley Community Foundation
The Americas Group
Ubuntu Green
United Way of California
Western Center on Law and Poverty
Consultant: Eileen Newhall (916) 651-4102