BILL ANALYSIS SENATE JUDICIARY COMMITTEE Adam B. Schiff, Chairman 1999-2000 Regular Session SB 834 S Senator Perata B As Amended May 6, 1999 Hearing Date: May 11, 1999 8 Civil Code 3 JMR:cjt 4 {u SUBJECT u} Deferred Deposit Loans {u DESCRIPTION u} This bill would enact the Deferred Deposit Loan Act which would prohibit any person from engaging in the business of making direct deposit loans without first obtaining a license from the Department of Justice. The Act would, among other things: (1) establish requirements and fees for obtaining that license; (2) require each licensee to file a prescribed annual report regarding transactions governed by the Act; (3) limit rates charged for these loans to a $5 fee, plus a maximum interest rate of 36 percent per year; (4) prohibit a licensee from making more than one deferred loan to a consumer at a time and from entering into another loan with the same consumer for at least 30 days after the termination of the first loan. The Act would also impose civil and criminal penalties for a violation of these provisions. {u BACKGROUND u} This bill was previously heard in Committee on April 20, 1999, and was put over at the Committee's request to allow the author to accept suggested amendments to clarify and alleviate concerns regarding some of the provisions. This bill seeks to increase the regulation of deferred deposit loans, which are more commonly referred to as "payday loans." These are small (under $300), short-term loans made by check cashers or other similar businesses. (more) SB 834 (Perata) Page 2 Typically, a borrower writes a personal check for $100-$300, plus a fee not to exceed 15 percent of the face value of the check, payable to the business. The business agrees not to deposit the check until an agreed upon future date, usually the consumer's next payday, anywhere from one day to one month later. In return, the borrower gets cash immediately. These transactions were expressly legalized in California two years ago in SB 1959 (Calderon, Ch. 682, Stats. 1996). Some argue that the check cashing industry has flourished as a result of SB 1959. For example, before the passage of the bill, 1,467 permits had been issued to check-cashing businesses. As of January, the number has more than doubled to 3,150 statewide. (Easy Money, Hard Interest, San Jose Mercury News, p. 1A, March 23, 1999.) {u CHANGES TO EXISTING LAW u} {u Existing law u} governs the services provided by check cashers, including deferred deposit transaction services. "Deferred deposit" is defined as a transaction whereby the check casher refrains from depositing a personal check written by a customer until a specific date, pursuant to a written agreement. (Civil Code 1789.31. All further references are to the Civil Code unless otherwise provided.) {u Under existing law u} , the restrictions placed on a deferred deposit transaction, include: A check casher may defer the deposit of a check for up to 30 days; The face amount of a check may not exceed $300; Limits the fee a check casher may charge to 15 percent of the face value of the check; Limits the fee for the return of a dishonored check to $15; Each deferred deposit shall be made pursuant to a written agreement, containing a statement of the total amount of any fees charged; Prohibits a customer who enters into a deferred deposit agreement from being subject to any criminal penalty for the failure to comply with the terms of that agreement; and Prohibits a check casher from seeking damages under SB 834 (Perata) Page 3 Section 1719 of Civil Code, including treble damages. {u Existing law u} also provides that a check casher may not charge more than the following fees for other transactions as follows: A payroll check or government check, not more than 3 percent if identification is provided, or 3.5 percent without identification, of the face amount of the check, or $3, whichever is greater; and A personal check, not more than 12 percent of the face value of the check. {u Existing law u} also authorizes the Attorney General to bring a civil action for a violation of these provisions. A person who has been injured by a violation of any of the fee provisions applicable to check cashers may bring an action to recover damages and a court may award punitive damages if the court determines by clear and convincing evidence that the breach or violation was willful. (Section 1789.35(i) and (k).) {u This bill u} would remove the references to the direct deposit transactions contained in the above-stated provisions and instead enact the Deferred Deposit Loan Act. {u This bill u} would define "deferred deposit loan" as any arrangement in which a person accepts a check and provides the drawer a portion of the face amount of the check in cash and agrees to hold the check pursuant to a written agreement for a period of days prior to deposit or presentment. {u Licensing requirements This bill u} would prohibit any person from engaging in or offering to engage in the business of making deferred deposit loans without first obtaining a license from the Department of Justice. Before issuing a license, the applicant would have to satisfy the following conditions: That the applicant has not been: (A) convicted of or pleaded nolo contendere to a crime involving dishonesty, fraud, or deceit, if the crime is substantially related to the qualifications, functions, or duties of a person engaged in business in accordance with this title, or (B) has not violated any provision of this title or the rules SB 834 (Perata) Page 4 thereunder or any similar regulatory scheme of a foreign jurisdiction; The applicant has provided a sworn statement that he or she has not violated applicable state law when collecting payment of deferred deposit loans made in this state; A $100 fee for investigation of the application and $200 as an application fee; A surety bond in the amount of $25,000 payable to the department. In addition, in order to maintain the license, the licensee would have to satisfy the following: Payment of the licensee's pro rata share of all costs and expenses reasonably incurred in the administration of the act by the department. The pro rata share would be based on the annual report of total loans submitted by the licensee. The amount would not be less than $250; Maintenance of books, accounts, and records to show compliance with these provisions; Submittal of an annual report with the department, showing a breakdown of each licensee's loan transactions, including, but not limited to, total number of loans and returned checks, average annual percentage rate, and average number of days a check was deferred. {u This bill u} also would allow the Attorney General, a city attorney, or the district attorney to enforce any violation of the licensing provisions. SB 834 (Perata) Page 5 {u Restrictions on the loans u} {u This bill u} would place certain restrictions on deferred deposit loans, including, but not limited to, the following: A licensee may not charge more than a $5 administrative fee for each loan, and charge interest at a rate no greater than 36 percent per annum (defined as a 365-day year), 3 percent per month, or 1 percent per 14-day period, based on the length of the loan; If there are insufficient funds to pay a check, a licensee may charge a fee, not to exceed the lesser of $15 or the fee imposed upon the licensee by the financial institution; Each loan must have a minimum term of no less than two weeks; The loan amount may not exceed three hundred dollars ($300); Prior to entering into the loan, a licensee would be required to obtain proof of income from the consumer. A licensee would be prohibited from entering into a loan with a consumer that exceeds 25 percent of the consumer's net income; After each payment made, the licensee would be required to give to the person making the payment a signed, dated receipt showing the amount paid and the balance due on the loan; Upon receipt of the check, the licensee would be required to immediately stamp the back of the check with an endorsement that states: "This check is being negotiated as part of a deferred deposit loan pursuant to Section 1789.50 et seq. of the Civil Code and any holder of this check accepts the check subject to all claims and defenses of the maker." Before entering into a deferred deposit loan, the licensee would be required to deliver to the consumer a notice regarding their rights and responsibilities; Every agreement for a deferred deposit loan would be required to be contained in a single document, setting forth all of the agreements of the licensee and the consumer with respect to the rights and obligations of each party, including: (1) an itemization of the fees and interest charges to be paid by the consumer, and (2) in at least 14-point bold typeface, a statement that "you cannot be prosecuted or threatened with prosecution in a SB 834 (Perata) Page 6 criminal court to collect this loan." Each licensee would be required to provide notice in each location of a business in letters not less than one-half inch in height that provide: (1) the licensee cannot use the criminal process against a consumer to collect; and (2) the schedule of all interest and fees to be charged on the loans. {u This bill u} also would prohibit a licensee from performing the following acts: Altering the date or any other information on the check; Charging a fee to cash a check in an amount equal to the deferred deposit loan; Using or attempting to use the check provided by the consumer in a deferred deposit loan as security for purposes of any state or federal law; Accepting payment of the deferred deposit loan through the proceeds of another deferred deposit loan provided by the same licensee or any affiliate of the licensee; Making more than one deferred deposit loan to a consumer at a time; Renewing, repaying, refinancing, or consolidating a deferred deposit loan with the proceeds of another deferred deposit loan made by the same consumer. Upon termination of a deferred deposit loan through the payment of the consumer's check by drawee bank, the return of a check to a consumer who redeems it for consideration, or any other method of termination, the licensee shall not enter into another deferred deposit loan with the same consumer for at least 30 days thereafter; provided, that a licensee may extend the term of the loan beyond the due date without charge. {u Remedies This bill u} would provide that a violation of this Act, except as the result of accidental or bona fide error of computation, renders the loan void. {u The bill u} also would provide that a consumer damaged by violation of this title is entitled to recover all of the following: (1) Actual damages. (2) Civil penalties of two thousand dollars ($2,000) per violation. SB 834 (Perata) Page 7 (3) The consumer's reasonable attorney's fees and costs. (4) If a court determined by clear and convincing evidence that a breach or violation was willful, the court, in its discretion, may award punitive damages. (5) Equitable relief as the court deems proper. {u This bill u} would provide that any person, including members, officers, and directors of a licensee, who willfully violates any provision of this title is guilty of a misdemeanor. {u COMMENT u} 1. {u Stated need for legislation u} This bill is sponsored by AARP, Consumers Union and Consumer Action. The sponsors seek to impose greater disclosure and other consumer protections for deferred deposit loans. The sponsors point to the following problems under the current system: SB 834 (Perata) Page 8 {u Payday loan rates are way too high, especially given their low risk u} Despite the claim by the industry that the high fees are necessary due to the risk, the sponsors contend that where data has been collected, payday lenders charge-off only 3 percent of the loans. {u Payday loans become a trap and are not used on a one-time basis u} According to the sponsors, consumers who must borrow money by a deferred deposit loan are in desperate debt. The sponsors contend that the current high rates of these loans make it difficult for many borrowers to repay the loan, thus putting many consumers on a perpetual debt treadmill. Because the borrower cannot repay the loan when due, they often extend the loan and pay the fee again. When this happens repeatedly, many consumers end up paying far more in fees than what they borrowed. The sponsors point to one report that found the average customer makes 11 transactions a year. {u Payday lenders are virtually unregulated in California u} According to the sponsors, unlike other consumer finance lenders (Household Finance or Avco Finance), who also make small loans, payday lenders are virtually unregulated. Other states have more regulation for payday lenders including audits, examinations, bonding, and reporting requirements. {u Consumers are easily deceived by payday loans u} The sponsors assert that these transactions are inherently deceptive. By requiring consumers to turn over a post-dated check, consumers are often coerced or harassed by illegal threats or collection practices. For example, the sponsors allege that they will be threatened with jail for passing a bad check, even though the law specifically says they cannot be prosecuted if the check bounces. 2. {u Should the authorized fee for these loans be lowered u} ? Existing law provides that a check casher may charge a fee for a deferred deposit in an amount not to exceed 15 SB 834 (Perata) Page 9 percent of the face value of the check. (Section 1789.35(d).) As set forth above, the sponsors argue that the existing fees for these loans are extremely high, resulting in $17.50 for every $100 borrowed, up to a maximum of $52.50 for $300. According to the sponsors, when you average these rates out over a year, the annual interest rates for such transactions are staggering: 911 percent for a one-week loan; 456 percent for a two-week loan, and 212 percent for a one-month loan. This bill seeks to limit these rates, by providing that a licensee would not be able to charge more than a $5 administrative fee for each loan, and an interest at a rate no greater than 36 percent per annum. This would result in a 3 percent interest rate per month, or 1.5 percent rate for two weeks. Since the introduction of the bill, the majority of the opponents have argued that they simply cannot operate at any interest rate any less than provided for under current law. On the other side, the author has repeatedly expressed a willingness to negotiate on the fee limitations in the bill since its introduction. In fact, recently the author expressed a willingness to double the fee allowed for in the bill to an interest rate no greater than 72 percent per annum, or six percent per month. Opponents have not accepted this offer of compromise. However, at least one of the opponents, the California Financial Service Providers, have expressed a willingness to move ever so slightly on the fee provision. California Financial Service Providers are willing reportedly to reduce the maximum fee cap to 15 percent of the amount advanced, as opposed to the 15 percent of the face value under existing law. Basically, under this proposal instead of paying $52.50 for a $300 loan a consumer would pay $45, a total savings of $7.50. Notwithstanding this slight movement of the issue, the majority of the opponents from the check cashing industry apparently continue to argue that this product cannot survive in the market place at less than 15 percent of face value. Opponents argue that the cost of setup and administration, together with the high losses associated SB 834 (Perata) Page 10 with these loans, make that an economic fact of life. In response to these positions, the sponsors point to Colorado, one of the few places in the country that collects actual data from the industry, where payday lenders charged-off only three percent (3%) of the loans made from 1996-1997. (Post-Dated Check Cashers Supervised Lenders' Annual Report, State of Colorado Department of Law, Office of the Attorney General, 1996-97.) Similarly, the sponsors assert that California banks charged off 2.7 percent of credit card debt in those same years, while having an APR of 15 to 22 percent. Thus, the sponsors state that the industry's claim of risk and loss simply does not stand up to close scrutiny and does not justify the high rates charged. WOULD THE AUTHOR'S SUGGESTED RATE OF 72 PERCENT PER ANNUM BE A REASONABLE COMPROMISE? 3. {u Opponents claim that bill would deny consumers a needed service u} Opponents claim that the supporters of SB 834 want this bill for no other reason than to remove the consumers' option of obtaining a cash advance on their next paycheck. According to the opponents, while the supporters believe they are helping the consumer, they would actually be harming them and the economy. Opponents argue that current law allows each month for more than 600,000 hard-working Californians, with an average household income of between $30,000 - $40,000, a viable solution to their short-term financial needs. Opponents contend that this bill would, in effect, deny these consumers that basic right. Opponents further contend that this bill is anti-consumer and anti-business. They argue that thousands of jobs will be lost and hundreds of thousands of consumers will be left with no alternative to their short-term financial needs. Opponents also contend that they have helped consumers who could have otherwise found themselves subject to steep financial penalties and even criminal prosecution, resulting from bounced checks. Supporters, however, state that consumers do have other SB 834 (Perata) Page 11 options, especially if one accepts the opponents' statement that their average client has a household income of between $30,000 and $40,000. Supporters contend that banks and other depository institutions offer customers overdraft protection, credit cards, and advances on direct deposit payroll checks which can be utilized for modest amounts with little "red tape." They further contend that these alternatives are far less expensive and avoid the credit and legal problems associated with writing bad checks. Support: Public Counsel Law Center; California Bankers Association; California State Employees Association; District Attorney of Ventura County; Strategic Actions for a Just Economy; California Credit Union League; Los Angeles Center for Law and Justice; Consumer Attorneys of California; Merced County Community Action Board; California Public Interest Research Group (CALPIRG); Friends Committee on Legislation; Consumer Credit Counseling Service of Inland Empire; Consumer Credit Counseling Service; Greenlining Institute; Gray Panthers of Central Contra Costa County; Los Amigos of Orange County; East San Jose Community Law Center; Consumer Credit Counseling of Mid-Counties; California Reinvestment Committee; League of African American Voters; California Community Economic Development Association; Human Services Network of Los Angeles; California Labor Federation, ALF-CIO; Consumer Credit Counseling Service of the East Bay; Lawyers' Committee for Civil Rights of the San Francisco Bay Area; Equal Rights Advocates; Service Employees International Union; and numerous individuals Opposition: Cash Plus; Cash 1; Cash Cow Financial; Urgent Money Service; Cash Check; Area Check Cashing Centers; Advance America; Nix Check Cashing; California Financial Service Providers; Gold X Financial Services, Inc.; and numerous individuals {u HISTORY u} Source: AARP; Consumer Action; Consumers Union SB 834 (Perata) Page 12 Related Pending Legislation: None Known Prior Legislation: SB 1959 (Calderon, Ch. 682, Stats. 1996) **************