California Legislature Advances Changes to Financing Law

Financial Services Law

A closely watched bill that would have a significant impact on the financial services industry continues to advance through the California Legislature, although a second measure that would regulate lead generators has stalled.

Assembly Bill 539 (also known as the Fair Access to Credit Act), which would amend the California Financing Law (CFL) to set a 36% cap (plus the federal funds rate) on loans of $2,500 or more but less than $10,000, already passed the state Assembly, cleared the Senate Judiciary Committee and could hit the full Senate floor in the coming weeks; Assembly Bill 642, on the other hand, failed to pass the Committee and must wait for another vote.

What happened
Under current law, a finance lender that lends up to $2,500 is authorized to contract for and receive charges at certain maximum rates based on the loan amount.

Introduced in February, AB 539 would amend the CFL to set a 36% cap (plus the federal funds rate) on loans of $2,500 or more but less than $10,000.

In addition, AB 539 would require finance lenders making loans subject to these provisions to, among other requirements, report each borrower’s payment performance to at least one nationwide consumer reporting agency and to also offer, at no cost to the borrower, a credit education program or seminar that has been previously reviewed and approved by the commissioner, in accordance with specific requirements.

The Fair Access to Credit Act would also prohibit a lender from charging, imposing or receiving any penalty for the prepayment of a loan under the CFL.

AB 539 passed the Assembly in May and advanced first through the Senate Banking and Financial Institutions Committee and then the Judiciary Committee, where lawmakers made a few tweaks. The bill was amended to add the requirement for lenders to report a borrower’s payment performance to at least one nationwide consumer reporting agency.

In addition, lawmakers added a requirement that lenders must offer the borrower – at no cost – a credit education program or seminar, whether in writing, electronically or orally (albeit accompanied by written or electronic materials). Covered topics must include the value of establishing a credit score, ways to establish and improve a credit score, factors that impact a credit score, ways to check a credit score, how to obtain a free copy of a credit report, and ways to dispute a credit report error.

The bill is now pending in the Senate Appropriations Committee but could move to the Senate floor for a vote before the end of the term on September 13, 2019.

While AB 539 continues to make its way through the legislature, another measure relating to the CFL failed to pass the Senate Banking and Finance Committee. Assembly Bill 642 would amend the CFL to revise the definition of a broker subject to regulation by the Department of Business Oversight.

The bill would add “anyone who is engaged in the business of performing specified acts in connection with loans,” including “transmitting confidential data about a prospective borrower to a finance lender with the expectation of compensation in connection with making a referral, making a referral under an agreement with a finance lender that meets certain criteria involving confidential data,” as well as participating in the preparation of loan documents, and counseling, advising or making recommendations to a prospective borrower about a loan based on confidential data.

Exempt from the proposed legislation would be persons performing the specified acts five or fewer times in a calendar year in connection with a consumer loan and the act of performing administrative or clerical tasks in support of the performance of a licensed broker.

Covered brokers would be subject to all the requirements of the CFL, from licensing to disclosures to substantive duties.

Similar to AB 539, AB 642 cleared the Assembly in May and was referred to the Senate Banking and Finance Committee. However, the bill was voted down by the committee. While it was re-referred with amendments, passage appears unlikely, as the Banking and Finance Committee is on recess until August 12, 2019.

To read AB 539, click here.

To read AB 642, click here.

Why it matters

AB 539 if signed into law in its present form would have a significant impact on the California financial industry. In this regard, there are a number of lenders operating under the CFL and extending loans to credit-challenged borrowers in amounts of $2,500 or more and at rates in excess of 36% (plus the federal funds rate). If AB 539 is adopted, it is unclear that these lenders would increase loan amounts to $10,000, given the credit risk presented, and this source of credit for certain borrowers may disappear. (AB 539 would not apply to banks and other financial institutions that are not licensed as finance lenders under the CFL, but it is uncertain whether they would fill this void, as they generally are not extending such loans today.) We also note that, although intended to apply to consumers, as drafted the limits would apply to “any” loan of at least $2,500 but less than $10,000, and so could also apply to some small-business loans.

AB 642 again currently is not moving forward, and may be of less consequence, as the California Department of Business Oversight has interpreted the term “broker” as used in the CFL broadly, and AB 642 would primarily impact lead generators operating on the Internet, and benefit the industry by clarifying the scope of the term “broker.”