Installment Consumer Lending Falls in California, DBO Reports

Financial Services Law

The California Department of Business Oversight (DBO) released a pair of reports on installment consumer lending for 2017, finding that the combined dollar amount of installment consumer loans by nonbanks in the state fell almost 10 percent over the prior year.

Further, the combined dollar amount of installment loans made by DBO-regulated lenders was down almost 10 percent from 2016, the regulator revealed, although the total number of loans rose slightly.

What happened

Pursuant to the California Financial Law (CFL), lender and broker licensees are required to submit annual reports to the DBO, and the DBO in turn must compile the data for its own public annual report, which was issued in June 2018 and addresses the operation of consumer finance lenders licensed under the CFL.

As compared with 2016, the combined dollar amount of installment consumer loans by nonbanks in California dropped 9.9 percent in 2017, totaling $37.2 billion as compared with $41.3 billion the prior year. However, the number of loans actually increased from year to year—1,484,257 in 2017 from 1,473,378 in 2016, or less than 1 percent.

The largest category of consumer loans by numeric volume was found in the $2,500 to $4,999 range, where more than half (58.8 percent) had an annual percentage rate (APR) of 100 percent or higher. Both the total number of loans and the dollar amount of the triple-digit APR loans increased about 5 percent from 2016.

In the next category, the $5,000 to $9,999 range, triple-digit APR consumer loans dropped as compared with the prior year. Just 30,784 loans were issued in this range, a decrease of 23.9 percent, while the total principal amount went down 23.7 percent to $170.6 million.

Overall, online lending accounted for a majority of unsecured consumer loans of $2,500 or higher, the DBO found—58.7 percent of the total number and 50.4 percent of the aggregate principal amount. The strength of online lending in this particular category is likely due to the fact that while the CFL limits interests rates on consumer loans under $2,500, it does not provide a cap on interest rates with respect to consumer loans of $2,500 or more.

The number of secured auto loans rose last year, up 4.5 percent from 2016 (112,983 from 108,080). However, the combined principal amount for those same loans fell just over 3 percent, from $433.2 million to $419.5 million. For secured auto loans in the $2,500 to $4,999 range, loans with triple-digit APRs made up 61.6 percent of the total number and 59.2 percent of the aggregate principal amount.

A total of 20,280 repossessions were conducted in connection with auto title loans last year, a slight decrease over the 20,648 reported in 2016 (or 1.8 percent).

“Triple-digit APR lending dropped for loans of some sizes, but continued to show a disconcerting dominance in the $2,500 to $4,999 range, the largest category of lending by volume,” DBO Commissioner Jan Lynn Owen said in a statement. “I hope the data in this report help inform the public policy debate over how to increase California consumers’ access to lower-cost capital.”

The DBO also released data on the state’s Pilot Program for Responsible Small Dollar Loans, which aims to increase consumer access to loans of less than $2,500. Reporting on the three-year period from 2015 to 2017, the regulator revealed that the number of lenders participating in the program has doubled since 2015, while the number of finders (who connect borrowers with lenders) almost tripled over the past three years.

Over the same time period, the number of loans under $2,500 jumped 18.2 percent to 230,855, and the annual total principal of the loans also grew, rising 15 percent from $225 million in 2015 to $258.9 million in 2017.

Breaking down the data by dollar amount, the report found that loans in the $500 to $999 range had higher APRs when finders were used (93.6 percent of the loans had APRs of 50 percent or higher when finders were used versus 64.4 percent when they were not used). The opposite was true for loans in the $1,000 to $1,499 range, where 28.5 percent of loans had APRs of more than 50 percent when finders were not used as compared with 11.1 percent when they were used.

To read the CFL report, click here.

To read the RYSL report, click here.

Why it matters

The state law-mandated reports provide interesting data about trends in the small-dollar lending industry and demonstrate the increasing use of online lending by consumers. More important, the reports—and the attention paid to those lenders providing the data–—could lead to additional regulation and oversight by agencies such as California’s DBO or the New York Department of Financial Services, which will soon issue a report about online lending in the state.