In a sign that the California Department of Business Oversight (DBO) is contemplating new enforcement activity or possibly proposed regulations in the lending space, the DBO sent letters to 20 consumer installment lenders asking for details about their annual percentage rates (APRs) and online lead-generation activities.
Responses to the letters could find their way into a written report that could in turn lead to expanded oversight from the state regulator, including enforcement in the case of unlicensed persons soliciting applicants for finance lenders. “What we’re seeking is additional information that will help us ensure lenders and lead generators do not use unfair, deceptive practices to trap consumers in high-cost loans they don’t want and can’t afford,” DBO Commissioner Jan Lynn Owen said in a statement.
What happened
Expressing an interest in lending practices and online lead generation, the DBO sent letters to 20 lenders licensed under the California Financing Law (CFL), which among other things caps interest rates for consumer loans under $2,500 but does not impose any interest rate limits on consumer loans of $2,500 or more.
Recipients of the letter each made at least 1,000 loans of $2,500 to $9,999 in 2017, originating 29.5 percent of all loans made by CFL licensees in such dollar range. For each of the 20 lenders, 90 percent or more of their loans in this range had APRs of 100 percent or higher, earning a combined $662 million in income.
Taking a closer look at the “effectiveness” of California’s regulatory structure governing the brokering and making of consumer loans ranging from $2,500 to $9,999, the DBO requested recipients provide certain data and information on their lending practices. Specifically, the regulator asked for the number of loans made by the lender, along with data on the highest, lowest, median and average APR of the loans as well as details on how customers submitted their loan applications, whether online, by telephone or at a physical office location.
Questions about lead generators included the number of customers referred or directed to the lender by an online lead generator, whether that lead generator was compensated if the customer successfully obtained a loan, and whether the lender’s underwriting differed in any respect between a customer referred by an online lead generator and other applicants.
For example, the DBO inquired whether customers referred by an online lead generator had their reported income verified or a credit report reviewed.
“We know from our enforcement work that California consumers who want loans with interest-rate limits are steered by online lead generators to lenders who only make high-cost loans that have no rate caps,” Owen said. “Lead generators, especially those who operate online, play a significant and growing role in borrower acquisition. In California, much of the activity is unlicensed and harmful to consumers. This problem needs to be fixed.”
The DBO is also weighing whether to adopt rules that govern how licensees consider borrowers’ ability to repay when making loans, Owen added.
Why it matters
Consumer installment lenders in California should anticipate additional regulation, particularly for midsize loans that are just above the current $2,500 maximum for interest rate caps. Based on the DBO inquiries, online lead generators and consumer lenders also should expect additional oversight of borrower underwriting practices, including how a borrower’s ability to repay a loan is evaluated. The DBO also has taken the position that persons involved in generating loans for finance lenders must be licensed under the CFL in order to be compensated, and the DBO likely will be taking a close look at the arrangements between these lenders and the lead generators.