New Requirements for Licensees Making Consumer Loans of $2,500 to $10,000 California Financing Law
Assembly Bill 539 (Limón, stats. 2019, ch. 708) enacted the Fair Access to Credit Act (the Act), operative January 1, 2020. The Act makes the following changes to the California Financing Law (Fin. Code, § 22000 et seq.).
PERMISSIBLE RATES OF CHARGES
For any consumer loan of a bona fide principal amount of at least $2,500 but less than $10,000 (including commercial loans of $2,500 to $5,000), a finance lender may not contract for or receive charges at a rate exceeding annual simple interest of 36 percent per annum plus the Federal Funds Rate.
- The “Federal Funds Rate” means the rate published by the Board of Governors of the Federal Reserve System in its Statistical Release H.15 Selected Interest Rates and in effect on the first day of the month immediately preceding the month during which the loan is consummated.
For loans of $5,000 or more, any administrative fee charged is included in the calculation of charges and subject to the interest rate limitation. For loans in excess of $2,500 but less than $5,000, an administrative fee not to exceed $75 may be charged in addition to the maximum rate of charges.
OFFER OF A CREDIT EDUCATION PROGRAM OR SEMINAR
For consumer loans of at least $2,500 but less than $10,000 (including commercial loans of at least $2,500 but less than $5,000), before disbursing loan proceeds to a borrower, a finance lender must offer a borrower a credit education program or seminar that has previously been reviewed and approved by the Department of Business Oversight (DBO).The credit education program or seminar may be provided by an independent third party. The program or seminar may be provided in writing, electronically, or orally. If provided orally, however, the program must be accompanied by written or electronic materials.
Minimum Topics for Credit Education Program
For consumer loans of at least $2,500 but less than $10,000 (including commercial loans of at least $2,500 but less than $5,000), a licensee must offer a credit education program at no cost to the borrower but may not require a borrower to participate in a credit education program.
Credit education program must cover all of the following topics:
- The value of establishing a credit score;
- Ways to establish a credit score;
- Ways to improve a credit score;
- Factors that impact a credit score;
- Ways to check one’s credit score;
- Ways to obtain a free copy of one’s credit report; and,
- Ways to dispute an error in one’s credit report.
Process for Obtaining Approval
To obtain approval of a credit education program, a licensee must email a summary of the program to the DBO at CEPHelp@dbo.ca.gov.
The request should include a chart identifying the seven statutory topics, a cross-reference to the location of the information in the materials, and a description of the content of the materials for each topic.
|The value of establishing a credit score||Slide No. XX||
Slide No. XX provides the following information to borrowers regarding the value of establishing a credit score:
REPORTING TO A CONSUMER REPORTING AGENCY
For consumer loans of at least $2,500 but less than $10,000 (including commercial loans of at least $2,500 but less than $5,000), a finance lender must report each borrower payment performance to at least one consumer reporting agency that compiles and maintains files on consumers on a nationwide basis.
- A national consumer reporting agency must meet the definition in Section 603(p) of the federal Fair Credit Reporting Act (15 U.S.C. Sec. 1681a(p)).
- A finance lender licensed prior to January 1, 2020 that is not an approved data furnisher to at least one consumer reporting agency must obtain approval by July 1, 2020, and report borrower payment performance to that consumer reporting agency for all loans originated on or after January 1, 2020.
- A newly licensed finance lender has up to one calendar year to obtain approval as a data furnisher and must thereafter report borrower payment performance for all loans originated on or after the lender’s date of licensure.
PROHIBITION ON PREPAYMENT PENALTY
A licensee may not charge a consumer a prepayment penalty on any consumer loan (including commercial loans less than $5,000). (This provision added by AB 539 is not applicable to a loan secured by real estate. Mortgages remain subject to other laws regarding prepayment penalties.)
PERMISSIBLE SCHEDULED REPAYMENT TERMS
For a consumer loan with a principal amount equal to or more than $3,000 but less than $10,000 (including commercial loans of at least $3,000 but less than $5,000), the maximum repayment term is 60 months and 15 days. (This provision is not applicable to a loan of at least $5,000 secured by real estate.)
For a consumer loan with a bona fide principal amount of at least $2,500 but less than $10,000 (including commercial loans of at least $2,500 but less $5,000), a scheduled repayment term may not be less than 12 months.
Several borrower protections in the California Financing Law applicable to open-end loans up to $5,000 have been extended to loans with a bona fide principal amount up to $10,000, including the manner of:
- Calculating charges on unpaid balances;
- Determining the minimum monthly payment;
- Charging for credit insurance; and
- Complying with the prohibition on receiving advance fees.
A licensee making open-end loans should review the changes.
If you have questions, contact the DBO Consumer Services Office at 866-275-2677.