Today's Trends in Credit Regulation

What’s New in the CFLL World? The California Pilot Program for Affordable Credit-Building Opportunities
By Elizabeth A. Huber

Effective January 1, 2011, the California Finance Lenders Law has been amended by 2010 Stats, ch. 640, S.B. 1146, by adding The Pilot Program for Affordable Credit-Building Opportunities (the “Program”). If it had a shorter name, it might be called “The Really Small-Dollar Loan Law.” The Program is scheduled to sunset as of January 1, 2015, unless a later enacted bill extends the date, or makes the Program permanent.

The Program is designed to increase the availability of affordable credit-building opportunities to underbanked (or unbanked) individuals in California seeking low-dollar-value loans to help those individuals move into the financial mainstream. This new law is not to be confused with California’s Deferred Deposit Transactions Law (payday lenders law), although both laws appear in the Financial Code, both types of lenders are regulated by the Department of Corporations, and both will likely operate in the same marketplace.

Under the Program, licensees under the California Finance Lenders Law (CFLL) can register with the Department of Corporations (“DOC”) to participate in the Program for a fee. An annual report is required to be filed with the DOC by the licensee, separate from the CFLL licensee’s regular annual report.

The minimum loan amount is $250, and the maximum amount is $2,499, with the maximum term for a loan of up to $499 being 90 days, a maximum term for a loan of $500 but not more than $1,499 being 120 days, and a maximum loan of $1,500 but not more than $2,499 being 180 days. Loans under the Program are unsecured, and the finance charge must accrue on the outstanding principal on the simple interest basis.

The maximum rate is higher than permitted under the CFLL for small dollar loans: for loans of $1,000 or less, the rate is 2-1/2% per month; for loans of more than $1,000, 2-1/6% per month. If the lender makes subsequent loans, the rate is reduced for each by a minimum of 1/12 of 1% per month, provided the subsequent loan is originated at least 180 days after the prior loan is fully repaid, the borrower was never more than 15 days delinquent, and the prior outstanding loan was on the books for at least one-half of its original term prior to repayment. A small administrative fee is permitted, and the delinquency fee permitted is more generous than under the CFLL: for a late payment of at least 7 days, $12; or, for a late payment of at least 14 days, $18. Late payment fees are restricted in the aggregate. Assignment of a loan to a collection agency is prohibited until the loan is at least 30 days past due. The licensee must report the borrowers payment performance to at least one of the national credit reporting agencies. The offer and sale of credit insurance is prohibited. Pre-dispute arbitration or mediation clauses are prohibited.

At the time of application, the licensee must provide the consumer with a written statement of the APR, and that the consumer has the right to rescind the loan by notifying the licensee of the consumer’s intent, and returning the principal advanced by the end of the business day following the date of consummation of the loan. Furthermore, the licensee must offer an approved credit education program or seminar to the borrower, or invite the borrower to an approved credit education program or seminar offered by an independent third party. Although there already is a requirement under the CFLL regulations to determine the borrower’s ability to repay the loan being made, this new law requires specific steps be taken to make that determination, and to retain records proving those steps have been taken.

Why would a CFLL licensee want to participate in such a program? One big reason is the authority to use “finders.” The Program seeks to regulate a lot of what is already going on in the small loan business in California. An approved licensee can use a finder, an entity that at the finder’s place of business brings a licensee and a prospective borrower together for the purpose of negotiating a loan contract. A finder may distribute, circulate, use or publish preprinted brochures, flyers, factsheets, and other written promotional material relating to the loans the licensee may make. The finder may provide written factual information about loan terms, conditions or qualification requirements to prospective borrowers, which information has been prepared or reviewed or approved in writing by the licensee. A finder may discuss the information with a prospective borrower in general terms, and may enter information provided in a preprinted or electronic application form, may assemble credit applications and other materials, and may check on the loan status, but not provide counseling or advice to a prospective borrower, and may not negotiate the terms of the loan. A finder may communicate to the prospective borrower a response that is returned by a licensee’s automated underwriting system, and may obtain the borrower’s signature on documents prepared by the licensee and deliver final copies of the documents to the borrower.

This offers CFLL licensees a way to greatly expand their business. Who are these finders? Exactly the same folks who operate in the marketplace as the licensee – payday loan companies and pawn shops.

Finders who provide counseling, who advise the prospective borrower, who negotiate the price, length or any other loan term between the licensee and the borrower, or who operate at a location other than the finder’s own business location, will not be a “finder” – that person will be a broker, and must be licensed as a broker under the CFLL.

At the time the finder receives or processes an application under the Program, the finder must provide a specific statement on behalf of the licensee to the prospective borrower printed in at least 10-point type. “Your loan application has been referred to us by [Name of Finder]. We may pay a fee to [Name of Finder] for the successful referral of your loan application. IF YOU ARE APPROVED FOR THE LOAN, [NAME OF LICENSEE] WILL BECOME YOUR LENDER, AND YOU WILL BE BUILDING A RELATIONSHIP WITH [NAME OF LICENSEE]. If you wish to report a complaint about [Name of Finder] or [Name of Licensee] regarding this loan transaction, you may contact the California Department of Corporations at 1-866-ASK-CORP (1-866-275-2677), or file your complaint online at” The prospective borrower must acknowledge receipt of the statement in writing.

Fees paid to a finder are limited. There must be a written agreement between the finder and the CFLL licensee, and the loan must close in order for the finder to get paid: $45 per loan for the first 40 loans originated each month at the finder’s location; $40 per loan for any subsequent loan originated during that month at the finder’s location. It is the CFLL licensee’s responsibility to report to the Department of Corporations that it is using a finder, including the payment of a fee, and report the name and location along with the finder’s employee’s name and contact information to the DOC. Under no circumstances may a borrower pay a finder a fee. If the finder violates the provisions, the licensee will be fined.

Although there is quite a bit of record-keeping and reporting needed in connection with the Program, it seems an excellent way for lenders in this marketplace to increase their amount of business and will, no doubt, be popular. Whether the legislature sees fit to extend the sunset date, or make the law permanent, remains to be seen.

Elizabeth A. (Liz) Huber is a partner in the Hudson Cook, LLP’s Orange County Office, and can be reached at 310-686-5050 or by email at Liz writes and speaks frequently on California consumer credit issues.

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