California Payday Loan Laws and Regulations

Consultant: California Subprime B2C Lending Landscape

Again, California’s subprime lending environment is complex and heavily regulated, presenting lenders with both challenges and opportunities.

While California payday loans (governed by the Deferred Deposit Transaction Law (DDTL) remain a segment of the market, it’s crucial for lenders to understand the broader landscape, including other small-dollar loan products and the evolving regulatory scrutiny.

We continue to discuss California payday loan lending under the DDTL and other relevant considerations.

Payday Loans (DTTL)

• Maximum Loan Amount: $300 per loan (Financial Code Section 23035). 
  
   
• Maximum Fee: 15% of the face amount of the check (e.g., $45 on a $300 loan), resulting in an effective APR often exceeding 400% for short terms (Section 23036). It is vital to clearly disclose the APR in all marketing and loan documents, emphasizing the cost of credit.
• Loan Term: Up to 31 days (Section 23035).
• Rollover Prohibition: Rollovers are prohibited; each transaction must be a new loan (Section 23037). This restriction is in place to prevent debt trapping, but it can also lead to borrowers seeking multiple loans from different lenders. 
  
   
• Written Agreement: A written agreement outlining terms and fees is required (Section 23035). This agreement must be clear, concise, and in a language the borrower understands. 
  
   

Beyond Payday Loans: The Rise of Installment Lending and Other Products

While payday loans remain regulated under the DDTL, the trend in California and nationally has been towards installment loans.

These loans, often with larger principal amounts and longer repayment terms, fall under the California Financing Law (CFL) or other regulations.

Many subprime lenders are diversifying their portfolios to include these products. Key considerations include:

• California Financing Law (CFL): The CFL licenses and regulates non-bank lenders offering installment loans. It imposes restrictions on interest rates, fees, and loan terms. Lenders must be aware of the specific requirements and licensing procedures under the CFL.  
  
   
• Other Small-Dollar Loan Products: Consider offering other products, such as personal loans or lines of credit, while adhering to relevant regulations.
• Credit Reporting: Accurate and responsible credit reporting is essential. While subprime borrowers have less-than-perfect credit, lenders should still report loan activity to credit bureaus to help borrowers rebuild credit (when applicable) and manage risk. [Reporting to the top 3 credit reporting bureaus is challenging for our industry. However, there are several CRAs devoted to our demographic. Reach out to me for more info: Jer@theBusinessOfLending.com.

Regulatory Scrutiny and Compliance

The subprime lending industry is under intense regulatory scrutiny at the state and federal levels.

California is particularly active in consumer protection, so lenders must prioritize compliance.

• AB 2953 and its Impact: While AB 2953 did not directly affect payday loan regulations under the DDTL, it demonstrates the California legislature’s focus on consumer lending practices. Lenders should stay informed about any future legislative changes.
• Consumer Financial Protection Bureau (CFPB): Yes! The current administration is upending the CFPB! Your task? Stay up to date via our NewsLetter.

  The CFPB has also been active in regulating small-dollar lending.

• Lenders must be aware of and comply with federal regulations related to disclosures, fair lending, and debt collection practices.
  
   
• Licensing and Examinations: Ensure all required licenses are in place and be prepared for regulatory examinations.
• Compliance Management System (CMS): Implement a robust CMS to monitor and manage compliance risks. This includes policies, procedures, training, and audits.

Actionable Steps for Subprime Lenders in California

1. Diversify Product Offerings: Explore offering installment loans and other credit products beyond payday loans to meet evolving consumer demand and potentially mitigate regulatory risk.
2. Prioritize Compliance: Invest in a strong compliance program to ensure adherence to all applicable state and federal laws and regulations.
3. Enhance Transparency: Clearly disclose all loan terms and fees to borrowers, emphasizing the APR and the total cost of credit. Use plain language and avoid legalese.
4. Responsible Lending Practices: Implement robust underwriting procedures to assess borrowers’ ability to repay loans. Avoid lending practices that could lead to debt trapping.
5. Focus on Customer Service: Provide excellent customer service and work with borrowers struggling to repay their loans.
6. Stay Informed: Keep abreast of all legislative and regulatory developments related to the subprime lending industry in California. Consult with legal counsel as needed: Newsletter.
7. Data Analytics: Leverage data analytics to understand borrower behavior, manage risk, and improve lending practices.

Statistics and Market Insights (Examples – Further Research Needed)

• Research and include statistics on the size and demographics of the subprime lending market in California.
• Analyze trends in loan demand and product preferences.
• Investigate default rates and other key performance indicators for subprime lenders in the state.

Subprime lenders can navigate the challenges and find opportunities in the California market by understanding the regulatory landscape, diversifying product offerings, and prioritizing compliance.

Continuous monitoring of the evolving regulatory environment is crucial for long-term success.