California Governor Gavin Newsom signed the Fair Access to Credit Act into law on October 11, 2019. Effective January 1, 2020, the Act will impose several significant changes to the small consumer loan (under $10,000) provisions of the California Financing Law, including rate caps, limits on the maximum/minimum loan term, and new reporting and customer education requirements, each of which will apply prospectively to newly made loans.
Although the Fair Access to Credit Act (AB 539) (the Act) primarily targets payday lenders, its provisions are worded broadly to reach lenders (or purchasers) of small consumer loans (under $10,000) in California. The changes the Act will impose warrant additional diligence by parties to securitization transactions that include small dollar consumer loans to California borrowers, lest any noncompliance trigger the onerous penalties available under the California Financing Law (CFL) for consumer loan violations, e.g., forfeit of interest or voiding of the loan contract.
Consumer installment loans and consumer open-end lines of credit of $2,500 or more but less than $10,000 will be subject to the following new requirements.
Rate Caps/Limit on Charges
The permissible interest rate is capped at an annual simple interest rate of 36% plus the federal funds rate. Charges that would exceed that rate are prohibited, other than an “administrative fee” provided for by the statute. The administrative fee is capped at $75 for loans having a principal balance of more than $2,500 (the cap for loans of $2,500 or less is 5% of the principal amount or $50, whichever is less) and also is subject to frequency limitations, e.g., it is not chargeable on a loan refinancing unless one year has elapsed since the borrower paid any previous administrative fee.
Mandatory Minimum/Maximum Term
Other than open-end loans and certain student loans, the minimum consumer loan term is set at 12 months. Maximum terms are also now specified, e.g., consumer loans of at least $3,000 but less than $10,000 (except for loans secured by real property of a bona fide principal amount of at least $5,000) will have a maximum term of 60 months and 15 days.
Affirmative Reporting/Offer of Consumer Education
All finance lenders must report consumer borrowers’ payment performance to at least one national credit bureau; newly licensed finance lenders not already approved as data furnishers to a consumer reporting agency will have up to one calendar year to obtain such approval. Finance lenders also must offer consumer borrowers, prior to funds distribution, a free credit education program approved by the commissioner of the California Department of Business Oversight, although the consumer need not accept the educational offer.
The above provisions apply to all loans with an original principal under $5,000 and consumer loans of less than $10,000; commercial-purpose loans of $5,000 or more are not subject to these new requirements.
Various provisions that formerly applied only to open-end loans of less than $5,000 will now apply equally to open-end loans with a principal amount of less than $10,000. Those restrictions include the following:
This prohibition upon consumer loan prepayment penalties applies without regard to loan amount, but does not apply to commercial-purpose loans or to real estate–secured loans.
As noted previously, entities that are exempt from the CFL, e.g., banks and insurance companies, are not affected by these changes. However, nonbank lenders should incorporate these new requirements into their compliance programs. And nonbank purchasers of bank-originated loans should either comply with these provisions or confirm that the transaction is structured so as to benefit from the originating entity’s exemption.
With respect to prospective securitizations that include California small dollar loans made by nonbank lenders, the new rate limitations and prepayment penalty restrictions may reduce the profitability of newly securitized pools (holding all other factors equal) as compared to prior securitized pools with a similar concentration of CFL-covered loans. Further, additional due diligence in securitization transactions will be required to ensure the continued enforceability of nonexempt loans. With respect to consumer loans, any nonwillful violation of the CFL, in addition to potential civil money penalties, may carry a statutory remedy of forfeit of all interest and charges on the loan. Willful violations, in addition to potential civil money penalties and incarceration, carry a statutory remedy of voiding the loan contract entirely, eliminating the right of any party to collect or receive any principal, charges, or recompense in connection with the transaction.
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