United States: California Regulator Focuses On Small Balance Consumer Lenders (And Indirectly On Online Lead Generators)

Last Updated: October 18 2018
Article by Jonathan D. Jaffe, Evan Sippel-Feldman and Melissa L. Richards

The California Department of Business Oversight (DBO) is focusing its attention on lenders offering triple-digit APR small-dollar loans.

Via a letter, the DBO recently issued formal information requests to 20 high-volume lenders licensed under the California Financing Law (CFL). The selected lenders all reported, in their 2017 annual reports filed with the DBO, that they made at least 1,000 small-dollar consumer loans ranging in size from $2,500 to $9,999. Of those loans, 90% carried APRs equal to or greater than 100%.

The DBO data collection focuses on these lenders' relationships with online lead generators and on the lenders' underwriting practices. DBO Commissioner Jan Lynn Owen has stated, "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."

The DBO 's requests evidence its concerns that lenders might employ unfair, deceptive or abusive tactics to steer consumers to their products offered through online lead generators. The DBO believes that consumers might take loans they will have difficulty repaying. Thus, the data collection likely is a prelude to the DBO promulgating new regulations to oversee lead generators and obligating lenders to consider a borrower's ability to repay loans between $2,500 and $9,999. The selected lenders have until early November to submit their data to the DBO.

The information that the DBO is asking for includes:

  • Number of small-dollar, high APR loans made;
  • Highest, lowest, median and average APRs for those loans;
  • Number of unique individual customers obtaining the loans;
  • Number of customers who submitted their applicants online, over the phone or in person; and
  • Number of customers referred by an online lead generator.

The DBO is also requesting additional data about the lead generators. Specifically, the DBO is collecting information on how many of the online lead generators were compensated only if the referred customer obtained a loan. It is also noteworthy that DBO has viewed online lead generators as "brokers" that are subject to broker licensing under the CFL when compensated by CFL-licensed lenders for loans that the lenders obtain through the lead generators.

Underwriting practices are also under the DBO's scrutiny. The DBO is asking if there are variations in the underwriting processes for customers using an online or telephone platform versus those used for customers appearing in-person at a storefront location.

Additionally, the DBO is investigating the due diligence that lenders undertake before issuing the loans. For example, the DBO is interested in whether the lenders obtained credit reports, verified reported income, relied exclusively on self-reported information or relied on information provided by online lead generators for their underwriting. The CFL already requires that licensees take into consideration the financial ability of the borrowers to repay the loan and prohibits licensees from making unconscionable loans.1 The DBO indicated that it is considering whether to adopt additional rules that govern how licensees consider borrowers' ability to repay when making loans.

Finally, the DBO is requesting data on the number of customers who sought loans of less than $2,500 and whether those customers were treated differently than customers who were seeking larger loans.

This investigation is part of California's continuing focus on the financial services industry. California recently also enacted a law requiring a commercial lender to make disclosures to borrowers seeking smaller balance loans similar to those disclosures required by TILA and Regulation Z.

Footnote

1 California Financial Code §§ 22302 and 22714; California Code of Regulations, Tit. 10, § 1452.

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