California law establishes small dollar lending pilot program

State Issues State Legislation Small Dollar Lending Consumer Lending Licensing

On September 30, the California governor signed AB 237, which establishes a pilot program under the California Financing Law with the stated purpose of encouraging lenders to provide affordable small dollar loans to consumers. Significant features of the program include: (i) an increase to the upper limit of a permissible loan, from $2,500 to $7,500; and (ii) the authorized imposition of specified alternative interest rates and charges on unsecured loans of at least $300 and less than $2,500.

Under California’s Pilot Program for Increased Access to Responsible Small Dollar Loans (Pilot Program), licensees who choose to participate in the Pilot Program will be required to apply and pay a specified fee to the Commissioner of Business Oversight (Commissioner). Participating licensees will also be required, among other things, to (i) determine a borrower’s ability to repay the loan, factoring in all verifiable outstanding credit and capping total monthly debt service payments at 50 percent of the borrower’s gross monthly income for loans of $2,500 or less and 36 percent for loans greater than $2,500; (ii) establish terms of 180 days or more for loans with principal balances of at least $1,500, but less than $2,500, upon origination; (iii) establish terms of no less than one year and no more than five years for loans with principal balances exceeding $2,500; (iv) implement policies and procedures for the purpose of answering borrower questions and performing reasonable background checks on any finders associated with the licensee’s participation in the Pilot Program (AB 237 permits approved licensees to use the services or one more finders); and (v) reduce the interest rate of each subsequent loan made to the same borrower by a minimum of one percentage point under certain conditions. In addition, AB 237 allows the Commissioner to charge a licensee certain fees associated with the use of a finder, stipulates examinations requirements for licensees and finders, and establishes deadlines and requirements for the Commissioner when submitting required findings from the Pilot Program. The Pilot Program will run through January 1, 2023.

Governor Brown issued a message in conjunction with his signing AB 237 expressing his concern, among others, that increasing the cap on small dollar loans without also providing stricter regulatory oversight may lead to “unintended consequences.” Governor Brown requested that the state’s Department of Business Oversight “increase their vigilance and more carefully oversee both lenders and finders to ensure their actions comply with existing law.”