The DBO Notifies CFL Lenders of New Rate and Other Limitations Imposed by AB 539

The California Department of Business Oversight (DBO) has issued a Release that summarizes the provisions of California Assembly Bill 539 and addresses some implementation issues. This bill was chaptered as Chapter 708 of the 2019 Statutes and is effective January 1, 2020. Our earlier Client Alert discussed the new law in detail.

The key points from the DBO Release include:

• Maximum Rate for Certain Consumer Loans. Consumer loans made under the California Financing Law (CFL) with a principal amount of at least $2,500 but less than $10,000 must not include charges at a rate exceeding an annual simple rate of 36% plus the Federal Funds Rate. The Federal Funds Rate is the rate published by the Federal Reserve in its Statistical Release H.15 and in effect on the first day of the month immediately preceding the month in which the loan is consummated.
• Maximum Rate Also Applies to Smaller Commercial Loans.  The new rate limitation also applies to a commercial loan with a principal amount of at least $2,500 but less than $5,000.[1]
• Administrative Fees. Certain rules regarding the treatment of administrative fees have been clarified. For a loan of at least $5,000 but less than $10,000, any administrative fees charged will be included in the calculation of charges that are subject to the new interest rate limitation. In contrast, for loans of at least $2,500 but less than $5,000, an administrative fee of up to $75 may be charged in addition to the new maximum rate of charges.[2]
• No-Cost Credit Education Program. A CFL licensee must offer a no-cost credit education program (or seminar) to the borrower on any loan that is subject to the new interest rate limitation. The offer of the credit education program also applies to a commercial loan with a principal amount of at least $2,500 but less than $5,000. The licensee may not require the borrower to participate in the credit education program. AB 539 states that the credit education program must be reviewed and approved by the DBO Commissioner. The DBO release identifies seven topics that must be covered by the credit education program, and provides details regarding the process for obtaining the DBO’s approval. Specifically, the DBO asks that the CFL licensee send the DBO an email to a specified email address with a summary of the program that includes a chart identifying the location of the discussion of each topic in the training materials as well as a description of the content of the information regarding each topic.
• Reporting Borrower Payment Performance. Each borrower payment performance on a loan subject to the new interest rate limitation (including a commercial loan) must be reported by the finance lender to at least one national credit bureau.[3] A finance lender licensed prior to January 1, 2020 that is not an approved data furnisher must obtain approval from a national credit bureau by July 1, 2020, and must report borrower payments to that bureau for all loans originated on or after January 1, 2020. A newly licensed finance lender has up to one calendar year to obtain approval from a national credit bureau as a data furnisher and must thereafter report borrower payments to that bureau on all loans originated on or after the lender’s date of licensure.
• Prepayment Penalties. A CFL licensee may not impose a prepayment penalty on any consumer loan (including any commercial loan of less than $5,000). This does not apply to real estate secured loans, although those loans remain subject to other federal and state laws governing prepayment penalties.
• Permissible Scheduled Repayment Terms. A consumer loan with a principal amount of at least $3,000 but less than $10,000 (including a commercial loan of at least $3,000 but less than $5,000) may have a maximum scheduled repayment term of 60 months and 15 days, but this requirement does not apply to real estate secured loans of at least $5,000. A consumer loan with a principal amount of at least $2,500 but less than $10,000 (including a commercial loan of at least $2,500 but less than $5,000) must have a scheduled repayment term of not less than 12 months.
• Open-End Loans. The DBO release notes that several provisions of the CFL that currently apply to open-end loans up to $5,000 now will apply to open-end loans with principal amounts up to $10,000.

In related news, California Assemblymember Monique Limón, the sponsor of AB 539, has warned three online lenders against using partnerships with banks to evade the new interest rate limitation imposed by the bill. Her letters to these lenders state that where the predominant economic interest in the loans is maintained by the finance lender, the finance lender will be treated as the true lender. DBO Commissioner Alvarez jumped on this bandwagon as well, providing a statement published by certain news outlets about supposed true lender concerns. These statements lacked any details regarding plans by any lender, much less any basis for the assertions of plans to evade California law. It remains to be seen how these issues will play out with the DBO and in the courts.

[1] These smaller commercial loans were already treated by the CFL as “consumer loans.” See California Financial Code Section 22204.

[2] CFL lenders can continue to assess administrative fees on loans of less than $2,500 as permitted by California Financial Code Section 22305.

[3] See definition at 15 USC §1681a(p).