OLA Comment Letter on CA PRO 04/08 – CDDTL Report Regulations

June 23, 2015

 

Commissioner Jan Lynn Owen
California Department of Business Oversight
1515 K St., Suite 200
Sacramento, CA 95814

RE:     PRO 04/08 – CDDTL Report Regulations

Dear Commissioner Owen:

The Online Lenders Alliance (OLA) is pleased to submit this response to the California Department of Business Oversight’s (the Department) request for comment related to the Department’s third proposed changes to the California Deferred Deposit Transaction Law (CDDTL).[1]  We appreciate the opportunity to comment in response to the Department’s proposed rulemaking to amend various provisions of the CDDTL.

OLA is an association of online Internet lenders, many of whom qualify as deferred deposit originators under California law because they offer, process, make, service, and collect deferred deposit transactions for California customers.  OLA members conduct deferred deposit transactions entirely through remote, online channels, without any face-to-face contact with the customer.  While OLA agrees with the goal of updating the CDDTL, certain proposed amendments raise issues of particular concern to online lenders, and our comments focus on those issues.

We understand that the Department is considering various amendments to its CDDTL, including three changes of particular importance to online lenders: (1) the prohibition of electronic fund transfers, including Automated Clearing House (ACH) transactions, remotely created checks, remotely created purchase orders, and credit cards in a deferred deposit transaction for any purpose; (2) a section specifically addressing Internet deferred deposit transactions; and (3) the establishment of a common database through which all deferred deposit transactions would be entered in real-time by deferred deposit originators and which would be used by deferred deposit originators to determine whether a consumer is eligible for a deferred deposit transaction.[2]

1. Prohibiting the Use of Electronic Fund Transfers in a Deferred Deposit Transaction

The Proposals

The Department is proposing to permit a deferred deposit originator to originate a deferred deposit transaction only if:  (a) the customer holds a checking account in his or her name; (b) the funds in the checking account are owned by the consumer; (c) the customer provides a “personal check” drawn upon his or her checking account to a deferred deposit originator, and (d) the customer is the maker and signer of the personal check.[3]  The proposal further provides that a “personal check” does not include an electronic fund transfer or other electronic debit or credit to the customer’s checking account.[4]  In addition, a deferred deposit originator is prohibited from using a customer’s account number to prepare, issue, or create a check on behalf of the customer.[5]

The Department is also proposing to limit the forms of payment that a deferred deposit originator may accept.  The proposal would require a deferred deposit originator to permit a customer to repay a deferred deposit transaction in cash or by depositing or presenting for payment the customer’s personal check that secures the transaction.[6]  Specifically, the proposal would prohibit a deferred deposit originator from:  (a) obtaining authorization from a customer for the originator or a third party to prepare, issue or create a check or other payment order to be drawn upon the customer’s checking account; or (b) including in any agreement language authorizing the originator or a third party to collect payment using any other form of payment or payment instrument.[7]

1. The Prohibition of Electronic Payments Would Eliminate Online Deferred Deposit Lending

As stated in the Invitation for Comments, these provisions, taken together, effectively prohibit the use of any electronic funds transfers, including Automated Clearing House (ACH) transactions; prepaid cards; debit cards; remotely created checks; remotely created purchase orders; and credit cards in a deferred deposit transaction for any purpose, including in the origination, funding or repayment of a deferred deposit transaction.

Online lenders offer consumers speed and convenience, and online lenders depend on the ability to fund and service loan transactions through the Internet environment.  Internet delivery of goods and services depends on the ability of consumers to make payments electronically – without electronic payments any Internet merchant would be hard-pressed to survive.  Cash and non-electronic check transactions simply do not work and have no place in the Internet environment characterized by fast-paced transactions between remote parties.  Requiring online lenders to obtain a physical check as security, and to obtain repayment through customer cash payments or by presenting the customer’s physical check for payment, is antithetical to the whole foundation of Internet commerce.  That the forward-thinking State of California – the cradle of the Internet economy – should be considering a proposal so fundamentally hostile to Internet commerce is all the more surprising.

If the proposal were to be made final, consumers would be adversely affected because they could not provide cash or a physical check to online lenders, and thus would be effectively limited to obtaining deferred deposit transactions from physical storefront locations.  As more consumers seek faster and more convenient lending and payment options, the elimination of online lending by regulatory fiat in California will likely result in less choice, higher costs, and greater burdens and inconvenience for California consumers.

We believe that the proposed approach is fundamentally inconsistent with the Department’s efforts elsewhere in the proposal to regulate deferred deposit loans originated over the Internet in Section 2030.26.  That section would be rendered meaningless if Internet lenders cannot do business in California because they can only obtain repayments from customers in cash or through presenting personal checks used to secure the loans.

We also note that the Department’s proposal completely disregards the extensive consumer protections that already exist for electronic fund transfers, including ACH and debit card transactions (Electronic Fund Transfer Act and Regulation E), credit cards (Truth in Lending Act and Regulation Z), and other forms of payment.  In fact, the proposed approach is inconsistent with efforts by the U.S. government and various payment systems operators to create a more robust, efficient, and consumer-friendly payment system throughout the United States.  Prohibiting loan repayments via regulated electronic fund transfers, debit cards, credit cards, and other electronic payment methods is contrary to modern banking and emerging payments trends.

iii.  The Terminology Related to the “Personal Check” Creates Ambiguities

The proposal also makes it unclear under what circumstances a deferred deposit transaction can be originated.  The proposal does not define what constitutes a “personal check.”  For example, it is not clear whether a personal check includes a photographic image of a paper check processed through remote deposit capture, a substitute check, as defined in the Check Clearing for the 21st Century Act (Check 21 Act),[8] or a bank-issued certified check.

The proposal also does not specify what it means for a customer to hold a checking account “in his or her name” and to own “the funds in the checking account.”  For example, it is not clear how deferred deposit originators should treat joint checking accounts and joint accountholders under the proposed rules.

OLA recommends that the Department reconsider the term “personal check” and related checking account criteria to provide clarity and certainty for both lenders and customers.

1. Adoption of Deferred Deposit Transaction Regulations Specific to Internet Lenders

OLA appreciates the Department’s recognition of the need for distinct regulatory provisions applicable to Internet lenders.[9]  The requirements outlined in the proposal generally are practical and would allow the customer to utilize the Internet to gain necessary customer information, including agreements, fee schedules, and licensing information without the delay of traditional transactions.  OLA also believes that the proposal requiring Internet lenders to establish and implement security practices and procedures to protect sensitive Personal Identifiable Information (PII)[10] is generally consistent with OLA’s Best Practices, which already require its members do the same.[11]

Nevertheless, OLA believes this provision, however well-intentioned, would be completely undermined and rendered meaningless by the payment restrictions discussed in Part A. above.  We also believe that the disclosure requirements applicable to Internet lenders would require lenders to provide a substantial volume of information, some of which would have to be posted conspicuously.  The proposed requirement should take into consideration Internet lenders’ aggregate disclosure requirements, including potential disclosure requirements from each state in which a lender does business.  Thus, we ask that the proposal expressly permit the use of links, pop-up windows, and similar techniques so that Internet lenders do not have to provide unnecessarily dense, small-print disclosures.

C. Establishment of a Common Deferred Deposit Database

OLA supports the Department’s efforts to prevent violations of deferred deposit transaction limits.  Lenders that disregard applicable legal requirements harm responsible Internet lenders, including OLA members, and California customers.  The Department’s proposal to establish a common database to track deferred deposit transactions, however, offers limited details and could have adverse consequences for Internet lenders and customers.[12]

The proposed language allows for either a Commissioner or a third-party to administer the database.  The proposal raises many questions about the timing, effective date, funding, administration, and support of the database.  The Department’s current proposed language does not adequately address these issues.

Similarly, although the proposal recognizes that there may be times when a system outage or other incident makes the database is inaccessible, the proposal simply provides that when the database is not accessible, the lender must follow the procedures provided by the database operator.[13]  This provision does not provide adequate guidance for lenders regarding the procedures they may have to follow.  Also, the proposal fails to address whether the source of the database inaccessibility–database operator or lender system issues–would affect the requirements.

Furthermore, the proposal would require loan originators to access this database both to contribute data and to verify the customer’s eligibility for a deferred deposit transaction.  While OLA Best Practices prescribe strong security of customer information, the database operator and each participating originator would be vulnerable to potential cybercrime aimed at accessing sensitive consumer data.  Cybercriminals regularly invade networks, gain access to sensitive consumer information, and then use this sensitive consumer data for their personal gain.  A database containing sensitive information on all deferred depositor customers in California would provide a treasure trove of data for those looking to exploit vulnerable California customers.

Conclusion

We hope this letter provides insight into the origination and repayment of deferred deposit loans over the Internet, as well as the practical constraints faced by Internet lenders.  We hope the issues we have raised are helpful to the Department in crafting appropriate amendments to the CDDTL.  We look forward to working with the Department to ensure that customers obtaining deferred deposit loans in California have access to a range of lenders and loan options, including Internet loans, and are adequately protected.

We thank you again for the opportunity to comment on this important rulemaking.  If you have questions or need additional information, please feel free to contact me at LMcGreevy@onlinelendersalliance.org.

Very Truly Yours,

Lisa S. McGreevy
President and CEO

[1] http://www.dbo.ca.gov/Licensees/Payday_Lenders/pdfs/PRO0408-CDDTL_3rdInviteComments.pdf

[2] Proposed Sections 2030.23, 2030.26, 2030.40, and 2030.90-98.

[3] Proposed Section 2030.23(a).

[4] Proposed Section 2030.23(b).

[5] Proposed Section 2030.23(c).

[6] Proposed Section 2030.40(a).

[7] Proposed Sections 2030.40(b) and (c).

[8] Pub. L. No. 108-100 (Oct. 28, 2003).

[9] Proposed Section 2030.26.

[10] Proposed Section 2030.26(a)(7).

[11] https://www.onlinelendersalliance.org/?page=bestpractices

[12] Proposed Sections 2030.90-98.

[13] Proposed Section 2030.93(e).