AN ACT CONCERNING SMALL LOAN LICENSEES.

1. expands the scope of activities, beyond the making of a loan, that require licensure, such as offering, soliciting, servicing, purchasing, assigning, or advertising small loans;

2. establishes a comprehensive list of permitted and prohibited licensee practices and loan provisions;

3. defines “small loan” as any monetary loan or extension of credit, or the purchase of, or an advance of money on, a borrower's future income where the amount or value is $15,000 or less and the Annual Percentage Rate (APR) is greater than 12%;

4. converts the existing interest rate structure to an APR that is capped at the maximum 36% allowed under the federal Military Lending Act;

5. requires small loan licensure to be done through the Nationwide Mortgage Licensing System and Registry (NMLS or “the system”)(see BACKGROUND);

6. changes the license application fee structure and the length of time a license remains valid; and

7. with some exceptions, voids any small loan made in connection with unlicensed activity, noncompliance with statutory restrictions, or prohibited licensee conduct.

The bill defines the following terms for use throughout the small loan statutes:

"Advertise" or "advertising" means any announcement, statement, assertion or representation placed before the public in a newspaper, magazine or other publication, in the form of a notice, circular, pamphlet, letter, or poster, over any radio or television station, by means of the Internet, by other electronic means of distributing information, by personal contact, or in any other way or medium.

"APR" means the annual percentage rate for the loan calculated according to the provisions of the federal Truth-in-Lending Act and its implementing regulations.

"Branch office" means a location other than the main office where the licensee, or any person on behalf of the licensee, engages in activities that require a small loan license.

"Connecticut borrower" means any borrower who resides in or maintains a domicile in this state and who:

1. negotiates or agrees to the terms of the small loan in person, by mail, by telephone, or via the Internet while physically present in this state;

2. enters into or executes a small loan agreement with the lender in person, by mail, by telephone, or via the Internet while physically present in this state; or

3. makes a payment on the loan in this state, including a debit on an account the borrower holds in a branch of a financial institution or the use of a negotiable instrument drawn on an account at a financial institution (i.e., any bank or credit union chartered or licensed under the laws of this state, any other state, or the United States and having its main office or a branch office in Connecticut).

"Control person" means an individual that directly or indirectly exercises control over another person, and includes any person that:

1. is a director, general partner or executive officer;

2. in the case of a corporation, directly or indirectly has the right to vote 10% or more of a class of any voting security or has the power to sell or direct the sale of 10% or more of any class of voting securities;

3. in the case of a limited liability company, is a managing member; or

4. in the case of a partnership, has the right to receive upon dissolution, or has contributed, 10% or more of the capital. "Control" means the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract or otherwise.

"Main office" means the main address designated on the system where the licensee, or any person on behalf of the licensee, engages in activities requiring a small loan license.

"Open-end small loan" means a small loan where the loan agreement provides that the lender may permit the borrower to obtain advances of money from time to time or provides that the lender may advance money on behalf of the borrower from time to time as directed by the borrower.

"Person" means a natural person, corporation, company, limited liability company, partnership or association.

"Small loan" means any loan of money or extension of credit, or the purchase of, or an advance of money on, a borrower's future income where the following conditions are present:

Small loan does not include a retail installment contract or a loan or extension of credit for agricultural, commercial, industrial, or government use.

"Future income" means any future potential source of money, and expressly includes a future pay or salary, pension, or tax refund.

"Trigger lead" means a consumer report obtained pursuant to the Fair Credit Reporting Act (15 USC 1681b) where the issuance of the report is triggered by an inquiry made to a consumer reporting agency in response to an application for credit. Trigger lead does not include a consumer report obtained by a small loan lender that holds or services existing indebtedness of the applicant who is the subject of the report.

"Unique identifier" means a number or other identifier assigned by protocols established by the system.

As under existing law, the bill requires anyone engaged in making small loans to a Connecticut borrower to first obtain a license from the Banking Department. Under the bill, licensure is also required for anyone who, with respect to a prospective Connecticut borrower:

The bill prohibits anyone from accepting, from a person who is not licensed or exempt from licensure, any lead, referral, or application for a small loan to a prospective Connecticut borrower.

It also prohibits anyone from selling, transferring, pledging, assigning, or otherwise disposing of, to a person who is not licensed or exempt from licensure, any small loan made to a Connecticut borrower.

The bill exempts from small loan licensure anyone licensed as a consumer collection agency engaged as a third party in collecting or receiving money due from a Connecticut borrower on a small loan for payment to others.

It maintains the existing law's exemption for banks; out-of-state banks; Connecticut credit unions; federal credit unions; out-of-state credit unions; savings and loan associations; wholly owned subsidiary service corporations; and licensed pawnbrokers. It no longer expressly exempts licensed mortgage lenders or mortgage correspondent lenders when they make residential mortgage loans.

Under the bill, a small loan licensee or anyone who is required to have a small loan license may not make, offer, engage in, or advertise small loans with conditions or provisions inconsistent with the bill's requirements. Also, banks, credit unions, or other exempt entities may not receive, purchase, or advertise any small loan with provisions inconsistent with the bill's requirements. Any such small loan is unenforceable in Connecticut except for a bona fide error (e.g., clerical, calculation, programming, or printing errors) or if the loan was valid under another state's law and the borrower was not a Connecticut resident at the time.

Small Loan-Related Activities: Making; Offering; Soliciting; Placing; Assisting a Borrower; Receiving Payments; Purchasing; Advertising; or Accepting Leads, Referrals, or Applications

Small loans that are the subject of the activities listed above must not contain:

1. for a small loan that is under $5,000, an APR that exceeds the 36% maximum APR permitted with respect to the consumer credit extended under the federal Military Lending Act, or for a small loan that is between $5,000 and $15,000, an APR that exceeds 25%;

2. a provision that increases the interest rate due to default;

3. a payment schedule with regular periodic payments that when aggregated do not fully amortize the outstanding principal balance;

4. a payment schedule with regular periodic payments that cause the principal balance to increase;

5. a payment schedule that consolidates more than two periodic payments and pays them in advance from the proceeds, unless such payments are required to be escrowed by a governmental agency;

6. a prepayment penalty;

7. an adjustable rate provision;

8. a waiver of participation in a class action or a provision requiring a borrower, whether acting individually or on behalf of others similarly situated, to assert any claim or defense in a nonjudicial forum that: (a) utilizes principles that are inconsistent with the general statutes or common law; (b) limits any claim or defense the borrower may have; or (c) is less convenient, more time consuming and more costly for the resolution of a dispute than a state judicial forum where the borrower may otherwise properly bring a claim or defense;

9. a call provision that permits the lender, in its sole discretion, to accelerate the indebtedness, except when repayment of the loan is accelerated by a bona fide default pursuant to a due-on-sale clause provision or another provision of the loan agreement unrelated to the payment schedule, including, but not limited to, bankruptcy or receivership;

10. a security interest, except as described below; or

11. fees or charges of any kind, except as expressly permitted below.

Small Loans That Are the Subject of Licensees' and Exempt Entities' Activities (Described Above)

Small loans that are the subject of licensees' and exempt entities' activities may contain provisions:

1. for late fees, if: (a) the fees are assessed after an installment remains unpaid for at least ten consecutive days, including Sundays and holidays; (b) the fees do not exceed the lesser of 5% of the outstanding installment payment, excluding any previously assessed late fees, or a total of $10 per month; and (c) no interest is charged on the fees;

2. allowing charges for a dishonored check or any other form of returned payment, provided the total fee for such returned payment cannot exceed $20;

3. allowing for collection of deferral charges, but only with the specific written authorization of the borrower and in a total amount not exceeding the interest due during the applicable billing cycle;

4. allowing interest accrual after the maturity date or the deferred maturity date, provided the interest must not exceed 12% per annum computed on a daily basis on the respective unpaid balances;

5. providing for reasonable attorney's fees;

6. including credit life insurance or credit accident and health insurance subject to certain conditions and restrictions; or

7. taking a security interest in a motor vehicle in connection with a closed-end small loan made solely for the purchase of such motor vehicle, provided the APR of the loan must not exceed the rates indicated for the respective classifications of motor vehicles as follows: (a) new motor vehicles, 15%; (b) used motor vehicles of a model designated by the manufacturer by a year not more than two years prior to the year in which the sale is made, 17%; and (c) used motor vehicles of a model designated by the manufacturer by a year more than two years prior to the year in which the sale is made, 19%.

1. not have an APR that exceeds 19.8%;

2. not provide for an advance of money exceeding at any one time an unpaid principal of $15,000;

3. provide for payments and credits to be made to the same borrower's account from which advances, interest, charges, and costs on such loan are debited;

4. provide for interest to be computed on any unpaid principal balance of the account in each billing cycle by one of the following methods: (a) converting the APR to a daily rate and multiplying such daily rate by the daily unpaid principal balance of the account, in which case the daily rate is determined by dividing the APR by three hundred sixty-five; or (b) converting the APR to a monthly rate and multiplying the monthly rate by the average daily unpaid principal balance of the account in the billing cycle;

5. not compound interest or charges by adding any unpaid interest or charges to the unpaid principal balance of the borrower's account; or

6. not include any other fees or charges of any kind, except as expressly permitted below.

Under the bill, a person who provides information identifying a potential customer (i.e., lead generator) must not:

1. initiate any outbound telephone call using an automatic telephone dialing system or an artificial or prerecorded voice without the prior express written consent of the recipient;

2. fail to transmit the lead generator's name and telephone number to any caller identification service in use by a consumer;

3. initiate an outbound telephone call to a consumer's residence between 9:00 p.m. and 8:00 a.m. local time at the consumer's location;

4. fail to clearly and conspicuously identify the lead generator and the purpose of the contact in its written and oral communications with a consumer;

5. fail to provide the ability to opt out of any unsolicited advertisement communicated to a consumer via an email address;

6. initiate an unsolicited advertisement via email to a consumer more than 10 business days after the receipt of a request from such consumer to opt out of such unsolicited advertisements;

7. use a subject heading or email address in a commercial email message that would likely mislead a recipient, acting reasonably under the circumstances, about a material fact regarding the sender, contents, or subject matter of the message;

8. sell, lease, exchange or otherwise transfer or release the email address or telephone number of a consumer who has requested to opt out of future solicitations;

9. collect, buy, lease, exchange or otherwise transfer or receive an individual's Social Security or bank account number;

10. use information from a trigger lead to solicit consumers who have opted out of firm offers of credit under the federal Fair Credit Reporting Act;

11. initiate a telephone call to a consumer who has placed his or her contact information on a federal or state Do Not Call list, unless the consumer has provided express written consent;

12. represent to the public, through advertising or other means of communicating or providing information, including, but not limited to, the use of business cards or stationery, brochures, signs or other promotional items, that such lead generator can or will perform any other activity requiring licensure, unless such lead generator is duly licensed to perform such other activity or exempt from such licensure requirements;

13. refer applicants to, or receive a fee from, any person who must be licensed but was not licensed as of the time the lead generator's services were provided;

14. assist or aid and abet any person in the conduct of business requiring licensure when such person does not hold the license required;

15. directly or indirectly employ any scheme, device, or artifice to defraud or mislead any person;

16. make any false, misleading or deceptive statement or representation in connection with a small loan or engage in bait and switch advertising; or

17. negligently make any false statement or knowingly and willfully omit a material fact concerning any information or report filed with a governmental agency or the system or in connection with any investigation conducted by the commissioner or another governmental agency.

As under existing law, insurance may be sold to a Connecticut borrower at his or her request for (1) insuring the life of the persons obligated on a small loan and (2) providing accident and health insurance covering one person on a small loan. The bill allows the borrower to cancel such insurance at any time by giving written notice. Under current law, the borrow has a 15-day cancellation period after the loan has been made.

Under the bill, in the case of an open-end small loan, the additional charge for credit life insurance or credit accident and health insurance must be calculated in each billing cycle by applying the current monthly premium rate for such insurance, as determined by the Insurance Commissioner, to the unpaid balances in the account, using any of the methods for the calculation of loan charges described above. The licensee is prohibited from cancelling the credit life insurance or credit accident and health insurance written in connection with an open-end small loan because of the borrower's delinquency in making the required minimum payments on the loan, unless:

Any cancellation shall be effective at the end of the billing cycle in which notice is received and the licensee must discontinue any further charges for the insurance.

1. causing a borrower, including a comaker or guarantor, to owe at any time more than $15,000 for principal;

2. inducing or permitting a borrower to split or divide any small loan or loans, or induce or permit a borrower to become obligated, directly or indirectly, under more than one loan contract at the same time, primarily for the purpose of obtaining rates or charges that would otherwise be prohibited by the small loan laws;

3. taking any (a) confession of judgment, (b) power of attorney, (c) note or promise to pay that does not state the actual amount of the loan, the time period for which the loan is made, and the charges for such loan, or (d) instrument related to the loan in which blanks are left to be filled in after the loan is made;

4. offering the borrower any other product or service in connection with a small loan unless (a) permitted by law, (b) authorized under another license, or by applicable exemption from any requirement for such licensure, to offer such product or services, or (c) if no separate license or exemption is required to offer such product or services, the loan is authorized in advance, in writing, by the commissioner after he is satisfied that the other product or service is of such a character that the granting of such authority would not permit or easily result in evasion of the small loan statutes or any implementing regulations; or

5. renewing or refinancing a small loan unless the renewal or refinancing of the loan will result in a distinct advantage to the borrower, provided restoration to a contractually up-to-date condition does not, in itself, constitute a distinct advantage to the borrower.

The bill explicitly prohibits anyone from, directly or indirectly, assisting or aiding and abetting any person in conduct prohibited by the small loan statutes.

Under the bill, a small loan licensee, in each case where a license is required, must have a main office license and may have a branch office license. All offices must be located in the United States. Each main office must have a qualified individual, who is responsible for supervising all aspects of the licensee's small loan business. Each branch must have a branch manager responsible for supervising all aspects of the branch's small loan business.

Under the bill, an application for a small loan license must be made and processed on “the system” (the Nationwide Mortgage Licensing System and Registry) in a form the commissioner prescribes. The form must contain information based on the commissioner's instruction or procedure and may be changed or updated as he deems necessary.

The applicant must furnish information concerning his or her identity, any control person, the qualified individual, and any branch manager. This information must include personal history and experience related to any administrative, civil, or criminal findings by any government jurisdiction. The commissioner may conduct a state and national criminal history records check of the applicant and its control persons, qualified individual, and branch manager. He may require the applicant to submit fingerprints to the FBI or other state, national, or international criminal databases and may require control persons, qualified individuals, and branch managers to furnish authorization for the system and the commissioner to obtain an independent credit report from a consumer reporting agency.

Applicants also may be required to provide the system with an audited financial statement prepared by a certified public accountant in accordance with generally accepted accounting principles dated not later than ninety days after the end of the applicant's fiscal year. Such financial statement must include a balance sheet, income statement, statement of cash flows and all relevant notes. If the applicant is a start-up company, only an initial statement of condition is required.

The commissioner may determine an application for a small loan license abandoned if the applicant fails to respond to any request for information required by the bill or any adopted regulations. The commissioner must notify the applicant on the system that if such information is not submitted on or before 60 days after the date of such request, the application is deemed abandoned.

An application filing fee paid before the date an application is deemed abandoned is not refunded. Abandonment of an application does not preclude the applicant from submitting a new license application.

Under the bill, each applicant for a small loan license must pay, through the system, a $400 license fee and any other required fees or charges. Each license expires at the close of business on December 31 of the year in which the license was approved unless it is renewed, in which case it expires at the close of business on December 31 of the following year. Under current law, an initial application fee is $800 for a biennial license which expires on September 30 of the odd year following its issuance. Under current law, the application fee is $400 if filed less than a year before it would expire.

Under the bill, a renewal application must be filed between November 1 and December 31 of the year in which the license expires and the renewal fee is $400 plus any other required fees or charges. Under current law, the renewal fee is $800. There is a $100 late fee under current law.

Under the bill, the commissioner must automatically suspend a license if the system indicates that a required payment was returned. The commissioner must give the licensee notice of the automatic suspension, pending proceedings for revocation or refusal to renew, and an opportunity for a hearing, and require the licensee to take or refrain from taking action as the commissioner deems necessary.

Upon the license applicant filing the required application and fee, the commissioner must investigate the following facts. The commissioner may not issue a license unless he finds that the:

If the commissioner fails to make such findings, the commissioner cannot issue a license and must notify the applicant of the denial and the reasons for the denial.

The commissioner may deny an application if the applicant, its control persons, qualified individual, or branch manager have demonstrated a lack of financial responsibility. Under the bill, a person shows that he or she is not financially responsible when he or she shows a disregard in the management of his or her own financial condition. A determination that a person has not shown financial responsibility may include:

The commissioner also may deny an application based on the history of criminal convictions of the applicant, its control persons, qualified individual, or branch manager.

An applicant must have a minimum of $50,000 continuously available for each licensed location. This may include cash or lines of credit.

To renew a small loan license, an applicant must meet the minimum standards for an initial license, and pay all required fees for renewal of the license and any outstanding examination fees or other moneys the commissioner requires.

A license application withdrawal is effective when the commissioner accepts the request on the system.

Within 15 days after a licensee ceases as a small loan lender in the state, including a business decision to terminate operations in this state, license revocation, bankruptcy, or voluntary dissolution, such licensee must surrender of the license on the system for each location in which the licensee has ceased to engage.

If a license expires due to the licensee's failure to renew, the commissioner may institute a revocation or suspension proceeding or issue an order suspending or revoking such license within one year after the expiration date.

A small loan license remains effective until it is surrendered, revoked, suspended, or expires.

Under the bill, small loan licenses are not assignable or transferable. Any proposed change in the control persons requires advance notice, filed on the system at least 60 days before the effective date of the change. Any change to the control persons requires the commissioner's approval.

No licensee may use any name other than its legal name or a fictitious name approved by the commissioner, but may not use its legal name if the commissioner disapproves such name. A licensee is prohibited from any activity requiring a small loan license under any other name or at any other place of business than that named in the license. Any proposed change in a licensee's name or to the licensee's place of business requires an advance change notice filed on the system at least 30 days before the effective date of the change. Any change to the licensee's name or place of business requires the commissioner's approval.

Under the bill, a licensee must file with the system any change in the license information most recently submitted or, if the information cannot be filed on the system, directly notify the commissioner, in writing, of the change in the information not later than 15 days after the licensee has reason to know of it.

A licensee must file with the system or, if the information cannot be filed on the system, directly notify the commissioner, in writing, of the occurrence of any of the following developments not later than 15 days after the licensee had reason to know of it:

1. filing for bankruptcy or the consummation of a corporate restructuring of the licensee;

2. filing of a criminal indictment against the licensee in any way related to the activities of the licensee or receiving notification of the filing of any criminal felony indictment or felony conviction of any of the licensee's control persons or qualified individual or branch manager;

3. receiving notification of license denial, cease and desist order, suspension or revocation procedures, or other formal or informal action by any governmental agency against the licensee and the reasons therefor;

4. receiving notification of the initiation of any action by the U.S. attorney general or any state attorney general and the reasons therefor;

5. receiving notification of a material adverse action with respect to any existing line of credit or warehouse credit agreement;

6. receiving notification of any of the licensee's control persons or qualified individual or branch manager filing or having filed for bankruptcy; or

7. a decrease in the available funds required by the bill (i.e., $50,000).

Under the bill, the unique identifier of any small loan licensee must be clearly shown on the licensee's small loan application forms and all of the licensee's solicitations or advertisements, including business cards or Internet web sites, and any other documents as determined by the commissioner.

The bill changes the record keeping and record retention requirements for small loan licensees.

Under the bill, each small loan licensee must keep adequate books and records at the place of business specified in the license in such form and in such manner as the commissioner prescribes and must preserve all books, accounts, and records for the following time periods:

Small loan licensees must make their books and records available at the office specified in the license or send the books and records to the commissioner by registered or certified mail, return receipt requested, or by any express delivery carrier that provides a dated delivery receipt, not later than five business days after requested to do so by the commissioner. Upon request, the commissioner may grant a licensee additional time to make such books and records available or send them to the commissioner.

Licensees must complete any reports of their condition required by the system. Any such reports of condition shall be accurately and timely filed on the system according to the due dates and formats required by the system.

Until the information is able to be captured by a system-based report, each licensee must furnish annually, on or before January 30, a sworn statement of the condition of the business as of the preceding December 31, together with such other information and statements as the commissioner may require.

As under existing law, the commissioner may suspend, revoke, or refuse to renew any small loan license or take any other action for any reason that would be sufficient grounds for the commissioner to deny an application for such license. Under the bill, the commissioner may also do so if he finds that the licensee or any control person of the licensee, qualified individual, or branch manager with supervisory authority, trustee, employee, or agent of such licensee has done any of the following:

1. made any material misstatement in the application;

2. committed fraud, misappropriated funds or misrepresented, concealed, suppressed, intentionally omitted or otherwise intentionally failed to disclose any of the material particulars of any small loan transaction to anyone entitled to such information, including, but not limited to, any disclosures required by regulations;

3. violated any of the provisions of the bill, any regulations adopted accordingly or any other law or regulation applicable to the conduct of its business; or

4. failed to perform any agreement with a licensee or a borrower.

The commissioner may take action whenever (1) it appears that a violation has occurred, (2) the violation is due to an act or omission such person knew or should have known would contribute to such violation, or (3) any licensee has failed to perform any agreement with a borrower, committed any fraud, misappropriated funds or misrepresented, concealed, suppressed, intentionally omitted, or otherwise intentionally failed to disclose any of the material particulars of any small loan transaction to anyone entitled to such information.

The commissioner may order a licensee to remove any individual from office and from employment or retention as an independent contractor in the small loan business in this state whenever the commissioner finds after investigating that such individual: (1) has violated any regulations adopted pursuant to the small loan statutes, or (2) for any reason that would be sufficient grounds for the commissioner to deny a license. The commissioner must do so by sending a notice to such individual by registered or certified mail, return receipt requested or by any express delivery carrier that provides a dated delivery receipt. The notice is deemed received by such individual on the earlier of the date of actual receipt or seven days after mailing or sending.

If a hearing is requested within the time specified in the notice, the commissioner must hold a hearing upon the matters asserted in the notice unless such individual fails to appear at the hearing. After the hearing, if the commissioner finds that any of the necessary grounds exist with respect to such individual, the commissioner may order a licensee to remove the individual from office and from any employment in the small loan business in this state. The commissioner may do the same if the individual fails to appear at the hearing.

If the commissioner finds that the protection of borrowers requires immediate action, the commissioner may suspend any such individual from office and require such individual to take or refrain from taking such action as, in the opinion of the commissioner, will effectuate the purposes of this bill, by incorporating a finding to that effect in such notice. The suspension or prohibition becomes effective upon receipt of the notice and, unless stayed by a court, remains in effect until the entry of a permanent order or the dismissal of the matters.

The commissioner may issue a temporary order to cease business under a license if the commissioner determines that the license was issued erroneously. The commissioner must give the licensee an opportunity for a hearing. The temporary order becomes effective when the licensee receives it and, unless set aside or modified by a court, remains in effect until the effective date of a permanent order or dismissal of the matters asserted in the notice.

As under existing law, the bill gives the commissioner broad oversight of small loan licensees and the authority to adopt regulations he deems necessary to administer and enforce the small loan statutes. In order to carry out his duties under the small loan laws, the commissioner, among other things, may (1) accept and rely on examination or investigation reports made by other state officials, (2) accept audit reports from an independent certified public accountant, and (3) use, hire, contract, or employ public or privately available analytical systems.

The “system” is the Nationwide Mortgage Licensing System and Registry developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators for the licensing and registration in the finance services industry. It (1) may be referred to as NMLS, NMLSR, or any other name or acronym as may be assigned and (2) is owned and operated by the State Regulatory Registry LLC, or any successor or affiliated entity (CGS § 36a-2).