This is the last in our series of posts related to California’s recent passage of Alternative “A” for individual debtor names to be used on a UCC financing statement. While California joins the majority of states that have adopted the use of the debtor’s name as it appears on that person’s state-issued driver’s license or other state-issued ID card, there are important deviations from the official text that secured parties need to be made aware.
One of those deviations is the non-uniform section 9503(a)(7), which makes it a violation of California’s Unruh Civil Rights Act for a secured party to decline to provide credit to a debtor or proposed debtor, or offer to make the terms and conditions of such credit less favorable, if that decision was based on the fact that the debtor does not currently hold an unexpired California driver’s license or identification card.
Why was that section written into the bill? Opponents of adopting Alternative “A” raised concerns last year when AB 502 was under consideration that the change “so highly incentivizes lenders to demand presentation of a California driver’s license or state identification in order to determine the name of the prospective borrower that shall be recorded on the financing statement, there is a significant risk that it may cause lenders to be less willing to extend credit to non-license holders in order to avoid the extra risk and work associated with searching and filing for more than one name per borrower.” (Excerpted from Assembly Bill Analysis - 5/14/2014)
Potential remedies available to a complainant under the Unruh Act include cease and desist orders, out-of-pocket legal expenses, actual damages, as well as punitive damages. The Unruh Act does set a rather high bar, however, for plaintiffs to establish a claim. A plaintiff must prove to a jury all of the following has occurred:
- That the secured party denied a loan application or offered financing under less favorable terms to the debtor;
- That a motivating reason for the secured party’s conduct was the lack of an unexpired driver’s license or identification card issued by the California Department of Motor Vehicles;
- That plaintiff was harmed; and
- That the secured party's conduct was a substantial factor in causing the harm.
Is this a significant business risk such that lenders should take precautions in order to minimize the potential costs associated with defending oneself against an Unruh Act claim in civil court? In addition to undocumented persons, the provision also protects California residents who have allowed their current driver’s license to lapse, as well as those who hold a current license issued by another state or country. What safeguards might lenders place in the credit application or lending-decision process?
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