BILL ANALYSIS                                                                                                                                                                                                    






                        SENATE COMMITTEE ON BANKING, FINANCE,
                                    AND INSURANCE
                           Senator Ronald Calderon, Chair


          SB 1146 (Florez)         Hearing Date:  April 7, 2010  

          As Amended: March 22, 2010
          Fiscal:             Yes
          Urgency:       No
          

           SUMMARY    Would authorize the creation of a four-year, statewide  
          pilot program under the California Finance Lenders Law (CFLL),  
          to increase the availability of affordable, low dollar value  
          loans.  Would authorize licensed finance lenders accepted by the  
          Commissioner of Corporations for admission into the pilot  
          program to charge higher rates and fees than currently allowed  
          under the CFLL and to use the services of one or more finders,  
          as defined.  
           
          DIGEST
            
          Existing law
            
           1.  Provides for the California Finance Lenders Law (CFLL),  
              administered by the Department of Corporations (DOC), which  
              authorizes the licensure of finance lenders, who may make  
              secured and unsecured consumer and commercial loans (Financial  
              Code Sections 22000 et seq.).  The following are the key rules  
              applied to consumer loans made pursuant to the CFLL:  

               a.     CFLL licensees who make consumer loans under $2,500 are  
                 capped at interest rates which range from 12% to 30% per  
                 year, depending on the unpaid balance of the loan (Sections  
                 22303 and 22304).  Administrative fees are capped at the  
                 lesser of 5% of the principal amount of the loan or $50  
                 (Section 22305);  

               b.     In addition to the requirements in "a" above, CFLL  
                 licensees who make consumer loans under $5,000 are prohibited  
                 from imposing compound interest or charges (Section 22309);  
                 are limited in the amount of delinquency fees they may impose  
                 (Section 22320.5; delinquency fees are capped at a maximum of  
                 $10 on loans 10 days or more delinquent and $15 on loans 15  
                 days or more delinquent); are required to prominently display  




                                               SB 1146 (Florez), Page 2




                 their schedule of charges to borrowers (Section 22325); are  
                 prohibited from splitting loans with other licensees (Section  
                 22327); are prohibited from requiring real property  
                 collateral (Section 22330), and are limited to a maximum loan  
                 term of 60 months plus 15 days (Section 22334);

               c.     In addition to the requirements in "a" and "b" above,  
                 CFLL licensees who make consumer loans under $10,000 are  
                 limited in their ability to conduct other business activities  
                 on the premises where they make loans (Section 22154); must  
                 require loan payments to be paid in equal, periodic  
                 installments (Section 22307); and must meet certain standards  
                 before they may sell various types of insurance to the  
                 borrower (Sections 22313 and 22314);  

               d.     Generally speaking, the terms of loans of $10,000 or  
                 above are not restricted under the CFLL;

           2.  Authorizes the licensure of finance brokers under the CFLL, and  
              defines a finance broker as any person who is engaged in the  
              business of negotiating or performing any act as a broker in  
              connection with loans made by a finance lender (Section 22004);
            
            3.  Prohibits a CFLL licensee from using advertising copy after its  
              use has been disapproved by the Commissioner of Corporations  
              (Commissioner), and the Commissioner has notified the licensee  
              in writing of the disapproval;
            
            4.  Authorizes the Commissioner to require CFLL licensees to  
              maintain a file of all advertising copy for a period of 90 days  
              from the date of its first use and to make that file available  
              to the Commissioner, upon request.
            
          This bill

            1.  Would authorize a four-year, statewide pilot program under  
              the CFLL, under which licensees approved by the Commissioner  
              for entry into the program could do all of the following:

               a.     Offer a new type of consumer loan under the CFLL,  
                 with a new (higher) rate schedule, a new (higher) set of  
                 allowable delinquency fees, new (lower) costs to file a  
                 claim against a borrower in small claims court, and a new  
                 series of conditions on the licensee, as follows:

                     i.          The interest rate of each loan would be  




                                               SB 1146 (Florez), Page 3




                      capped at 3% per month, simple interest, on the  
                      unpaid principal balance; 

                     ii.         Origination fees would be capped at the  
                      lesser of 5% of the principal amount of the loan or  
                      $75;  

                     iii.        Delinquency fees would be capped at an  
                      amount not to exceed one of the following amounts:   
                      $20 for a delinquency of seven days or more, and $25  
                      for a delinquency of fourteen days or more;

                     iv.         The cost for a pilot project participant  
                      to file a small claims action to enforce a pilot  
                      project loan contract would be $25 (rather than a  
                      maximum of $100 per action, depending on the size of  
                      the loan and the number of actions filed during the  
                      prior twelve months);  

                     v.          The loan would have to have a term of at  
                      least 90 days, and a principal amount between $250  
                      and $2,499 upon origination;

                     vi.         The licensee would have to disclose the  
                      annual percentage rate of the loan, the periodic  
                      payment amount, and the total finance charge to the  
                      borrower at the time of application; 

                     vii.        The licensee would also have to inform  
                      the consumer that he or she could rescind the loan  
                      by returning the loan principal by the end of the  
                      business day following the day on which the loan was  
                      consummated; 

                     viii.       Before disbursing the loan proceeds, the  
                      licensee would have to either offer a credit  
                      education program or seminar to the borrower or  
                      invite the borrower to a credit education program or  
                      seminar offered by an independent third party.  The  
                      education program or seminar would have to have been  
                      previously approved by the Commissioner.  The  
                      borrower would not be required to attend these  
                      education programs or seminars;

                     ix.         The licensee would have to report each  
                      borrower's payment performance to at least one of  




                                               SB 1146 (Florez), Page 4




                      the three major credit bureaus in the U.S.;

                     x.          The licensee would have to underwrite the  
                      loan, and could not make the loan, if it determined  
                      that a borrower's total monthly debt service  
                      payments, across all outstanding forms of credit  
                      known to the licensee, and including the loan,  
                      exceeded 50% of the borrower's gross monthly income  
                      at the time of loan origination;

               b.     Utilize the services of one or more finders, as  
                 specified;

                     i.          A finder would be defined for purposes of  
                      the bill as a person who brings a licensee and a  
                      prospective borrower together for the purpose of  
                      negotiating a loan contract;

                     ii.         Finders would be authorized to engage in  
                      one or more of a list of eight tasks, which are  
                      enumerated in the bill, and which generally relate  
                      to disseminating loan-related advertising and  
                      informational materials, collecting information from  
                      prospective borrowers, filling out loan applications  
                      for prospective borrowers, arranging for and  
                      facilitating credit checks on prospective borrowers,  
                      and serving as intermediaries between prospective  
                      borrowers and CFLL licensees;  

           2.  Would prohibit finders from doing any of the following:

               a.     Providing counseling or advice to a borrower or  
                 prospective borrower;

               b.     Providing loan-related marketing material that had  
                 not been previously approved by a CFLL licensee to a  
                 borrower or prospective borrower;

               c.     Interpreting or explaining the relevance,  
                 significance, or effect of the marketing materials or  
                 loan documents the finder provides to a borrower or a  
                 prospective borrower;

           3.  Would provide that a finder meets the definition of a  
              broker under the CFLL, if it does any of the following:





                                               SB 1146 (Florez), Page 5




               a.     Negotiates the price, length, or any other loan term  
                 with a prospective borrower;

               b.     Advises a prospective borrower or licensee regarding  
                 any loan term;

               c.     Offers information about the same borrower to more  
                 than one licensee, unless the borrower has been formally  
                 rejected in writing by one of the licensees, before the  
                 borrower's information is provided to the other licensee;

           4.  Would prohibit licensees from passing on any finder's fees  
              to borrowers; 

           5.  Would require all arrangements between a licensee and a  
              finder to be set forth in a written agreement between the  
              parties, and would require each written agreement to contain  
              a provision establishing that the finder agrees to comply  
              with all regulations established by the Commissioner  
              regarding the activities of finders, and agrees to give the  
              Commissioner access to all of the finder's books and records  
              that pertain to the finder's operations under its agreement  
              with the licensee;

           6.  Would require a licensee that utilizes the services of a  
              finder to provide specified information about the finder to  
              the Commissioner within 10 days of entering into a contract  
              with that finder.  Licensees would also have to pay an  
              annual finder registration fee to the Commissioner and  
              submit an annual report to the Commissioner, which includes  
              information pertaining to the finder and the licensee's  
              relationship and business arrangements with the finder;

           7.  Would authorize the Commissioner to examine the operations  
              of each licensee and each finder, attribute the costs of  
              those examinations to the licensee, and attribute any  
              violation of the CFLL by a finder or a finder's employee to  
              the CFLL with whom the finder entered into an agreement;  

           8.  Would require the Commissioner to submit a report to the  
              Legislature on or before January 1, 2014, in which he  
              summarizes utilization of the pilot program by CFLL  
              licensees and makes recommendations regarding whether the  
              program should be continued;

           9.  Would increase the length of time that the Commissioner may  




                                               SB 1146 (Florez), Page 6




              require a CFLL licensee to retain advertising copy from 90  
              days to two years;

           10. Would authorize the Commissioner to direct any CFLL  
              licensee to submit advertising copy for review prior to its  
              use. 












































                                               SB 1146 (Florez), Page 7




           COMMENTS

          1.  Purpose of the bill   To help underbanked Californians obtain  
              affordable loans and build credit, with the aim of helping  
              them enter the financial mainstream.

           2.  Background   This bill is the brainchild of James Gutierrez,  
              President and CEO of a Mountain View, California-based  
              company called Progreso Financiero, or Progress Financial.   
              Initially hatched by Gutierrez as a research project at  
              Stanford's Graduate School of Business, Progreso Financiero  
              was founded by Gutierrez in 2005, with the aim of offering  
              underbanked Latinos a responsible alternative to payday  
              loans.  Using a CFLL license, Progreso Financiero currently  
              offers short-term, unsecured loans of $250 to $2,500, to  
              Latino borrowers who lack credit scores.  Loans are made  
              through 27 retail locations in California, all of which are  
              inside ethnic supermarkets and ethnic pharmacies.  To date,  
              Progreso has made 40,000 loans totaling $36 million.  The  
              company is currently making slightly over 3,000 loans per  
              month.  

          Consistent with its authority under the CFLL, Progreso charges  
              borrowers average annual percentage rates of 36% (a number  
              calculated by adding Progreso's 26% annual interest rate to  
              origination fees allowable under the CFLL).  Progreso offers  
              lower rates to borrowers on subsequent loans.  The typical  
              loan obtained by a Progreso Financiero borrower is a  
              fully-amortizing installment loan of $900, and a nine month  
              duration.  

          One of the key components of Progreso Financiero's business  
              model is the practice of reporting borrower payments to a  
              major credit bureau, to help its customers establish a  
              credit history.  In discussions with Committee staff,  
              Progreso states that a customer who lacks a credit score  
              before obtaining a Progreso loan can establish a FICO score  
              of up to 638, after successfully paying off two Progreso  
              loans without experiencing a delinquency, and up to 660  
              after successfully paying off three Progreso loans without a  
              delinquency.  

          Although its current products are limited to relatively low  
              dollar value, unsecured installment loans, Progreso has  
              plans to expand into additional financial markets.   
              According to information provided by the company, it plans  




                                               SB 1146 (Florez), Page 8




              to offer FDIC-insured, reloadable debit cards during the  
              second quarter of 2010, savings options and life insurance  
              policies by the end of 2010, and, eventually, investment  
              accounts.  These new product rollouts are intended to allow  
              Progreso to branch out beyond helping build its customers'  
              credit histories, and into transactional security,  
              asset-building, and personal security for borrowers.  

          To date, Progreso has secured its funding from venture capital  
              firms.  It is not yet profitable, but hopes to become  
              profitable before the end of 2010.

           3.  What is being proposed, and why?   As noted above, Progreso's  
              loans are currently offered at average annual percentage  
              rates of 36%.  The rate structure proposed in this bill  
              would allow loans to be made at higher annual percentage  
              rates, ranging from 39% (for high dollar value loans  
              amortized over 24 months) to 67% (for low dollar value loans  
              amortized over three months).  

          Many of the requirements in SB 1146 are based on Progreso's  
              business model and its desire to begin using retail  
              employees of department stores to help it market its loans.   
              Progreso already underwrites loans, and will not lend to a  
              borrower if their overall debt to income ratio, including  
              the Progreso loan, will exceed 50%.  The company schedules  
              loan payments to coincide with borrowers' paychecks,  
              provides customers with a full payment schedule at loan  
              origination showing the dates and amounts of all payments,  
              provides credit education to borrowers at the time of loan  
              origination, and reports all loan payments made by borrowers  
              to Experian.  Progreso also makes all of its loan agreements  
              and credit education materials available in Spanish, the  
              first language of most of its borrowers.  

          Currently, Progreso uses word-of-mouth and booths inside  
              supermarkets to attract potential customers, and is testing  
              direct mail.  The company does not advertise via print,  
              broadcast, or electronic media.  To date, DOC has not  
              allowed Progreso to use unlicensed finders, to help it  
              acquire customers.  However, as envisioned by Mr. Gutierrez,  
              and as proposed in this bill, Progreso would use finders  
              that act in much the same way a retail clerk acts at a  
              department store, when he or she offers a customer the  
              opportunity to apply for a store-branded credit card.  





                                               SB 1146 (Florez), Page 9




          Instead of offering a customer the opportunity to apply for a  
              store-branded credit card, the retail clerk could offer the  
              customer an opportunity to apply for a Progreso Financiero  
              loan.  If a customer chooses to apply, the clerk would  
              collect preliminary information from the potential borrower  
              at the point of sale, and input that information into a  
              Progreso prequalification program.  If Progreso's  
              prequalification program rejects the potential borrower, the  
              clerk would inform the customer of their rejection.  If  
              Progreso's prequalification program suggests that the  
              customer could qualify to become a Progreso borrower, the  
              clerk would collect additional, more detailed information  
              from the customer.  Customers would then be asked to provide  
              personal identification, proof of address, and a paycheck  
              stub, all of which the retail clerk could verify at the time  
              of loan application, or subsequently, if the borrower had to  
              gather the information from home before returning.  

          Mr. Gutierrez sees the use of finders as a way to lower his  
              costs of customer acquisition.  The lower his customer  
              acquisition costs, the easier time he will have achieving  
              and sustaining profitability.  He cites customer acquisition  
              as the largest cost of maintaining a low dollar value loan  
              program.  

           4.  Support   Progreso Financiero is seeking the changes in SB  
              1146, in order to help it grow its own business and to help  
              attract other, similar businesses into the low dollar loan  
              market.  Mr. Gutierrez sees the loans his company offers as  
              a responsible alternative to payday loans for individuals  
              who have not entered the financial mainstream.  

          In support of his lending model, Mr. Gutierrez notes that  
              Progreso's current loan terms are consistent with the  
              Guidelines for Affordable Small-Dollar Loans, issued by the  
              Federal Deposit Insurance Corporation (FDIC) as part of its  
              two-year pilot project to encourage small dollar loans by  
              banks.  The company is also a Community Development  
              Financial Institution, certified by the U.S. Treasury.   
              Furthermore, in recognition of his efforts to promote access  
              to affordable credit in minority communities, Mr. Gutierrez  
              has been asked by FDIC Chair Sheila Bair to participate on  
              her Small Dollar Loan Advisory Committee, and is frequently  
              invited to speak at conferences geared toward banking the  
              unbanked and financially empowering the underbanked.    





                                               SB 1146 (Florez), Page 10




           5.  Opposition    The Center for Responsible Lending (CRL),  
              California Reinvestment Coalition, and Consumers Union are  
              all opposed to the bill, unless it is amended.  Although the  
              organizations strongly support the goal of having a wider  
              availability of affordable and responsible small dollar  
              value loan products in the marketplace, the organizations  
              are concerned that SB 1146 would authorize substantial  
              expansions in fees and marketing channels for finance  
              lenders, without providing enough checks against abuse.

          The three consumer advocacy organizations are requesting the  
              following six amendments, some of which they would like to  
              apply to all consumer loans made under the CFLL, and some of  
              which are focused only on the pilot program being proposed  
              by SB 1146.  The amendments these organizations are seeking  
              include the following:  

          1) Amend the CFLL to adopt a tiered interest rate structure,  
              where interest rates decline as the loan balance grows.  The  
              organizations advocate adopting the rate structure used in  
              North Carolina, which allows for a maximum interest rate of  
              30% on the first $1,000 borrowed and a maximum interest rate  
              of 18% on loan amounts above $1,000.  By amending the entire  
              CFLL, rather than just the pilot program proposed in SB  
              1146, this amendment would impose maximum interest rates on  
              CFLL loans above $2,500, where interest rate caps do not  
              currently exist.  

          2) Limit pilot program origination fees to one full fee per  
              borrower, per year, per lender, regardless of whether the  
              lender is originating a new loan or refinancing an existing  
              loan for the borrower.  CRL would propose that a credit  
              report fee of up to $10 per loan could be charged for each  
              new pilot project loan for which a credit report is  
              obtained.  

          3) Allow pilot program lenders to charge one late fee per loan,  
              equal to the lesser of 10 percent of the late payment or $20  
              per payment cycle.

          4)  Require declining interest rates to be provided under the  
              pilot project, to repeat borrowers, who pay off their pilot  
              project loans in a timely fashion.

          5)  Institute a tiered minimum loan term for all CFLL loans,  
              with a minimum of 90 days for loans of up to $500, 120 days  




                                               SB 1146 (Florez), Page 11




              for loans between $500 and $1,500, six months for loans  
              between $1,500 and $2,500, and one year for loans above  
              $2,500.  

          6) Prohibit the use of finders.  Continue, instead, to allow  
              CFLL-licensed brokers to generate leads for CFLL lenders.

          In advocating against the use of finders, the consumer groups  
              express concern that finders could aggressively market their  
              products to people who may not be shopping for a loan.  The  
              consumer groups are also concerned that DOC will lack the  
              capacity to monitor, regulate, and enforce infractions  
              committed by large chain retailers, particularly those with  
              high staff turnover.  In particular, the groups are unclear  
              how DOC would monitor the prohibition against finders  
              providing advice or counseling to prospective borrowers, or  
              against marketing of products from multiple licensees.  

          Regarding the use of finders, Consumers Union states, "We  
              believe that good financial products worth having sell  
              themselves.  They don't need to be aggressively marketed to  
              consumers by paying commissions to those whose primary  
                                                             interest is in generating a commission by completing another  
              sale?Over the last decade and a half, we have witnessed the  
              serious financial consequences experienced by consumers when  
              commission-based salespersons sell them higher-cost products  
              that create more debt.  Rather than building wealth, they  
              plunge consumers deeper into a cycle of debt."  

          CRL is also seeking an amendment to require underwriting of all  
              loans made under the CFLL. 
           
          6.  Questions   

                  a.        If Progreso is likely to achieve profitability  
                    later this year under its current fee schedule, should  
                    the company be allowed to charge higher interest  
                    rates, origination fees, and delinquency fees than  
                    allowed under current law?  

                  b.        Will other companies use the availability of  
                    the proposed pilot project to enter the small dollar  
                    loan market, or will this bill benefit only one  
                    company?

                  c.        California licensed finance lenders made  




                                               SB 1146 (Florez), Page 12




                    approximately 97,000 loans with principal amounts  
                    under $2,500 during 2008 (the most recent year for  
                    which loan level data are available).  They made these  
                    loans under the current rate and fee schedule.  Will  
                    some of the lenders who made these loans begin  
                    charging higher rates and fees, if this bill becomes  
                    law?  Or will the bill attract new lenders, who did  
                    not previously lend under the authority of the CFLL?  

                  d.        How much will it cost for DOC to administer  
                    the pilot program?  Will the fees that DOC charges  
                    pilot program applicants and participants to offset  
                    its administrative costs be high enough to discourage  
                    companies from applying to participate in the pilot  
                    program? 
                   


































                                               SB 1146 (Florez), Page 13




          7.  Suggested Amendments  
           
                   a.        Page 8, line 11, correct an unintentional  
                    drafting error by striking "do not"  

          
          POSITIONS
          
          Support
           
          Progreso Financiero (sponsor)
           
          Oppose
               
          California Reinvestment Coalition
          Center for Responsible Lending
          Consumers Union

          Consultant:  Eileen Newhall  (916) 651-4102