BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1146| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 1146 Author: Florez (D) Amended: 5/27/10 Vote: 21 SENATE BANKING, FINANCE, AND INS. COMMITTEE : 9-0, 4/7/10 AYES: Calderon, Cogdill, Correa, Florez, Kehoe, Lowenthal, Padilla, Price, Runner NO VOTE RECORDED: Cox, Liu SENATE JUDICIARY COMMITTEE : 4-0, 4/20/10 AYES: Corbett, Harman, Hancock, Leno NO VOTE RECORDED: Walters SENATE APPROPRIATIONS COMMITTEE : 9-0, 5/10/10 AYES: Kehoe, Cox, Alquist, Leno, Price, Walters, Wolk, Wyland, Yee NO VOTE RECORDED: Corbett, Denham SUBJECT : Finance lenders SOURCE : Progreso Financiero DIGEST : This bill creates the Pilot Program for Affordable Credit-Building Opportunities, a four-year, statewide pilot program under the California Finance Lenders Law that would allow participants to offer a new type of small-dollar consumer loan subject to specified requirements. CONTINUED SB 1146 Page 2 Senate Floor Amendments of 5/27/10 permit a licensee to pay a fee to a finder, as specified and revise the bill's underwriting language. In addition, the amendments prohibit licensees from offering credit insurance in connection with a loan offered under the program, provide that late fees must be proportional to the delinquent payment amount, as specified, and make other related changes. ANALYSIS : Existing law, the California Finance Lenders Law (CFLL), caps interest rates that may be charged by CFLL licensees who make consumer loans under $2,500. Those caps range from 12 percent to 30 percent per year, depending on the unpaid balance of the loan. Existing law also caps administrative (origination) fees that may be charged for such loans at the lesser of five percent of the principal amount of the loan or $50. Existing law caps the amount of delinquency fees that CFLL lenders who make consumer loans under $5,000 may impose. Those fees are capped at a maximum of $10 on loans that are more than 10 days delinquent and $15 on loans 15 days or more delinquent. Existing law requires CFLL lenders to prominently display their schedule of charges to borrowers. Existing law provides for filing fees in small claims actions and specifies increased filing fee amounts based on the dollar amount of the demand and whether the party has filed more than 12 other small claims in the state within the previous 12 months. Existing law provides that the commissioner of the Department of Corporations (DOC) may require a CFLL licensee to retain advertising copy for a period of 90 days from the date of its use. Existing law prohibits advertising copy from being used after its use has been disapproved by the commissioner and the licensee is notified in writing. This bill authorizes, until January 1, 2015, a four-year, statewide Pilot Program under the CFLL that would allow licensees accepted into the program to offer a new type of SB 1146 Page 3 small-dollar consumer loan under the CFLL subject to the following: 1. The loan has a minimum principal amount upon origination of $250 and is not more than $2,500, as specified; 2. The interest rate of each loan would be capped at 30 percent for the unpaid balance of the loan up to and including $1,000 and 26 percent for the unpaid balance of the loan in excess of $1,000; 3. Delinquency fees would be capped at the lesser of 10% of the amount delinquent payment due or at an amount not to exceed: (1) $15 for a delinquency of seven days or more; or (2) $20 for a delinquency of 14 days or more; 4. Origination fees would be capped at the lesser of five percent of the principal amount of the loan or $65. A licensee would be prohibited from charging the same borrower more than one origination fee in any six-month period; 5. The loan term is: (1) 90 days for loans whose principal balance upon origination is less than $500; (2) 120 days for loans whose principal balance upon origination is at least $500, but is less than $1,500; and (3) 180 days for loans whose principal balance upon origination is at least $1,500; 6. The licensee must report each borrower's payment performance to at least one of the three major credit bureaus; 7. The licensee must underwrite each loan and may not make a loan if it determines that the borrower's total monthly debt service payments exceed 50 percent of the borrower's gross monthly income. In underwriting the loan, the licensee must assess the borrower's willingness and ability to repay and must validate a borrower's outstanding debt obligations, as specified; 8. Prior to disbursement of the loan funds, the licensee must either offer to the borrower a credit education program that has been reviewed and approved by the SB 1146 Page 4 commissioner, or invite the borrower to such a program that has been reviewed and approved by the commissioner; and 9. Prohibits the offering, selling or requiring the borrower to contract for credit insurance. This bill permits any CFLL licensee to participate in the program provided that the licensee is in good standing with the commissioner and has no outstanding enforcement actions or deficiencies at the time of its application. This bill permits a licensee participating in the Pilot Program to be able to use the services of one or more "finders," defined to mean a person who brings a licensee and a prospective borrower together for the purpose of negotiating a loan contract. This bill permits finders to perform certain specified services for a licensee, including, among other things: (1) distributing or publishing preprinted, pre-approved written materials relating to the licensee's loans; (2) providing written factual information about loan terms, conditions, or qualification requirements to a prospective borrower; (3) entering the borrower's information into a preprinted or electronic application; (4) assembling credit applications for submission to the finance lender; and (5) contacting the licensee to determine the status of the loan application. This bill prohibits a finder from doing any of the following: 1.Providing counseling or advice to a borrower or prospective borrower; 2.Providing loan-related marketing material that has not been previously approved by the licensee to the borrower; and 3.Interpreting or explaining the significance or effect of any of the marketing materials or loan documents the finder provides to the borrower. SB 1146 Page 5 This bill prohibits a fee being paid to a finder in connection with a loan application, until and unless the loan is consummated, prohibits a fee being paid to a finder based upon the principal amount of the loan, creates a fee compensation structure for finders based upon the number of loans issue per location per month, and prohibits the licensee from passing on to the borrower any finder fee, or portion thereof. This bill requires the finder to provide a disclosure to the prospective borrower stating that a fee may be paid by the licensee to the finder and containing the contact information of DOC if the borrower wishes to make a complaint. This bill requires a licensee that uses the services of a finder to provide the commissioner with specified information regarding those finders. This bill requires that all arrangements between a licensee and a finder must be set forth in a written agreement between the parties which must contain a provision requiring the finder to comply with all applicable regulations and provides that the commissioner may examine the operations of each licensee and finder to ensure compliance with the bill. If the commissioner determines that a finder has violated the provision of this bill, the commissioner may terminate the written agreement between the finder and the licensee, and if the commissioner deems that action in the public interest, to bar the use of that finder by all licensees participating in the pilot program. This bill requires the DOC to provide specified legislative committees with a report by January 1, 2014 regarding the Pilot Program and would require that the report contain specified information. Requires the commissioner to conduct a sample survey of borrowers who have participated in the pilot program to better understand the borrowers experience. This bill increases the length of time licensees may be required to retain advertising copy to two years and would permit the commissioner to direct any licensee to submit advertising copy to the commissioner for review prior to SB 1146 Page 6 its use. This bill provides that, notwithstanding those increased amounts, in any action filed to enforce a contract entered into pursuant to the Pilot Program, the filing fee shall be $25. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: Yes According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund Admin expenses approx $50 annuallySpecial* offset by fee revenue *Corporations Fund SUPPORT : (Verified 5/11/10) Progreso Financiero (source) New America Foundation OPPOSITION : (Verified 5/11/10) California Reinvestment Coalition Center for Responsible Lending Consumers Union ARGUMENTS IN SUPPORT : According to the author's office: Enacted in the 1950's, based on statutes from the 1920's, the CFL is archaic and needs reform. For example, its restrictions on interest rates, fees, and marketing partnerships for loans in the $250 to $2500 range effectively discourages lenders from making loans that would otherwise be a fair alternative to payday loans. As a result, today there are very few fully amortizing, credit building loans in the $250-$2500 range and even fewer providers. Instead, the vast majority [of] CFL licensees only make loans SB 1146 Page 7 above $2500, precisely because there is no cap on interest rates for loans over $2500. Lenders simply do not believe they can make a profit below $2500, given current CFL law. Thus, if a lender wants to make small loans, they become a pawn broker or payday lender (who as an industry makes over 10 million loans to California residents each year). The result: Californians have only one option - pay-day loans - and no opportunity to build or repair their credit. Californians need access to credit, now more than ever. But, they also need alternatives that are safe and affordable, provide credit education and help borrowers build credit. SB 1146 will hopefully allow consumers who need small loans an alternative to a pay-day loan option, which likely causes more of a financial burden when payments cannot be made. ARGUMENTS IN OPPOSITION : The California Reinvestment Coalition (CRC) writes, "?While we support responsible lending alternatives for consumers in need of small-dollar loans, encouraging the practice of enticing consumers in greater amounts of spending and debt does not serve the needs of low-income consumers looking to build assets and wealth." JA:nl 5/28/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****