BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1146
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          Date of Hearing:   June 21, 2010

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                                   Mike Eng, Chair
                     SB 1146 (Florez) - As Amended:  May 27, 2010

           SENATE VOTE  :   36-0
           
          SUBJECT  :   Finance Lenders

           SUMMARY  :   Establishes the Pilot Program for Affordable Credit  
          Building Opportunities that would allow licensees under the  
          California Finance Lender Law (CFLL) to participate in the pilot  
          program involving unsecured consumer loans less than $2,500  
          until January 1, 2015.  Specifically,  this bill  :   

          1)Provides that any California Finance Lender (CFL) that wishes  
            to participate in the pilot program shall file an application  
            with the commissioner of the Department of Corporations (DOC)  
            and pay a fee calculated by the commissioner of DOC to cover  
            the costs necessary to administer the pilot.

          2)Specifies that a licensee may not make a loan, nor use a  
            finder without prior approval to participate in the program.

          3)Requires that any loan made pursuant to the pilot project must  
            comply with the following:

             a)   The loan has a minimum principal amount upon origination  
               of $250 and is not more than $2,500, as specified;

             b)   The interest rate of each loan would be capped at 30%  
               for the unpaid balance of the loan up to and including  
               $1,000 and 26% for the unpaid balance of the loan in excess  
               of $1,000;

             c)   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;

             d)   Origination fees would be capped at the lesser of 5% 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;








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             e)   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;

             f)   The licensee must report each borrower's payment  
               performance to at least one of the three major credit  
               bureaus; and

             g)   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% 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.

          4)Requires licensees to comply with requirements of any  
            applicable law, including specific federal regulations.

          5)Allows a licensee to charge a delinquency fee that is the  
            lesser of 10% of the amount of the delinquent payment due or  
            one of the following amounts:

             a)   For a period of default no less than 7 days, an amount  
               not in excess of $15; or

             b)   For a period of default no less than 14 days, an amount  
               not in excess of $20.

          6)Provides that 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  
            commissioner, or invite the borrower to such a program that  
            has been reviewed and approved by the commissioner.

          7)Prohibits the offering, selling or requiring the borrower to  
            contract for credit insurance.

          8)Allows the use of "finders" defined as a person who brings a  
            licensee and a prospective borrower together for the purpose  
            of negotiating a loan contract.

          9)This bill permits finders to perform certain specified  







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            services for a licensee, including, among other things: 

             a)   Distributing or publishing preprinted, pre-approved  
               written materials relating to the licensee's loans; 

             b)   Providing written factual information about loan terms,  
               conditions, or qualification requirements to a prospective  
               borrower; 

             c)   Entering the borrower's information into a preprinted or  
               electronic application; 

             d)   Assembling credit applications for submission to the  
               finance lender; and 

             e)   Contacting the licensee to determine the status of the  
               loan application. 

          10)This bill prohibits a finder from doing any of the following:  


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

             b)   Providing loan-related marketing material that has not  
               been previously approved by the licensee to the borrower;  
               or,

             c)   Interpreting or explaining the significance or effect of  
               any of the marketing materials or loan documents the finder  
               provides to the borrower. 

          11)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 issued  
            per location per month, and prohibits the licensee from  
            passing on to the borrower any finder fee, or portion thereof.

          12)Establishes a cap on what can be paid to finders based on  
            number of loans referred.

          13)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  







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            of DOC if the borrower wishes to make a complaint.

          14)Requires a licensee that uses the services of a finder to  
            provide the commissioner with specified information regarding  
            those finders.

          15)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.

          16)Requires the DOC to provide specified legislative committees  
            with a report by January 1, 2014 regarding the Pilot Program  
            that would contain specified information.  

          17)Requires the commissioner to conduct a sample survey of  
            borrowers who have participated in the pilot program to better  
            understand the borrower's experience.

          18)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 its use. 

           EXISTING LAW  

          1)Under the CFLL [Financial Code 22000 et seq], caps interest  
            rates that may be charged by CFLL licensees who make consumer  
            loans under $2,500.  Those caps range from 12% to 30% per  
            year, depending on the unpaid balance of the loan.  (All  
            further references are to the financial code).

          2)Caps administrative (origination) fees that may be charged for  
            such loans at the lesser of 5% of the principal amount of the  
            loan or $50. 

          3)Caps the amount of delinquency fees that CFLL lenders who make  
            consumer loans under $5,000 may impose.  Those fees are capped  







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            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. 

          4)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.

          5)Provides that the 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.  

           FISCAL EFFECT  :   According to the Senate Appropriations  
          Committee, costs to DOC will be absorbed via licensing fees.

           COMMENTS  :   

           Need for bill.
           
          According to the author:

            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 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  







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            alternative to a pay-day loan option, which likely causes more  
            of a financial burden when payments cannot be made.

           Background  .

          This bill sponsored by Progreso Financiero seeks to establish a  
          pilot program under the CFLL to fill the gap in loan products  
          that exist between payday loans of $255 and CFL loans of  $2,500  
          or more.   Between those two amounts their is little incentive  
          on the part of potential lenders to offer loans due to stringent  
          restrictions on fees, marketing and interest rates.   For  
          example, in 2008 98,665 CFL loans under $2,500 were originated,  
          whereas almost 12 million payday loan transactions occurred.   
          This bill intends to fill this gap by allowing some flexibility  
          on the fees and interest rates associated with the loans in this  
          pilot project, with an enhanced underwriting process to  
          determine borrower's repayment ability, something often lacking  
          for non-bank loans, specifically payday loans.  Additionally,  
          the sponsor views the pilot program as a way to help the  
          unbanked and underbanked build credit files in order to advance  
          to more traditional lines of credit by the requirement that loan  
          performance be reported to the credit reporting agencies.  No  
          other lending law requires reporting of payment performance.   
          The sweet spot of this bill is that it attempts to make small  
          dollar lending a profitable business so that more options will  
          become available, while creating lending standards that will  
          make it a responsible product under certain conditions. 

          A point of contention between the sponsor and several consumer  
          organizations is the authorization to use finders to generate  
          loans.  In the context of this bill a finder, under certain  
          circumstances, and under strict requirements would be allowed to  
          refer potential borrowers to the licensee for loans.  The  
          sponsor contends that the use of finders is necessary in order  
          to keep the overhead costs of such a lending program small, so  
          that the rates and terms of the loans can remain competitive.   
          Various consumer organizations have been concerned with these  
          provisions due to the potential that a finder would steer a  
          borrower to a loan under this pilot project that could be  
          potentially expensive, or that marketing for these products  
          could become so aggressive as to convince consumers not in the  
          market for a loan to apply for one under this pilot.  As  
          currently drafted, these consumer organizations are neutral.  So  
          as to provide clarity to the reason for their neutrality the  
          following are passages from a letter from the Center for  
          Responsible Lending stating their reasons for being neutral:







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               Although we continue to have some reservations, we have  
          removed opposition contingent                               upon  
          the specific compromises reached.  We are hopeful that the bill  
          will lead to more                                            
          lenders offering affordable and responsible credit alternatives  
          for borrowers currently                                      
          relying on even more expensive payday loans, while eliminating  
          certain abusive or unfair                                    
          practices that could otherwise undermine the program.  We  
          strongly urge, therefore, that                              the  
          bill be maintained in its current form, and that the compromises  
          that led to the                                              
          removal of our opposition not be disturbed.

               In its current form, SB 1146 proposes to amend the  
          California Consumer Finance                            Lenders'  
          Law with the stated intent of stimulating more lenders to make  
          responsible                                            loans  
          between $250 and $2,500.  This would be accomplished by creating  
          a new pilot                                            program  
          to allow DOC-approved CFL licensees to charge higher interest  
          rates and fees                                         than  
          allowed under existing law, and to allow contractual  
          relationships with "finders" -                          
          unlicensed retailers who would be paid on a commission basis to  
          market these loans to                                   
          consumers.  Under the bill, the allowable annual percentage  
          rates (APRs) on such loans                              
          (including interest and origination fees, but not late fees)  
          would range from just over                             30% to  
          just over 60%, with most rates falling between 35% and 40%.

               In exchange for allowing higher rates, fees and new  
          marketing channels, the bill would                           
          require that loans originated under this pilot program meet  
          certain standards, including                                 
          robust underwriting, minimum terms that vary with the size of  
          the loans, reasonable and                                    
          proportional limits on the amount and frequency of late fees,  
          and prohibitions on                                          
          expensive add-on fees like credit insurance, which provide  
          virtually no tangible benefits                              to  
          borrowers.  Including these standards in the pilot program was  
          and remains crucial to                                      the  
          removal of CRL's opposition.







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               Under current law and regulations, lenders offering loans  
          between $250 and $2,500 are                            at a  
          competitive disadvantage because both smaller and larger loans  
          are much more                                           
          profitable than those in the $250-$2,500 range, even if the  
          loans in this range are                                 
          profitable.  SB 1146 does not fix this fundamental problem.   
          These small loan lenders                               ($250 -  
          $2,500 range) compete at the low end with 459% APR payday loans  
          and at the                                             higher  
          end with CFL loans that have NO interest rate limits, often  
          resulting in car title                                 loans  
          with interest rates of 72 to 120 percent for loans secured with  
          a borrower's car.  

               We applaud the author's goal to provide wider availability  
          of affordable and responsible                small loan  
          products.  Such products are particularly important for those  
          borrowers who are limited in their access to responsible credit  
          due to the lack of a credit score or the     presence of credit  
          blemishes.  Although the best way to jump start more loans in  
          the  $250-$2,500 range would be to more strictly regulate payday  
          loans and the loans above                    $2,500, SB 1146  
          offers a pilot program aimed at increasing access to credit.  In  
          its  current version, the pilot program includes carefully  
          negotiated standards to minimize             the potential for  
          abuse or harm. The pilot program will be evaluated for its  
          success in                                   responsibly meeting  
          these credit needs before it concludes.  

               CRL removed opposition to the bill contingent upon  
          resolution of extensive negotiations.  In conjunction with the  
          Chair and staff of the Senate Judiciary Committee, we agreed to  
          remove opposition to the bill based on the following compromise  
          agreement:

               ?      We agreed to accept the sponsor's proposal with  
                 respect to the use of unlicensed finders that would allow  
                 CFL lenders participating in the program to market their  
                 products to customers shopping in retail stores like Best  
                 Buy and Sears.  As detailed in our prior letters, this is  
                 the issue that has caused perhaps the most concern among  
                 opponents.  Specifically, we have been concerned that  
                 incentivizing retailers to sell these relatively  
                 high-cost loans to sell more product could lead to  







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                 finders aggressively marketing the pilot's loan products  
                 to potential borrowers, including many borrowers who may  
                 not be "shopping" for a loan at all.

               ?      In order to accept the use of unlicensed finders in  
                 this program, we negotiated that the following three  
                 amendments be made to minimize to the extent possible the  
                 likelihood of abuses with the loan product itself:

                    o           Robust underwriting.  In order to insure  
                      that pilot program loans are offered only to  
                      consumers who can afford to repay the loans, robust  
                      underwriting is necessary.  The analysis of whether  
                      the consumer can afford to repay must be based upon  
                      the consumer's verified income, as well as all  
                      verified and reported debt obligations (other than  
                      loans from families and friends).  CRL must oppose  
                      the bill if it is amended to eliminate the robust  
                      and fulsome underwriting set forth in the current  
                      bill language.

                    o           Prohibition of credit insurance products.   
                      Credit insurance is one of the most widely abused  
                      methods for increasing revenue for lenders, while  
                      providing little to no benefit to borrowers.  Credit  
                      insurance is more frequently sold with for larger  
                      loans, such as a mortgage or car loan, and would  
                      seem to be an extremely questionable need for a  
                      small dollar loan.  Such products are extremely  
                      profitable for lenders, but offer almost no benefit  
                      to consumers.  For example, in 2006 (the most recent  
                      data that could be found on the CA Department of  
                      Insurance website), the average loss ratio for  
                      credit unemployment insurance in California was only  
                      3.5%, with a three-year average over 2004-2006 of  
                      3.9%.  Moreover, most policies have extensive gaps  
                      that significantly limit a borrower's ability to  
                      receive the benefits, including limitations on the  
                      ability to make claims and on the scope of claims.   
                      By contrast, the National Association of Insurance  
                      Commissioners suggests a target 60% loss ratio. 
          
                    As such, credit insurance simply should not be sold in  
                    conjunction with a loan that is described as a model  
                    for responsible lending.  CRL must oppose the bill if  
                    it is amended to allow credit insurance products to be  







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                    offered or sold in connection with the loans provided  
                    under the pilot program.

                    o           Limitation on duplicative or excessive  
                      late fees.  Although some measure of late fees can  
                      be appropriate, such fees must not be duplicative or  
                      excessive.  We have accepted the sponsor's proposal  
                      that late fees can be charged twice per month.   
                      However, in order to control the size of such fees,  
                      they must be reasonable and proportionate to the  
                      size of the late payment that was missed, similar to  
                      the requirements of the CARD Act.  The Senate-passed  
                      bill caps late fees at 10% of the total late  
                      payment.  CRL must oppose the bill if it is amended  
                      to allow duplicative or unreasonable late fees.
          
               To conclude, we have worked hard to create compromises on  
          this legislation to remove CRL's opposition to this bill.  While  
                                                       we would like to see this bill move forward to create new  
          small-dollar lending opportunities, it is critical that adequate  
          consumer protections are in place to make these transactions  
          responsible loans.  Opening up some of the finely-tuned  
          agreements would require us to revert to our OPPOSE position. 

           Unbanked & Underbanked.
           
          A driving force behind this bill is that many people do not have  
          access to mainstream credit options due to minimal credit  
          history.  This history is often due to a lack of relationship  
          with a banking institution through a checking or savings  
          account.   Ironically, a consumer without a checking account  
          would not be able to get a payday loan as payday loans are  
          contingent upon the borrower having a checking account so in  
          some cases an unbanked borrower could not have very many options  
          at all.

          The unbanked, or those without a transaction account with a  
          financial institution constitute approximately 22 million, or  
          20% of Americans.  This population spends $10.9  billion on more  
          than 324 million alternative financial service transactions per  
          year. Bearing Point, a global management and  technology  
          consulting company, estimates that the unbanked population  
          expands to 28 million when you include those who do not have a  
          credit score.  In addition, Bearing Point, puts the underbanked  
          population, defined as those with a bank account but  a low FICO  
          score that impedes access to incremental credit, at an  







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          additional 45 million people.  Although estimates find that  at  
          least 70% of the population has some type of bank account, these  
          individuals continue to use non-bank services, ranging from the  
          purchase of money orders, use of payday lenders, pawn shops or  
          sending of remittances.  The Federal Reserve Board has noted  
          that 50% of current unbanked households claim to have had an  
          account in the past.

          In California, 28% of adults do not have a checking or savings  
          account, according to the U.S. Census.  In San Francisco, the  
          Brookings Institution estimated that one in five San Francisco  
          adults, and half of its African-Americans and Hispanics, do not  
          have accounts.  Recent market research indicates that Fresno and  
          Los Angeles have the second and third highest percentages of  
          un-banked residents in the country.

          Nationwide, the unbanked are disproportionately represented  
          among lower-income households, among households headed by  
          African-Americans and Hispanics, among households headed by  
          young adults, and among renters.  A Harvard Poll of Hurricane  
          Katrina evacuees in the Superdome found that seven out of ten  
          did not have a checking or savings account.

          The unbanked poor pay more to conduct their financial lives.   
          Check cashing outlets can charge between 2-3% of the face value  
          of a check. So, an individual who makes $30,000 a year can pay  
          $800 a year in fees to cash their payroll checks and pay their  
          bills.  The lack of access to mainstream banking costs both  
          consumers and society, as well as, the financial community that  
          misses out on this untapped market.  

          Families without accounts don't have a safe place to keep their  
          money. They may walk around with wads of cash in their pockets,  
          or keep it at home in a coffee can. Robberies are more prevalent  
           around check cashing outlets. A burglary, or a fire, could cost  
          them their life's savings in a matter of moments.  A bank  
          account helps people take the first step onto the path of  
          savings and mainstream financial products. Without  an account,  
          it is much more difficult to get well-priced car loans, credit  
          cards, or mortgages-the exact financial tools needed to climb up  
          the economic ladder. Stable societies are built on financially  
          stable families who have access to high-quality, low-cost  
          financial services.

          For a more comprehensive review of the unbanked, please read the  
          committee's April 16, 2010 analysis of AB 2581 (Bradford).







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           Amendments.
           
          In reviewing the provisions of this bill, committee staff  
          recommends some additional amendments, clarifications and fixes  
          to provide greater clarity and workability.  

           Amendments needed to provide clarity  :

          1)On Page 5, lines 7-9 provides that licensees must comply with  
            requirements of any applicable law, including requirements of  
            Part 433 of Title 16 of the Code of Federal Regulations.  The  
            reference to the federal regulations concern the Preservation  
            of Consumers' Claims and Defenses when a loan transaction is  
            contingent upon the purchase of good or service.  For example,  
            a consumer acquires a loan to purchase a washer or dryer and  
            that item is defective in some way.  Federal law provides in  
            that case the consumer has claim against the creditor in the  
            same way they do against the retailer.   Additionally, Part  
            433 requires disclosure to the consumer regarding their rights  
            when the transaction is based upon purchase of goods.   This  
            provision appears to be overly broad.  First, if a licensee  
            under this program used a finder such as a retailer to refer a  
            borrower for a loan to purchase a retail item (similar to  
            applying for credit card at a retail store to acquire goods at  
            that location) then it could be conceivable that the loan was  
            originated for the purpose of acquiring goods or services with  
            that retailer.  In that case, because the relationship is so  
            direct, in that the finder (retailer in this example) has  
            referred the potential borrower, not out of concern for the  
            financial well being of the consumer, but for the purpose of  
            purchasing some items.  The way this provision is written the  
            lender under the pilot would be required to issue the  
            disclosures regarding liability even if the transaction is  
            originated completely separate from the use of a finder.  This  
            assumes that the lender is liable even in cases where the loan  
            originated absent the use of a finder, or absent a retail  
            relationship.  Staff recommends either one of two options to  
            address this concern:

             a)   "The licensee complies with the requirements of any  
               applicable state or federal law."; or,

             b)   "The licensee complies with the requirements of any  
               applicable law, including the requirements of Part 433 of  
               Title 16 of the Code of Federal Regulations, if a retailer  







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               acting as a finder is used to refer the borrower to the  
               licensee for a loan for the purpose of purchasing goods or  
               services from that retailer."

          2)Page 7 contains the steps a licensee must take in order to  
            underwrite the loan and verify the borrowers debts and income.  
             This language requires the following:

             a)   The licensee must seek information and documentation  
               regarding all of the borrowers current debt obligations  
               whether or not they appear on the borrowers credit report;

             b)   Verification of the borrowers credit information using a  
               credit report and information from other available and  
               reasonable reliable electronic debt verification services;  
               and,

             c)   Income verification from electronic means that provides  
               reliable evidence of the borrower actual income or from IRS  
               Form w-2, tax returns, payroll receipts, bank statements,  
               or other third party documents that provide evidence of the  
               borrower's actual income.

          These requirements create several potential problems.  First,  
          the licensee is required to seek out     all of the borrowers  
          debt obligations whether they appear on a credit report or not.   
          This assumes that the licensee must subject to borrower to some  
          type of financial interrogation.  Additionally, a licensee is  
          required to seek evidence of the borrowers "actual" income.    
          After using paystubs and other means one must assume that they  
          have a good idea of the borrowers income.  Requiring an "actual"  
          standard implies that in spite of all available evidence, the  
          borrower may have more or less income than claimed and that the  
          licensee should be aware of such facts.  Everyday thousands of  
          consumers apply for credit cards at retail locations in order to  
          receive some discount or preferred terms for purchasing goods at  
          that retailer all without the complex underwriting required  
          here.  Lastly, the underwriting process in this bill requires  
          that the licensee must verify the borrower's debt, not only  
          using a credit report, but other reasonable electronic means.   
          If one option of reviewing credit is sufficient then why require  
          both?  In all likelihood in the context of the borrowers who  
          would seek loans under this pilot project, they most likely will  
          not have a credit report that provides enough information to  
          make a credit decision.  Progreso Financiero, the sponsor, uses  
          a proprietary credit scoring model that examines 600 data points  







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          that they believe can out perform traditional FICO scores.

          In order to provide clarity to the underwriting provisions,  
          committee staff recommends the following amendments:


               (3) (A) The licensee shall underwrite each loan to  
          determine a borrower's ability and                           
          willingness to repay the loan pursuant to the loan terms, and  
          shall not make a loan if it                                  
          determines, through its underwriting, that the borrower's total  
          monthly debt service                                         
          payments, at the time of origination, including the loan for  
          which the borrower is being considered, and across all  
          outstanding forms of credit  known to the   that can be         
            independently verified by the  licensee,  except as indicated in  
          clause (ii) of subparagraph                                  (B),   
          exceed 50 percent of the borrower's gross monthly income.


               (B) (i) The licensee shall seek information and  
          documentation pertaining to all of a                         
          borrower's  current debt service  outstanding debt  obligations   
           during the loan application                                 and  
          underwriting process,  including loans that are self reported by  
          the borrower but not                                         
           available through independent verification. The licensee shall  
          verify that information                                      
          using a credit report from at least one of the three major  
          credit bureaus  and also   or                                    
          through other available and reasonably reliable electronic debt  
          verification services  that                                   
           provide reliable evidence of a borrowers outstanding debt  
          obligations.  


               (ii)  In considering the borrower's debt-to-income ratio,  
          the licensee shall consider and                              
           include all reported debt obligations, except for loans from  
          friends or family members,                                   
          whether or not the debt obligation appears on the borrower's  
          credit report or through                                     
           other verification services.    The licensee shall not be required  
          to consider, for purposes                                    of  
          debt to income ratio evaluation, loans from friends or family.  








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               (C) The licensee shall also verify the borrower's income  
          that the licensee relies on to                               
          determine the borrower's debt-to-income ratio using information  
          from either of the                                           
          following:


               (i) Electronic means or services that provide   reliable  
          evidence of   the borrower's actual                            
          income.


               (ii) Internal Revenue Service Form W-2, tax returns,  
          payroll receipts, bank statements, or                        
          other third-party documents that provide reasonably reliable  
          evidence of   the borrower's                                   
           actual  income.

          3)As mentioned previously in this analysis, the issue of finders  
            has been controversial.  In response to the controversy the  
            bill contains numerous detailed prohibitions and requirements  
            for persons acting as finders.  Among these provisions are  
            prohibitions on finders from providing advice on loan terms or  
            engaging in other details of the loan transaction other than  
            providing introduction between the borrower and lender.   
            Additionally, prohibits compensation to the finder based on  
            the terms of the loan.  It also includes a schedule of fees  
            that the lender may pay to the finder based on the volume of  
            loans referred.  It seems overly prescriptive to have a list  
            of prohibited acts and practices, yet at the same time  
            proscribe a menu of what the licensee can pay a finder under  
            what would be a negotiated contract.  This statutory menu  
            outlining what the licensee can pay for referrals seems  
            unnecessary given the multiple other consumer protections in  
            the bill. Therefore, staff recommends striking that language  
            as it occurs beginning on page 10 line 24 through page 11,  
            line 21 inclusive.

          4)The pilot project authorized under this statute, sunsets on  
            January 1, 2015 if not extended by future legislation.  This  
            could create a unique situation where the authorization to  
            perform the duties that this bill would allow would abruptly  
            come to an end, including the potential use of powers by DOC  
            to regulated licensees.  If this program were not to be  
            extended, what would happen to the repayment of loans  







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            originated prior to the sunset date, but still outstanding  
            when the statute expires?  Technically, a licensee would no  
            longer be licensed under this program so would they be able to  
            collect the outstanding debt after the program expires?  This  
            could potentially be resolved by drafting language that if the  
            sunset of this program occurs, the licensee is still  
            authorized to recover outstanding debts, and the DOC is still  
            authorized to enforce consumer complaints or other actions  
            until outstanding loans are cleared.  Committee staff will  
            work with Legislative Counsel to address this concern.

          Committee staff is aware that the version of this bill currently  
          under consideration, sans amendments, represents, what some have  
          described as a delicate compromise between consumer groups and  
          the sponsor.  The amendments proposed in this analysis could in  
          some way alter the position of entities that are currently  
          neutral or in support.  In light of these concerns, it is  
          important to note that the committee amendments proposed in this  
          analysis attempt to achieve balance by providing clarity, while  
          ensuring that consumer protection is maintained.   The sponsor  
          of this measure also approached the committee to request  
          additional amendments.  These amendments were evaluated, and  
          while there is some small overlap with what the committee has  
          suggested, the amendments offered by the sponsor were not deemed  
          necessary to make this pilot program work.   However, the  
          committee recommends further discussion on a point relating to  
          late fees.  

          Currently, the bill allows a late fee that is the lesser of 10%  
          of the delinquent payment or $15 if the payment is 7 days late,  
          or $20 if the payment is 14 days late.  In most cases, the  
          lesser amount will be the 10% of the late payment amount.  A  
          late fee is not only a measure to recoup the costs of  
          outstanding capital on the part of a lender, but also serves as  
          a deterrent to the borrower to being late on a payment.   On a  
          $50 dollar per month payment, this late fee would be $5.  Does  
          this serve as a sufficient deterrent?  Committee staff is not  
          suggesting that the $15 or $20 late payment schedule is fair.   
          Based on a percentage this could amount to 50-60% of the payment  
          amount.   This 10% late fee provision was added during  
          amendments that took place on the Senate Floor and as far as  
          staff is concerned, have not been discussed in a policy  
          committee.  Therefore, a more appropriate option may be a late  
          payment schedule on a sliding scale that is based on the amount  
          of the late payment, making the payment amount and the late fee  
          actually relative to each other.  While staff does not have a  







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          tangible solution, it is recommended that all parties continue  
          to discuss this point to find a workable solution.   
          Additionally, if a sliding scale late fee schedule can be worked  
          out, the committee would also recommend that a disclosure of  
          that schedule be provided to the borrower at loan origination.

           REGISTERED SUPPORT / OPPOSITION :

           Support 
           
          Office of the Treasurer & Tax Collector (San Francisco)
          Silicon Valley Community Foundation - Support with Caution
           
            Opposition 
           
          None on file

           Neutral

           Center for Responsible Lending
          Consumers Union

           Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081