BILL ANALYSIS
SB 1146
Page 1
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