BILL ANALYSIS SB 1146 Page 1 Date of Hearing: June 29, 2010 ASSEMBLY COMMITTEE ON JUDICIARY Mike Feuer, Chair SB 1146 (Florez) - As Amended: June 23, 2010 As Proposed to be Amended SENATE VOTE : 36-0 SUBJECT : FINANCE LENDERS: SMALL LOAN PILOT PROGRAM KEY ISSUE : SHOULD A NEW PROGRAM BE TESTED IN AN EFFORT TO PROVIDE GREATER CREDIT OPPORTUNITIES TO UNDERSERVED MARKETS WITH APPROPRIATE SAFEGUARDS AND CONSUMER PROTECTIONS? FISCAL EFFECT : As currently in print this bill is currently keyed fiscal. SYNOPSIS This bill would create an experimental small-loan program denominated the Pilot Program for Affordable Credit-Building Opportunities (Pilot Program), a four-year program under the California Finance Lenders Law (CFLL) that would allow participants to offer a new type of small-dollar consumer loan subject to specified requirements. That loan would permit the licensee to charge higher interest rates, origination fees, and delinquency fees than permitted under existing law. The loans, which could be originated in an amount from $250 to $2,500, must be underwritten by the licensee, as specified, and the licensee must report a borrower's payment performance to at least one of the three major credit bureaus. Licensees participating in the program would be allowed to use the services of a "finder" who would bring the licensee and a prospective borrower together for the purpose of negotiating a loan contract, and the Department of Corporations (DOC) would be required to submit a report to the Legislature with specified information concerning the Pilot Program. Supporters believe this program will help build credit histories and increase participation in the financial services industry for lower-income borrowers and others who are not well served by the existing market. As proposed to be amended, it is believed that previous opposition from consumer advocates has been addressed. SB 1146 Page 2 SUMMARY : Establishes a temporary program for smaller loans, denominated the Pilot Program for Affordable Credit Building Opportunities that would allow licensees under the California Finance Lender Law (CFLL) to sell 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 not exceed specified maximums that are greater than existing limits within specified time periods that are shorter than existing limits; 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; 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 be accepted as a data reporter to at least one of the three major credit bureaus; and SB 1146 Page 3 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)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. 6)Prohibits the offering, selling or requiring the borrower to contract for credit insurance. 7)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. 8)Permits finders to perform certain specified 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. 9)Prohibits a finder from doing any of the following: SB 1146 Page 4 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. 10)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. 11)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. 12)Requires a licensee that uses the services of a finder to provide the commissioner with specified information regarding those finders. 13)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. 14)Requires the DOC to provide specified legislative committees with a report by January 1, 2014 regarding the Pilot Program that would contain specified information. SB 1146 Page 5 15)Requires the commissioner to conduct a sample survey of borrowers who have participated in the pilot program to better understand the borrower's experience. 16)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, 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. (Financial Code 22000 et seq. 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 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. COMMENTS : In support of the bill the author states: Consumer Finance Lenders (CFL) Law, enacted in the 1950's based on statutes from the 1920's, is archaic and needs reform. For example, its restrictions on interest rates, fees, and marketing partnerships for loans in the $250 to SB 1146 Page 6 $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 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. This Bill Would Allow An Experimental Program That Is Designed To Increase Credit Opportunities For Those Not Served By The Existing Market, While Ensuring That These Products Are Underwritten and Sold Responsibly. As supporters note, the Department of Corporations (DOC) administers the CFLL and licenses finance lenders who may make secured and unsecured consumer and commercial loans under that law. The DOC's "2008 Annual Report on the Operation of Finance Companies Licensed under the CFLL" indicates that in 2008, licensees made 96,665 consumer loans under $2,500. Of this amount, 81,790 were unsecured loans. In contrast, during that same time period, payday lenders made over 11 million payday loans. (DOC, "2008 Annual Report on the Operation of Deferred Deposit Originators under the California Deferred Deposit Transaction Law.") This bill is intended to create a responsible alternative to payday loans by establishing a pilot program until January 1, 2015 that would allow CFLL licensees to offer a new type of small-dollar consumer loan that meets specified requirements. This bill is based on the small-dollar loan model of Progreso Financiero (Progreso), a company based in Mountain View, California which offers short-term, unsecured loans of $250 to $2,500 directed to Latino borrowers who lack credit scores. Progreso makes its loans through 27 retail locations in California, all of which are located inside ethnic supermarkets and pharmacies. So far, the company, created in 2005, has made 40,000 loans totaling $36 million with an average loan of $900 and an average term of nine months. SB 1146 Page 7 Any relaxation of current rules for loan products targeted to those who may lack or have more risky credit histories naturally creates concern that there are appropriate safeguards to prevent any potential for abuse by any of the potential market entrants. Accordingly, this bill has been crafted in collaboration with consumer advocates in an effort to anticipate and preclude as many pitfalls as stakeholders have been able to identify. In particular, there have been detailed negotiations regarding late fees, finder's fees, insurance products, and assuring as much accuracy as possible in determining an applicant's debt for the purpose of meeting the debt-to-income ratio requirements. The proposed amendments reflect a consensus reached between the sponsor and consumer advocates in consultation with the Committee. It is believed that these amendments address all outstanding concerns. Author's Amendments . The author prudently proposes that the bill be amended as reflected in the attached mock-up to address concerns by consumer advocates. REGISTERED SUPPORT / OPPOSITION : Support Progreso Financiero (sponsor) California Hispanic Chamber of Commerce Experian Propser Marketplace, Inc. Jose Cisneros, San Francisco Treasurer and Tax Collector Opposition (as proposed to be amended) None on file Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334