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.









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           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









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             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: 









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             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.  









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          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  








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               $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. 








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          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