BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1146
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          SENATE THIRD READING
          SB 1146 (Florez)
          As Amended  August 16, 2010
          Majority vote 

           SENATE VOTE  :36-0  
          
           BANKING & FINANCE   12-0        JUDICIARY           10-0        
           
           ----------------------------------------------------------------- 
          |Ayes:|Eng, Niello, Evans, Fong, |Ayes:|Feuer, Tran, Brownley,    |
          |     |Fuentes, Gaines, Harkey,  |     |Evans, Hagman, Huffman,   |
          |     |Mendoza, Nava, Ruskin,    |     |Jones, Knight, Monning,   |
          |     |Torres, Tran              |     |Saldana                   |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           APPROPRIATIONS      17-0                                        
           
           -------------------------------- 
          |Ayes:|Fuentes, Conway,          |
          |     |Bradford, Huffman, Coto,  |
          |     |Davis, De Leon, Gatto,    |
          |     |Hall, Harkey, Miller,     |
          |     |Nielsen, Norby, Skinner,  |
          |     |Solorio, Torlakson,       |
          |     |Torrico                   |
          |     |                          |
           -------------------------------- 
           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)Prohibits DOC from approving an application for the pilot  
            unless the licensee has been accepted as a data furnisher by  
            at least one the national credit reporting agencies.









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

          4)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 $500 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)   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;

             d)   The loan term is:  i) 120 days for loans whose principal  
               balance upon origination is at least $500, but is less than  
               $1,500; and, ii) 180 days for loans whose principal balance  
               upon origination is at least $1,500;

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

             f)   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.

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

          6)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  








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               not in excess of $12; or,

             b)   For a period of default no less than 14 days, an amount  
               not in excess of $18.

          7)Provides that the imposition of delinquency fees would be  
            subject to the following:

             a)   No more than one fee may be imposed per delinquent  
               payment;

             b)   No more than two delinquency fees may be imposed during  
               any period of 30 consecutive days;

             c)   No delinquency fee may be imposed on a borrower who is  
               180 days or more past due if that fee would result in the  
               sum of the borrower's remaining unpaid principal balance,  
               accrued interest, and delinquency fees exceeding 180% of  
               the original principal amount of the borrower's loan; and,

             d)   The licensee shall attempt to collect a delinquent  
               payment for a period of at least 30 days following the  
               start of the delinquency before selling or assigning that  
               unpaid debt to an independent party for collection.

          8)Requires the licensee to request from the borrower information  
            regarding outstanding deferred deposit transactions.

          9)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.

          10)States that a licensee may not require as a condition of  
            providing the loan that the borrower waive any right, penalty,  
            remedy, forum or procedure otherwise available under the law.

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

          12)Prohibits a licensee from offering insurance on tangible  
            personal or real property as specified.









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          13)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.

          14)This bill 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. 

          15)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. 

          16)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.








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

          18)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.

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

          20)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.

          21)Allows DOC to exercise various enforcement powers regarding  
            finders.

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

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

          24)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  :









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          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  
            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 Assembly Appropriations  
          Committee,   DOC would incur one-time costs in the range of  
          $200,000 and ongoing costs in the range of $75,000 to $150,000  
          (special funds).

           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  








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          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 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. 

           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  








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          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  
          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  








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          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).


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


                                                               FN:  0006048