BILL ANALYSIS SB 1146 Page 1 SENATE THIRD READING SB 1146 (Florez) As Amended August 20, 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. 3)Specifies that a licensee may not make a loan, nor use a SB 1146 Page 2 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 $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) 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) 90 days for loans whose principal balance upon origination is less than $500. ii) 120 days for loans whose principal balance upon origination is at least $500, but is less than $1,500; and, iii) 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 SB 1146 Page 3 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. 13)Allows the use of "finders" defined as a person who brings a SB 1146 Page 4 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. 17)Establishes a cap on what can be paid to finders based on SB 1146 Page 5 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 : 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 SB 1146 Page 6 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 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 SB 1146 Page 7 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 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 SB 1146 Page 8 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 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, SB 1146 Page 9 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: 0006428