BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
SB 318 (Hill) Hearing Date: April 17, 2013
As Amended: April 1, 2013
Fiscal: Yes
Urgency: No
SUMMARY Would enact the Pilot Program for Increased Access to
Responsible Small Dollar Loans, as specified, which would be
operative until January 1, 2018.
DESCRIPTION
1. Would establish a new pilot program under the California
Finance Lenders Law (CFLL), which builds on the experiences
of and knowledge gained through establishment in 2010 of the
Pilot Program for Affordable Credit Building Opportunities
(SB 1146, Florez, Chapter 640, Statutes of 2010; referred to
as "the SB 1146 pilot" in this analysis).
PROVISIONS OF SB 318 THAT RETAIN ELEMENTS OF THE SB 1146 PILOT
2. Like the SB 1146 pilot, SB 318 would require lenders
interested in participating in the pilot program to apply to
the Commissioner of Corporations (commissioner) for
acceptance to the pilot. Existing lenders would have to be
in good standing with their regulators in order to apply.
Licensees accepted into the pilot would be authorized to
make installment loans with principal amounts between $300
and $2,500. Pilot program lenders would have to underwrite
each pilot program loan, offer credit education to borrowers
prior to disbursing loan proceeds, and report borrower
payment history to at least one major credit bureau. A
pilot program lender could not extend a loan to any borrower
whose total debt to income ratio, including the installment
loan for which the borrower applied, exceeded 50% of that
borrower's gross monthly income.
Pilot program lenders would be limited as to the frequency with
which they could charge origination fees and late fees, and
would be prohibited from offering, selling, or requiring
SB 318 (Hill), Page 2
borrowers to contract for credit insurance. They would be
authorized to use third parties (known as finders) to help
market their loan products to prospective borrowers, subject
to specified restrictions. They would be authorized to
charge slightly higher interest rates, origination fees, and
delinquency fees to borrowers relative to those authorized
under the CFLL.
SB 318 (Hill), Page 3
PROVISIONS OF SB 318 THAT REPRESENT CHANGES RELATIVE TO THE SB
1146 PILOT
3. Application to the pilot: Would streamline the application
process for companies that do not currently possess a CFLL
license, by taking what is currently a two-step process
under the SB 1146 pilot (apply for and receive a CFLL
license, then apply for and receive permission to enter the
pilot) and making it a single step (apply for both
simultaneously). Would allow any business entity in good
standing with its regulator(s) in California and the other
states in which it does business to submit a joint
application for licensure under the CFLL and admittance to
the pilot program.
4. Acceptance as a data furnisher: Would delete the SB 1146
pilot program requirement that a licensee be approved as a
data furnisher by a consumer reporting agency, before being
accepted into the pilot. Under SB 318, the commissioner
would be authorized to approve a licensee for the new pilot,
before that licensee has been accepted as a data furnisher,
if the commissioner has a reasonable expectation, based on
information supplied by the licensee, that: a) the licensee
will be accepted as a data furnisher, once it achieves a
lending volume required of data furnishers of its type by a
consumer reporting agency, and b) such lending volume will
be achieved within the first six months of the licensee
commencing lending under the pilot.
Licensees that are admitted to the SB 318 pilot before being
accepted as data furnishers would be required to report all
borrower payment performance since their inception of
lending under the pilot, as soon as they are accepted as
data furnishers, but in no event more than six months after
they begin lending under the SB 318 pilot. Any licensee
that fails to become accepted as a data furnisher by a
national credit reporting agency within six months of
commencing lending under the pilot would automatically be
dropped from the pilot program.
5. Definition of consumer reporting agency: SB 318 would
define "consumer reporting agency that compiles and
maintains files on consumers on a nationwide basis" by
reference to Section 603(p) of the federal Fair Credit
Reporting Act. The SB 1146 pilot references "national
credit reporting agencies" but does not define the term.
SB 318 (Hill), Page 4
6. Underwriting fee amount: Would allow pilot program lenders
to charge an underwriting fee of up to $30 per loan, to help
offset the significant costs of underwriting according to
pilot program requirements. The underwriting fee would be
charged at loan origination, and only on approved loans.
The SB 1146 pilot requires stringent underwriting, but does
not allow for an underwriting fee.
7. Origination fee amount: Would authorize an origination fee
equal to 6% of the principal amount of the loan, capped at
$75. The SB 1146 pilot authorizes an origination fee of 5%
of the principal amount of the loan, capped at $65. The
origination fee would be charged at loan origination, and
only on approved loans (same as the SB 1146 pilot).
8. Underwriting and origination fee frequency: Would allow
lenders to charge borrowers an underwriting and origination
fee in connection with a new loan once every four months
(versus once every six months under the SB 1146 pilot).
Would allow lenders to charge borrowers an underwriting and
origination fee once very eight months in connection with a
refinancing (versus once every twelve months under the SB
1146 pilot).
9. Interest rates: Would authorize interest rates that are
tied to the prime rate, to reflect lenders' cost of capital.
SB 1146 authorizes fixed interest rates, which do not float
to reflect the cost of funds.
Would set annual interest rates on loan principal amounts of
$1,000 and below at "prime plus 32.75%," which currently
equates to a 36% annual simple interest rate. Annual
interest rates on principal amounts between $1,001 and
$2,499 would be set at "prime plus 28.75%," which currently
equates to a 32% annual simple interest rate. Interest
rates would be locked in at loan origination, to protect
borrowers from unexpected payment increases. The fixed
interest rates authorized by the SB 1146 pilot are 30% on
principal amounts of $1,000 and below, and 26% on principal
amounts between $1,001 and $2,499.
SB 318 would not require pilot program lenders to offer repeat
borrowers lower interest rates. The SB 1146 pilot requires
lenders to offer repeat borrowers interest rate reductions
of at least one percentage point annually, subject to
SB 318 (Hill), Page 5
certain conditions, with no cap on the number of interest
rate reductions for which a customer can qualify.
10. Late fees: Would authorize SB 318 lenders to charge late
fees of up to $16 to borrowers whose payments are four or
more days late, or up to $22 to borrowers whose payments are
fourteen or more days late. The SB 1146 pilot authorizes
late fees of up to $12 to borrowers whose payments are seven
or more days late, or up to $18 to borrowers whose payments
are fourteen or more days late. SB 318 would retain the SB
1146 prohibition against charging more than one delinquency
fee per delinquent payment, and against charging more than
two delinquency fees during any 30-day period. SB 318 would
also retain the SB 1146 pilot program provision, which
states that 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 loan.
11. Information provided to borrowers at loan origination:
Would increase the information that borrowers are provided
at the time of loan application, by requiring all of the
following to be provided, in a type-size of at least
10-point type: a) the amount borrowed; b) the total dollar
cost of the loan to the consumer, if the loan is paid back
on time, including the sum of the origination fee,
underwriting fee, principal amount borrowed, and interest
payments; c) the corresponding annual percentage rate,
calculated in accordance with Federal Reserve Board
Regulation Z; d) the periodic payment amount; e) the
delinquency fee schedule; and f) the following statement:
"Repaying your loan early will lower your borrowing costs by
reducing the amount of interest you will pay. This loan has
no prepayment penalty."
The SB 1146 pilot only requires applicants to be provided with
the annual percentage rate, periodic payment amount, and
total finance charge, calculated in accordance with Federal
Regulation Board Regulation Z.
12. Finders: Would clarify language that is unclear in the SB
1146 pilot, by providing that licensees who use finders are
responsible for identifying one or more employees of a
finder, who are in charge of finder activities across all of
that finder's locations. Would also clarify that the
SB 318 (Hill), Page 6
disclosure notice required to be provided by lenders who
utilize finders to borrowers may be provided as part of the
loan contract, or via any other means acceptable to the
borrower.
13. Secured loans: Would remove the SB 1146 pilot requirement
that pilot program loans be unsecured.
14. Reporting: SB 318 would require DOC to publish two
reports, rather than one, regarding lender and borrower
performance under the new pilot, and would alter some of the
data elements of the report to focus more on lender and
borrower performance, and less on the intended uses of loan
proceeds.
PROVISIONS OF SB 318 THAT ARE NOT CONTAINED IN THE SB 1146 PILOT
15. Due date reminders: Would require SB 318 pilot program
lenders to remind borrowers about upcoming payments, at
least two days prior to the payment due date, via any means
acceptable to the borrower.
16. Branch managers: Would authorize a licensee accepted to
participate in the SB 318 pilot to appoint one or more
branch managers with responsibility for multiple branch
locations, subject to approval by the commissioner and a
finding by the commissioner that the centralized nature of
underwriting and other key business activities provided by
the licensee does not require a unique manager for each
branch location to ensure consumer protection.
17. Click-throughs to a lender's web site: Would provide that
provision by a third party of an electronic portal, which
can be used by a prospective borrower to "click through" to
a pilot lender's web site, does not, in and of itself,
represent finder activity by that third party.
18. Unlicensed lending voids the loan contract: Would amend
the CFLL to provide that the extension of a loan subject to
the CFLL by a person that is unlicensed under the CFLL voids
the loan contract, and would prohibit any person from
collecting or receiving any principal, charges, or other
recompense in connection with the loan.
SB 318 (Hill), Page 7
EXISTING LAW
19. Provides for the CFLL, administered by the Department of
Corporations (DOC), which authorizes the licensure of finance
lenders, who may make secured and unsecured consumer and
commercial loans (Financial Code Sections 22000 et seq.). The
following are the key rules applied to consumer loans made
pursuant to the CFLL:
a. CFLL licensees who make consumer loans under $2,500 are
capped at interest rates which range from 12% to 30% per
year, depending on the unpaid balance of the loan (Sections
22303 and 22304). Administrative fees are capped at the
lesser of 5% of the principal amount of the loan or $50
(Section 22305).
b. In addition to the requirements in "a" above, CFLL
licensees who make consumer loans under $5,000 are prohibited
from imposing compound interest or charges (Section 22309);
are limited in the amount of delinquency fees they may impose
(Section 22320.5; delinquency fees are capped at a maximum of
$10 on loans 10 days or more delinquent and $15 on loans 15
days or more delinquent); are required to prominently display
their schedule of charges to borrowers (Section 22325); are
prohibited from splitting loans with other licensees (Section
22327); are prohibited from requiring real property
collateral (Section 22330), and are limited to a maximum loan
term of 60 months plus 15 days (Section 22334).
c. In addition to the requirements in "a" and "b" above,
CFLL licensees who make consumer loans under $10,000 are
limited in their ability to conduct other business activities
on the premises where they make loans (Section 22154); must
require loan payments to be paid in equal, periodic
installments (Section 22307); and must meet certain standards
before they may sell various types of insurance to the
borrower (Sections 22313 and 22314).
d. Generally speaking, the terms of loans of $10,000 or
above are not restricted under the CFLL.
20. Authorizes the licensure of finance brokers under the CFLL, and
defines a finance broker as any person who is engaged in the
business of negotiating or performing any act as a broker in
connection with loans made by a finance lender (Section 22004).
SB 318 (Hill), Page 8
COMMENTS
1. Purpose: The provisions of this bill are intended to
increase the availability of installment loans made in
California, in principal amounts between $300 and $2,500, on
terms that are affordable to borrowers, and in a manner that
helps borrowers build or improve their credit scores. The
contents of the bill are based on detailed conversations
with each of the three SB 1146 pilot program lenders about
changes they believe will improve that earlier pilot. Taken
together, the changes proposed in SB 318 are intended to
expand Californians' access to responsible, credit-building
loans between $300 and $2,500, by increasing the number of
lenders in this space, and allowing lenders who are
currently lending responsibly in this space to expand.
2. Background: In 2010, an entrepreneur named James Gutierrez,
then President and CEO of a San Francisco Bay Area-based
company called Progreso Financiero, asked the Legislature to
help him responsibly serve more borrowers, by authorizing a
series of changes to the CFLL. Mr. Gutierrez' venture
capital-backed company was founded with the aim of offering
unbanked and underbanked borrowers a responsible alternative
to payday loans. Using a CFLL license, Progreso offered
short-term, unsecured loans between $250 and $2,500, to
borrowers who lacked credit scores or whose credit files
were too thin to qualify them for more traditional forms of
credit. Most of Progreso's borrowers were relatively recent
immigrants of Hispanic descent.
One of the key components of Progreso Financiero's business
model was the practice of reporting borrower payments to a
major credit bureau, to help its customers establish a
credit history. Mr. Gutierrez asserted that a customer who
lacked a credit score before obtaining a Progreso loan could
establish a FICO score of up to 638, after successfully
paying off two Progreso loans without experiencing a
delinquency, and up to 660 after successfully paying off
three Progreso loans without a delinquency. These credit
score impacts are representative of the positive impacts
that loan repayment can have on a borrower's credit score;
they do not take into account other credit-impacting events
that typically occur while a Progreso loan is outstanding
(thus they are representative, not predictive).
The changes initially sought by Mr. Gutierrez in 2010 were
SB 318 (Hill), Page 9
contained in SB 1146 (Florez). That bill was ultimately
enacted by the Legislature, albeit in substantially
different form than the form initially proposed on behalf of
Progreso Financiero by Senator Florez.
Since the 2010 legislation was enacted, five lenders have
applied to participate in the SB 1146 pilot program. Three
of the applicants were accepted, including Progreso
(accepted to the pilot program in April 2011; made 118,000
loans under the pilot during 2012), LendUp (accepted to the
pilot program in November 2012 and not yet lending under the
pilot), and FairLoan Financial (accepted to the pilot
program in November 2012; has made under 100 loans under the
pilot program since acceptance). Two of the applicants to
the pilot program withdrew their applications.
3. Discussion: Despite the existence of the SB 1146 pilot,
relatively few installment loans are made in California,
with principal amounts under $2,500. This represents a
challenge to the significant population of people in
California, who are unable to access affordable credit
through banks and credit unions. Californians who lack
credit scores or have very thin credit files currently have
very few options when they need to borrow money. Credit
cards are often unavailable to this population, or, if
available, bear very high interest rates and fees.
Californians with subprime credit scores also have few
options for affordable credit, and typically access payday
lenders or high-interest rate installment lenders that lend
in amounts above $2,500, when their incomes fail to match
their spending needs.
The lack of choices available to borrowers who cannot qualify
for credit cards, or for bank or credit union loans, and who
require credit with which to meet their expenses, is borne
out by a comparison of the number of small dollar value
installment loans made each year by licensed lenders
operating in California with the number of payday loans made
each year by licensed lenders operating in California.
During 2011 (the most recent year for which lending data are
available for all CFLL licensees), CFLL licensees made
approximately 275,000 consumer loans with principal amounts
under $2,500. This compares with 12.4 million deferred
deposit transactions (payday loans), which were made by
licensed payday lenders during the same calendar year. The
number of loans made by unlicensed lenders operating in
SB 318 (Hill), Page 10
California during that same time period is unknown.
Although aggregated annual data are not yet available for 2012,
DOC has indicated that only two CFLL lenders made the vast
majority of installment loans with principal amounts below
$2,500 during 2012 - Progreso Financiero and Adir Financial,
each of which made approximately 118,000 loans during 2012.
As noted above, Progreso is a pilot program participant that
makes loans of various sizes under the pilot. Its loans are
currently available in 65 locations throughout California.
Adir Financial is not a pilot program participant. It
extends unsecured loans of up to $500 to finance purchases
made by customers of the Curacao department store chain in
Los Angeles. Its loans are not available elsewhere in
California.
4. Rationale: Each of the changes proposed by SB 318 is based
on information gained from existing pilot program
participants about ways in which the SB 1146 pilot can be
improved. The author's office provided the following logic
for each of the changes proposed by the bill.
a. Goal: Reflect the high costs of capital, customer
acquisition, and loan origination that are experienced by
non-depository institutions, such as pilot program
lenders.
SB 318 reflects these realities by proposing to alter the
interest rate and origination fee schedules of the SB
1146 pilot. Unlike the fixed interest rates in the SB
1146 pilot, the new pilot authorizes interest rates that
are tied to the prime rate, to reflect lenders' cost of
capital, and to ensure that the SB 318 pilot program will
not become obsolete, as the cost of money rises from
current historic lows.
SB 318 proposes that annual interest rates on loans of
$1,000 and below be set at "prime plus 32.75%," which
currently equates to a 36% annual simple interest rate.
It further proposes that annual interest rates on loan
principal amounts between $1,001 and $2,499 be set at
"prime plus 28.75%," which currently equates to a 32%
annual simple interest rate. Interest rates will be
locked in at loan origination, to protect borrowers from
unexpected payment increases.
SB 318 (Hill), Page 11
SB 318 also reflects the fact that the cost to originate a
loan is not driven by loan amount; origination costs for
loans of $500, $1,500, and $3,000 are identical. To
reflect this reality, SB 318 proposes to increase
allowable origination fees under the pilot to 6% of the
principal amount of the loan, capped at $75, the same
maximum origination fee authorized under the CFL for
loans of $2,500 and above.
SB 318 also proposes to delete the SB 1146 pilot program
requirement that pilot program lenders offer repeat
borrowers lower interest rates. Increased competition
for borrowers in the $300 to $2,500 space will reward the
best borrowers, without the need for a statutory interest
rate reduction requirement. Mandating serially lower
interest rates is not reflective of market realities, and
fails to work over the long-term -- the existing pilot
program has no floor on the total interest reductions
that can accrue to a given borrower. Mandating lower
interest rates for repeat borrowers also misaligns
borrower and lender interests, by creating a situation in
which a lender cannot afford, and will likely decline to
make a loan to a high-quality, repeat borrower, leaving
that borrower few responsible options for the cash he or
she needs.
Finally, SB 318 proposes to remove the SB 1146 pilot
program requirement that pilot program loans be
unsecured. Allowing for the possibility of both secured
and unsecured loans is intended to increase the types and
numbers of small dollar loans available to borrowers from
pilot program lenders.
b. Goal: Retain the stringent underwriting
requirements adopted as part of the SB 1146 pilot, to
ensure that borrowers who obtain pilot program loans can
afford to pay them back, and increase the likelihood that
their credit scores will grow as a result of their
borrowing from pilot program participants.
SB 318 reflects the high cost of the stringent underwriting
it proposes to retain, by allowing pilot program lenders
to charge an underwriting fee of up to $30 per loan.
c. Goal: Remove the barriers that prevent good
borrowers from returning to pilot program lenders once
SB 318 (Hill), Page 12
they repay their initial loans. Align lender and
borrower interests by loosening the restriction on the
frequency with which loan origination fees may be
imposed.
Often, good borrowers pay off their initial loans and
return to their lenders for larger loans. Sometimes,
these good borrowers refinance their loans to obtain
higher principal amounts. The SB 1146 pilot prohibits
lenders from charging more than one administrative fee in
any six month period. It also prohibits lenders from
charging an administrative fee, when a borrower
refinances his or her loan within one year of loan
origination. Both of these prohibitions prevent pilot
program lenders from serving those of their borrowers
whose good behavior qualifies them for new, larger loans.
Often the best option for these borrowers is another
loan from their existing pilot program lender - a loan
that lenders cannot afford to make under the existing
pilot program rules, because those rules prevent pilot
program lenders from offsetting their costs to originate
these new loans.
SB 318 proposes to allow pilot program lenders to charge
origination fees more frequently than allowed under the
current pilot (once every four months in the case of a
new loan origination, and after eight months has elapsed,
in connection with a refinancing).
d. Goal: Improve the transparency of loans made under
the pilot program.
SB 318 achieves this goal by requiring all of the following
key loan terms and information to be disclosed to
consumers, at the time of loan application: the amount
borrowed; the total dollar cost of the loan to the
consumer, if the loan is paid back on time, including the
sum of the origination fee, underwriting fee, principal
amount borrowed, and interest payments; the corresponding
annual percentage rate, calculated in accordance with
Federal Reserve Board Regulation Z; the periodic payment
amount; the delinquency fee schedule; and the following
statement: "Repaying your loan early will lower your
borrowing costs by reducing the amount of interest you
will pay. This loan has no prepayment penalty." The SB
1146 pilot requires far less information to be provided
SB 318 (Hill), Page 13
to borrowers who obtain pilot program loans.
e. Goal: Promote and enhance the credit-building
aspects of the pilot program by discouraging late
payments by borrowers.
SB 318 proposes to require pilot program lenders to remind
borrowers about upcoming payments, at least two days
prior to the payment due date. The SB 1146 pilot lacks
this requirement.
SB 318 also authorizes the imposition of late fees earlier
than is currently allowable under the existing pilot
program, and proposes to increase the sizes of late fees
that may be charged. These changes are based upon the
finding (observed by the largest of the SB 1146 pilot
program lenders) that more stringent delinquency fees are
highly motivating to borrowers. The proposed changes to
the timing of delinquency fee imposition and to the sizes
of allowable delinquency fee charges are expected to
reduce the number of delinquencies that occur.
f. Goal: Remove bureaucratic hurdles experienced by
start-ups seeking to gain entry to the pilot program.
Two of the three pilot program participants struggled
with the requirement to be approved as data furnishers by
a national credit reporting agency before being accepted
into the pilot program. Among their many requirements to
approve an entity as a data furnisher, national credit
reporting agencies require lending histories. The SB
1146 pilot program language creates a Catch-22 for
start-ups - they can't lend under the pilot, without
first being accepted as a data furnisher, but they can't
be accepted as a data furnisher, until after they have
reached the lending threshold required for acceptance as
a data furnisher.
SB 318 proposes to eliminate the Catch-22 experienced by
start-ups seeking entry to the pilot program, by deleting
the existing pilot program requirement that a licensee be
approved as a data furnisher by a consumer reporting
agency, before being accepted into the pilot. Under SB
318, the DOC commissioner is authorized to approve a
licensee for the new pilot, before that licensee has been
accepted as a data furnisher, if the commissioner has a
reasonable expectation, based on information supplied by
SB 318 (Hill), Page 14
the licensee, that: 1) the licensee will be accepted as a
data furnisher, once it achieves a lending volume
required of data furnishers of its type by a consumer
reporting agency, and 2) such lending volume will be
achieved within the first six months of the licensee
commencing lending under the pilot. Licensees that are
admitted to the new pilot before being accepted as data
furnishers must report all borrower payment performance
since their inception of lending under the pilot, as soon
as they are accepted as data furnishers, but in no event
more than six months after they begin lending under the
pilot. Any licensee that fails to become accepted as a
data furnisher by a national credit reporting agency
within six months of commencing lending under the pilot
is automatically dropped from the pilot program.
g. Goal: Clarify what is meant by national credit
reporting agency. The SB 1146 pilot refers to national
credit reporting agencies, without defining the term.
This has led to confusion among lenders regarding program
requirements. Some credit reporting agencies are
national in scope and maintain data that can be used to
generate a FICO score or other nationally-recognized
credit score. Other credit reporting agencies
(including, but not limited to Clarity and Teletrack),
are national in scope, but do not generate credit scores
that are recognized by providers of prime credit.
Reporting to a national credit reporting agency whose
data are used to generate a FICO or other mainstream
credit score is an important element of the pilot,
intended to help borrowers build credit and improve their
credit scores.
SB 318 proposes to clarify that the credit bureaus to which
pilot program lenders must report are those which
generate credit scores that are recognized by mainstream
providers of prime credit. To achieve this goal, it
proposes to require reporting to "consumer reporting
agencies that compile and maintain files on consumers on
a nationwide basis," as defined in Section 603(p) of the
federal Fair Credit Reporting Act.
h. Goal: Remove bureaucratic hurdles that prevent
pilot program participants from utilizing finders to help
acquire customers. To date, none of the pilot program
lenders have utilized finders, despite the fact that the
SB 318 (Hill), Page 15
finder component of SB 1146 was the single element of
that bill, which was intended to have the greatest
positive impact on lenders' ability to serve more
borrowers.
SB 318 removes these bureaucratic barriers by proposing to
clarify three topics. First, it clarifies that licensees
who utilize finders are responsible for identifying one
or more employees of a finder, who are in charge of
finder activities across all of that finder's locations.
Lack of clarity in SB 1146 has been read by some as
requiring each licensee to identify a single individual
at each of a finder's many locations, who is in charge of
finder activity at that single location. This
requirement is impractical, given the significant staff
turnover in most retail establishments. The proposed
clarification retains the intent of SB 1146 to ensure
accountability among finders and the licensees that use
those finders, without imposing an impossible-to-meet
standard.
Second, SB 318 clarifies that the disclosure notice
required to be provided to borrowers who utilize finders
may be provided as part of the borrower's loan contract,
or via any other means acceptable to the borrower.
Third, the bill clarifies that provision by a third party
of an electronic portal that can be used by a prospective
borrower to "click through" to a licensee's web site
does not, in and of itself, represent finder activity by
that third party. This change is intended to allow pilot
program lenders to place electronic kiosks or other
electronic portals at third party locations, through
which individuals interested in obtaining a pilot program
loan can directly access the pilot program lender's web
site.
i. Goal: Remove bureaucratic hurdles that hinder the
efficient operation of pilot program participants. DOC
currently interprets Section 22102 of the CFL as
requiring a unique branch manager to oversee every
branch. This is a logical consumer protection for a
lender with decentralized lending operations, but a
bureaucratic hurdle for a pilot program licensee where a
branch consists of a single booth or window staffed with
a handful of employees, and where the centralized nature
SB 318 (Hill), Page 16
of underwriting and other business activities of the
licensee mean that the branch lacks independent
decision-making authority.
SB 318 proposes to authorize DOC to exercise discretion in
the application of Section 22102, by allowing pilot
program participants to apply to DOC for approval to
appoint branch managers with responsibility for
overseeing activities at more than one branch.
j. Goal: Improve the utility of reporting intended to
evaluate the success of the new pilot.
SB 318 proposes to require DOC to publish two reports,
rather than the single report required by the SB 1146
pilot, regarding lender and borrower performance under
the new pilot. Those reports would be due two years
before the bill sunsets, and one year before the bill
sunsets, to provide the Legislature with more timely and
more complete information about how the SB 318 pilot is
working. SB 318 also proposes to alter some of the data
elements of the report that SB 1146 required, to focus
more on lender and borrower performance, and less on the
intended uses of loan proceeds.
aa. Goal: Streamline the application process for
companies that do not currently possess a CFLL license,
by taking what is currently a two-step process (apply for
and receive a CFLL license, then apply for and receive
permission to enter the pilot) and making it a single
step (apply for both simultaneously).
SB 318 proposes to allow any business entity in good
standing with its regulator(s) in California and the
other states in which it does business to submit a joint
application for licensure under the CFLL and admittance
to the pilot program.
bb. Goal: Minimize the ability of unlicensed
installment lenders to operate in California.
SB 318 proposes to reduce the potential profitability of
engaging in unlicensed installment lending in California
by providing that if an installment loan is willfully
extended by an unlicensed lender to a California
borrower, that loan contract is void, and no person shall
SB 318 (Hill), Page 17
have any right to collect or receive any amount provided
for in the contract, nor any charges or fees in
connection with the transaction.
5. Summary of Arguments in Support:
a. All three of the SB 1146 pilot program lenders
support SB 318.
Progreso Financiero, sponsor of SB 1146, notes that small
dollar lending is high-cost and challenging; lenders
incur many of the same expenses and risks with small
dollar loans as they would with larger loans, but with
much less profit. Yet, there is an extraordinary and
growing demand for such small loans. The imbalance
between supply and demand drives individuals and
families, particularly those from low-income, minority
communities, to rely on expensive, potentially dangerous
financial options that can be harmful to their financial
well-being. The SB 1146 pilot program took important,
pioneering steps toward addressing some of the regulatory
barriers related to making small loans.
But, Progreso writes, "Now, after several years of
experience in the pilot, it is clear that more needs to
be done to increase access to the program for both
lenders and borrowers. We need to make the benefits of
the pilot more widespread, viable, and useful to
Californians. SB 318 does that....The best way to combat
predatory and harmful lending is to encourage and allow
more socially responsible lending like that enabled by
the pilot program. SB 318 does this in a measured,
thoughtful way...We think that the adjustments proposed
by the bill are modest and very beneficial to the
millions of Californians who need and want real options
and an ability to build a better financial future when
they need credit."
LendUp characterizes itself as a socially-responsible
online lender whose goal is to help those Californians
who traditionally utilize payday loans. It is proud that
California began taking steps, through SB 1146, to
support the importance of credit-building, and the
benefits it has on people and communities. "SB 1146
arose from a specific need: people with modest financial
means and little or no credit have very few options for
SB 318 (Hill), Page 18
borrowing small dollar amounts when they need them, and
the options they do have are often detrimental to their
financial health...we think this new bill will take the
best of what we have learned with the original pilot
program and encourage more participants to enter the
space, in order to provide newer and more innovative
solutions for our state and its people. We believe SB
318 will further improve the program by attracting more
lenders and allowing those currently in the program to
expand their offerings to Californians in a way that is
dignified, empowering, and accessible to the millions who
need it the most."
FairLoan Financial writes that SB 318 "is very much a step
in the right direction in terms of increasing access to
transparent and responsible credit to as many
Californians as possible....It is our belief that SB 318
lays the ground work for a dynamic marketplace governed
by a consistent and stringent set of rules that ensure
consumers will be the ultimate beneficiaries."
b. Chris Larsen, CEO and co-founder of OpenCoin, a
virtual currency and distributed open source payment
network, and the Silicon Valley Leadership Group also
support the bill. Both believe that the changes proposed
in SB 318 are appropriate, balanced, and targeted to
reflect what has been learned through the SB 1146 pilot.
They believe that it is an important bill, which will
have positive effects for the many low-income people with
limited credit options.
6. Summary of Arguments in Opposition: Consumers Union (CU)
is opposed to the bill unless it is amended, but has not
suggested any amendments that would remove its opposition.
CU has requested data from the existing pilot program
lenders to get a sense for how loans made under the SB 1146
pilot are performing, but has not yet received or analyzed
the data. "Although the participants claim that the pilot
must be altered by raising fees to achieve profitability,
they have not yet provided any data or projections to
support the specific changes they request. Without more
information, it is simply too difficult to know whether SB
318 will create policy that is sustainable for lenders and
fair to consumers."
7. Amendments: The author has agreed to the following
SB 318 (Hill), Page 19
amendments, to address technical concerns raised by CU.
These amendments do not remove CU's opposition.
a. Increase the type size of the notice that must be
provided to borrowers, containing key loan terms and
other loan information, from a minimum of 10-point type
to a minimum of 12-point type. Clarify that provision by
a lender of a mobile phone application, on which the type
size of the disclosure can be manually modified by a
prospective borrower, does not represent a violation of
the requirement to provide the notice in 12-point type,
as long as the borrower is given an option to print the
disclosure in a type size of at least 12-points.
b. Require pilot program lenders to inform borrowers of
the name of the national credit reporting agency/ies to
which it reports borrower payment history.
c. Clarify the language the bill uses to authorize the
imposition of late fees. At present, the bill's language
is patterned on late fee language in SB 1146 and the
CFLL, which inartfully refer to borrowers who are a
certain number of days "in default" on their loans. CU
has suggested that these borrowers are more accurately
"in delinquency" rather than in default. The author has
agreed to clarify the bill's language by referring to a
period of delinquency, rather than a period in default.
8. Prior and Related Legislation:
a. SB 1146 (Florez), Chapter 640, Statutes of 2010:
Authorized the Pilot Program for Affordable
Credit-Building Opportunities, as described above.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
FairLoan Financial
LendUp
OpenCoin
Progreso Financiero
Silicon Valley Leadership Group
Opposition
SB 318 (Hill), Page 20
Consumers Union
Consultant: Eileen Newhall (916) 651-4102