BILL ANALYSIS Ó
SB 318
Page 1
Date of Hearing: August 15, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
SB 318 (Hill, Steinberg, and Correa) - As Amended: July 1, 2013
As Proposed to be Amended
SENATE VOTE : 36-1
SUBJECT : FINANCE LENDERS: SMALL LOAN PILOT PROGRAM
KEY ISSUE : SHOULD AN EXISTING PILOT PROGRAM FOR SMALL-DOLLAR
LOANS BE ABOLISHED AND REPLACED WITH ANOTHER PILOT PROGRAM THAT
ALLOWS HIGHTER INTEREST RATES AND FEES?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill follows SB 1146 of 2010, which was sponsored by
Progreso Financiero and created an ongoing pilot program for
small-dollar loans. This bill would abolish the SB 1146 pilot
before the Legislature receives the Department of Business
Oversight report on the operation of that program, and replace
it with a new pilot program that would allow lenders to charge
higher interest rates and fees. The new pilot program also
makes a number of other technical changes to make applying to
the pilot easier for lenders. Additional provisions require
greater disclosure to borrowers during application and before
payment deadlines, provide for two intermediate reports (instead
of one) with slightly different data, and make other minor
changes. Finally, this bill amends the CFLL such that if an
unlicensed person violates any provision of the CFLL (that is,
by extending a loan), the contract of loan is void, and no
person has any right to collect any recompense in connection
with the transaction. As proposed to be amended it is believed
that the bill has no opposition.
SUMMARY : Abolishes an existing small-loan pilot program and
establishes a new program in its place until January 1, 2018.
Specifically, this bill :
1)Establishes the pilot program for Increased Access to
Responsible Small Dollar Loans for the purpose of allowing
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greater access for responsible installment loans in principal
amounts of at least $300 and less than $2,500. Under this
program, licensees:
a) Must offer unsecured loans with a minimum principal
amount of $300 upon origination and minimum terms depending
on the size of the loan, as specified;
b) Must charge an interest rate no more than the lesser of
36.0% or the following: (1) 32.75% plus the United States
prime lending rate on that portion of the unpaid principal
balance up to $1,000; (2) 28.75% plus the United States
prime lending rate on that portion of the unpaid principal
balance in excess of $1,000 but less than $2,500, capped at
35 percent;
c) May impose an administrative fee in an amount not to
exceed 7 percent of the principal amount, or $90, whichever
is less, with limits on repeated fees and a rate reduction
for the second and subsequent loans to the same borrower;
and a delinquency fee that is no more than $14 for a
delinquency of at least 7 days and $20 for at least 14
days, with limits on repeated fees;
d) Applies a variety of other anti-predation restrictions,
including making specified disclosures to the consumer in
writing at the time of application, including the right to
repay early and the right to timely rescission; reporting
borrower payment performance to a consumer credit reporting
agency, as specified; and not making the loan if the
payments would exceed specified thresholds relative to the
borrower's income.
2)Prohibits any person, in connection with the making of a loan,
from offering, selling, or requiring credit insurance, and
prohibits a licensee from requiring waivers of specified
rights.
3)Regulates finders in a variety of specified ways, including:
a) Licensees may use finders, and those finders may perform
listed services for a licensee at the finder's physical
location for business, such as providing written factual
information about the loan.
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b) Finders are prohibited from providing counseling advice,
providing unapproved loan-related marketing material, and
interpreting or explaining marketing materials, and
specified activities qualify a person as a broker rather
than a finder.
4)Involves the Deputy Commissioner of Business Oversight for the
Division of Corporations, as specified, including:
a) An entity may apply to the Deputy Commissioner for the
pilot program according to specified procedures, and the
Deputy Commissioner may approve a licensee for the program
before that licensee has been accepted as a data furnisher
by a consumer reporting agency, under specified conditions.
b) A licensee must notify the Deputy Commissioner within 15
days of entering into a contract with a finder, as
specified, with fee and reporting requirements.
c) The Deputy Commissioner must examine the operations of
each licensee regularly, as specified, and the Deputy
Commissioner may examine the operations of each finder and
take specified actions against a finder for violations.
d) On or before July 1, 2015, and again, on or before
January 1, 2017, the Deputy Commissioner must post a report
on his or her Internet Web site summarizing utilization of
the program. That report must include, among other things,
the results of a random survey of borrowers who have
participated in the Program.
5)Provides that if an unlicensed person violates any provision
of the CFLL (by extending a loan), the contract of loan is
void, and no person has any right to collect or receive any
principal, charges, or recompense in connection with the
transaction.
EXISTING LAW :
1)Under the California Finance Lenders Law (CFLL), administered
by the Department of Corporations (DOC), authorizes the
licensure of finance lenders, who may make secured and
unsecured consumer and commercial loans. (Financial Code
section 22000 et seq. All references hereinafter are to this
code unless otherwise noted.)
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2)Provides that CFLL licensees who make consumer loans under
$2,500 are capped at interest rates which range from 12
percent to 30 percent per year, depending on the unpaid
balance of the loan. (Financial Code sections 22303, 22304.)
Administrative fees are capped at the lesser of 5 percent of
the principal amount of the loan or $50. (Section 22305.)
3)Authorizes, until January 1, 2015, the Pilot Program for
Affordable Credit-Building Opportunities that allow licensees
accepted into the program to offer small-dollar consumer loans
under the CFLL that are subject to the following:
a) the loan has a minimum principal amount upon origination
of $250 and is not more than $2,500, as specified, with
minimum loan terms based on the size of the loan;
b) the interest rate does not exceed 30 percent for the
unpaid principal balance of the loan up to and including
$1,000, and, 26 percent for the unpaid balance of the loan
in excess of $1,000;
c) an administrative fee not in excess of either 5% of the
principal amount, or $65, whichever is less;
d) the licensee must report each borrower's payment
performance to at least one of the national credit
reporting agencies; and
e) the licensee must underwrite each loan and shall not
make a loan if it determines that the borrower's total
monthly debt service payments exceed 50 percent of the
borrower's gross monthly income. (Section 22348 et seq.)
4)Imposes various other restrictions on participants in the
above pilot program, including the use of finders, and
requires the Commissioner of the Department of Corporations to
submit a report no later than January 1, 2014, summarizing
utilization of the pilot program, including recommendations
regarding whether the program should be continued after
January 1, 2015. (Section 22361.)
COMMENTS : In support of the bill, the author states:
Increased access to loans in the $300 to $2,500 space is
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critical to the significant population of people 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 and high interest rate
installment loans are commonly unavailable to them.
Californians with subprime credit scores also have few
options, and typically access payday lenders when their
incomes fail to match their spending needs.
The lack of choices available to borrowers who cannot
qualify for credit cards, 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 in California with
the number of payday loans made each year. During 2011
(the most recent year for which lending data are available
for all CFL 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. Californians
who cannot readily access credit from depository
institutions need more options, when they find themselves
unable to make ends meet.
This Bill Would Permit Increases In Interest Rates, Fees and
Every Other Source of Revenue For Lenders Participating In The
Small Loan Pilot. This bill is premised on the notion that the
existing small loan pilot rules authorized by SB 1146 do not
allow companies to make enough money. The evidence for this
determination is that the primary lender under the existing
program, Progreso Financero (also called Progress Financial),
has not yet earned a profit. With a universe of one, it is very
difficult to say conclusively whether Progreso's lack of
profitability to date is a fundamental attribute of the existing
pilot, or simply the result of the way in which Progreso has run
its business.
In either event, it is worth noting that many start-up companies
don't make a profit right away (e.g., Amazon, Tesla) but
Progreso's bottom line has improved over time, and it continues
to make progress toward profitability. Moreover Progreso has
not indicated that it intends to withdraw from the market; it
has continued to attract large and savvy financial backers, and
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is now being headed by an experienced executive from the Walmart
corporation, one of the most profitable companies in the world.
It is also worth noting that despite Progreso's struggles, two
other companies - LendUp and FairLoan - have recently elected to
join the pilot program under the current SB 1146 rules,
presumably based on their calculation that they can make a
profit.
Nevertheless, it is hoped that by increasing the profit
potential of this loan product, participating lenders will be
able to attract financing that is less costly than the
relatively high-priced venture capital sources, such as Madrone,
on which they reportedly rely now - allowing fees and interest
rates to be reduced in any future extension of this pilot. Of
course, the ultimate success of these pilot lending programs
should reflect not only a consideration of the profit potential
but whether the loans are suitable and responsible.
Unfortunately, by revising the rates and fees before the
Legislature has the benefit of the data required by the report
required by SB 1146 regarding the performance of loans under the
existing pilot, the success of the pilot is hard to measure.
By all accounts, the current pilot lenders appear to offer a
small loan product for which there is strong demand and very few
good alternatives. If they are more profitable, lending in this
segment of the market may increase. If those loans are made
responsibly, increased lending will be beneficial for consumers
in addition to being profitable for lenders. Unfortunately while
we have some information about the profit potential of the pilot
participants, we have no information about the cost or quality
of the loans that have been made thus far. Presumably these
pilot loans are more responsible than payday loans because they
are different products largely targeting different customers.
Among other differences, payday lenders, under the California
Deferred Deposit Transaction Law, lend less than $300 per loan,
while the loans covered by this bill are $300 or greater.
Moreover, payday loans are not underwritten and are therefore
most appealing to customers with damaged credit, while pilot
loans are required to be underwritten and therefore target
customers with little or no credit histories, rather than those
with bad credit histories.
Opposition of Consumer Advocates Removed With Proposed
Amendments. A number of consumer groups had expressed concerns
about whether the full extent of the proposed fee and interest
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rate increases was necessary in order to ensure profitability
and consistent with responsible lending practices. To address
these concerns, the author proposes to amend the bill as
reflected in the attached mockup. As proposed to be amended,
the Committee understands that all opposition has been removed.
REGISTERED SUPPORT / OPPOSITION :
Support
FairLoan Financial
LendUp
OpenCoin
Progreso Financiero
Silicon Valley Leadership Group
Vallarta Supermarkets
Opposition (as proposed to be amended)
None on file
Analysis Prepared by : Kevin G. Baker and Tom Watts / JUD. /
(916) 319-2334