BILL ANALYSIS Ó
SB 318
Page 1
SENATE THIRD READING
SB 318 (Hill)
As Amended September 6, 2013
Majority vote
SENATE VOTE : 36-1
BANKING & FINANCE 10-0 JUDICIARY 10-0
-----------------------------------------------------------------
|Ayes:|Dickinson, Morrell, |Ayes:|Wieckowski, Wagner, |
| |Achadjian, Blumenfield, | |Alejo, Chau, Dickinson, |
| |Bonta, Chau, Gatto, | |Garcia, Gorell, |
| |Linder, Perea, Weber | |Maienschein, Muratsuchi, |
| | | |Stone |
-----------------------------------------------------------------
APPROPRIATIONS 16-0
--------------------------------
|Ayes:|Gatto, Harkey, Bigelow, |
| |Bocanegra, Bradford, Ian |
| |Calderon, Campos, Eggman, |
| |Gomez, Hall, Holden, |
| |Linder, Pan, Quirk, |
| |Wagner, Weber |
| | |
--------------------------------
SUMMARY : Establishes, until January 1, 2018, the Pilot Program
for Increased Access to Responsible Small Dollar Loans (program)
under the California Finance Lenders Law (CFLL). Specifically,
this bill :
1)Provides that an existing California Finance Lender (CFL)
licensee in good standing that wishes to participate in the
program shall file an application with the Department of
Business Oversight (DBO) in a manner prescribed by the
Commissioner and shall pay a fee. Additionally provides that
an entity that is not licensed under the CFLL may file a duel
application.
2)Specifies that loans made pursuant to the program shall comply
with the following:
a) Interest on the loan shall accrue on a simple-interest
basis;
SB 318
Page 2
b) The licensee shall disclose to the consumer in type face
no smaller than 12-point font, at time of application for
the loan the following:
i) Amount borrowed;
ii) Total dollar cost of the loan to the consumer if the
loan is paid back on time, including sum of the
administrative fee, principal amount borrowed, and
interest payments;
iii) Corresponding annual percentage rate (APR);
iv) Periodic payment amount;
v) Delinquency fee schedule;
vi) A statement of the following, "Repaying your loan
early will lower your borrowing costs by reducing the
amount of interest you will pay. This loan has no
prepayment penalty.";
vii) A statement that the borrower may rescind the loan
within one business day following the day the loan is
consummated and by returning any loan principal advanced;
and,
viii) This disclosure may be provided via a mobile phone
or other electronic application if the font size can be
manually modified by the borrower, and if the borrower
gives the option to print the disclosure in a type face
of least 12-point size or is provided a hardcopy by the
licensee.
c) The loan shall have a minimum principal amount upon
origination of $300 and a term of not less than the
following:
i) Ninety days for loans whose principal balance upon
origination is less than $500;
ii) One hundred twenty days for loans whose principal
balance upon origination is at least $500, but is less
than $1,500; and,
SB 318
Page 3
iii) One hundred eighty days for loans whose principal
balance upon origination is at least $1,500.
3)Allows the following interest rates and charges:
a) For a loan made pursuant to this section at an annual
simple interest rate not to exceed the following:
i) The lesser of 36% or the sum of 32.75% plus the
United States prime lending rate, as of the date of loan
origination, on that portion of the unpaid principal
balance of the loan up to and including, but not in
excess of, $1,000. The interest rate calculated as of the
date of loan origination shall be fixed for the life of
the loan; or,
ii) The lesser of 35% or the sum of 0.75% plus the
United States prime lending rate, as of the date of loan
origination, on that portion of the unpaid principal
balance of the loan in excess of $1,000, but less than
$2,500. The interest rate calculated as of the date of
loan origination shall be fixed for the life of the loan.
b) The licensee may contract for and receive an
administrative fee of the following:
i) Seven percent of the principal amount, exclusive of
the administrative fee, or $90, whichever is less, on the
first loan made to a borrower; and,
ii) Six percent of the principal amount, exclusive of
the administrative fee, or $75, whichever is less, on the
second and subsequent loans made to a borrower.
4)Prohibits a licensee from charging the same borrower an
administrative fee more than once in any four-month period.
5)Provides that an administrative fee shall not be contracted
for or received in connection with the financing of a loan
unless at least eight months have elapsed since the receipt of
a previous administrative fee paid by the borrower.
6)Provides that a "refinance" is the replacement or revision of
an existing loan contract with a borrower that results in an
SB 318
Page 4
extension of additional principal to that borrower.
Additionally, prohibits a refinancing unless the following
conditions are met:
a) The borrower has repaid at least 60% of the outstanding
principal remaining on the loan;
b) The borrower is current on the outstanding loan;
c) The licensee underwrites the loan in accordance with the
same underwriting criteria required at loan origination;
and,
d) The borrower has not refinanced the outstanding loan
more than once, if the loan is for personal, family or
household purposes.
7)Allows a licensee to require a borrower to reimburse the
licensee from actual insufficient funds fees incurred by that
licensee due to actions of the borrower, as well as, receive a
delinquency fee in the following amounts:
a) For a period of delinquency of not less than seven days,
an amount not in excess of $14; or,
b) For a period of delinquency of not less than 14 days, an
amount not in excess of $20.
8)Specifies that no more than one delinquency fee may be imposed
per delinquent payment or no more than two delinquency fees
may be imposed during any period of 30 consecutive days.
9)Prohibits the imposition of a delinquency fee that 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
principle amount of the borrower's loan.
10)Requires a licensee to attempt to collect a delinquent
payment for a period of at least 30 days before selling or
assigning that unpaid debt to an independent party for
collection.
11)Specifies that prior to disbursement of loan proceeds, the
licensee shall either:
SB 318
Page 5
a) Offer a credit education program or seminar to the
borrower that has been previously approved by DBO; or
b) Invite the borrower to a credit education program or
seminar offered by an independent third party that has been
previously reviewed and approved by DBO.
12)Requires that a licensee must report each borrower's payment
performance to at least one consumer reporting agency (CRA)
upon acceptance as a data furnisher by the CRA.
13)Provides that a licensee that is accepted as a data furnisher
after admittance to the program must report all borrower
payment performance since its inception of lending under the
program, but no longer than six months after acceptance into
the program.
14)Allows the Commissioner to approve a licensee for the
program, prior to that licensee's acceptance as a data
furnisher by a CRA if the Commissioner has a reasonable
expectation, based on information supplied by the licensee,
that:
a) The licensee will be accepted once it achieves lending
volume required of data furnishers of its type; and
b) That lending volume will be achieved within the first
six months of the licensee commencing lending.
15)Provides the Commissioner with authority to withdraw
participation from the pilot program to a licensee that fails
to become a data furnisher within the first six months of
program participation.
16)Specifies that a licensee shall provide each borrower with
the name of the CRA or agencies to which it will report the
borrower's payment history.
17)Mandates that each loan shall be underwritten to determine a
borrower's ability and willingness to repay the loan pursuant
to the loan terms, and shall not make a loan if it determines,
through its underwriting, that the borrower's total monthly
debt service payments, at the time of origination, including
the loan for which the borrower is being considered, and
SB 318
Page 6
across all outstanding forms of credit that can be
independently verified by the licensee, exceed 50% of the
borrower's gross monthly income.
18)Requires the licensee, in conducting underwriting, to seek
information and documentation, verified through at least one
CRA or other available electronic debt verification service,
pertaining to all of a borrower's outstanding debt
obligations, including loans that are self-reported by the
borrower but not available through independent verification.
19)Requires the licensee to request from the borrower and
include all information obtained from the borrower regarding
outstanding deferred deposit transactions in the calculation
of the borrower's outstanding debt obligations. A licensee
shall not be required to consider, for purposes of
debt-to-income ratio evaluation, loans from friends or family.
20)Provides that no licensee shall require, as condition of
providing the loan, that the borrower waive any right,
penalty, remedy, forum, or procedure provided for in any law
applicable to the loan.
21)States that the provisions of the program do not apply to any
loan with a bonafide principle amount of $2,500.
22)Prohibits:
a) Any person, in connection with the making of a loan,
from offering, selling, or requiring "credit insurance";
b) A licensee from requiring, as a condition of the loan,
that the borrower waive any right, penalty, remedy, forum
or procedure provided for in any law applicable to the
loan, as specified; and
c) A licensee from refusing to do business with, or
discriminating against a borrower or applicant on the basis
that the person refuses to waive any right, penalty,
remedy, forum, or procedure.
23)Allows a licensee to use the services of one or more finders,
as specified.
24)Requires the Commissioner to examine each licensee at least
SB 318
Page 7
once every 24 months and provide that the cost of the
examination shall be paid to the Commissioner by the licensee
examined.
25)Specifies that the commissioner may waive one or more branch
office examinations if the commissioner deems that the branch
office examinations are not necessary for protection of the
public due to various specific factors.
26)Requires a licensee to notify borrowers, at least two days
prior to the due date, of upcoming loan payments that are due,
unless the borrower opts-out of those notifications.
27)Mandates reporting on pilot program loan performance based on
the percentage of borrowers that are delinquent over specific
intervals of delinquency.
28)Provides that the report on delinquency data also include
comparable delinquency data for loans made by licensees in
specific loan amount ranges under the California Finance
Lenders Law.
29)Requires, on or before July 1, 2015, and again, on or before
January 1, 2017, the Commissioner to post a report on his or
her Internet Web site summarizing utilization of the Program,
as specified. That report shall include, among other things,
the results of a random survey of borrowers who have
participated in the Program.
30)Clarifies under the CFLL that an 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.
31)Sunsets the program on January 1, 2018.
FISCAL EFFECT : According to Assembly Appropriations Committee,
estimated costs for DBO are approximately $300,000.
SB 318
Page 8
COMMENTS :
According to the author:
In 2010, SB 1146 was enacted to authorize a pilot
program intended to increase the availability of
responsible small dollar loans made in California.
Since that 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.
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.
In 2010, the legislature passed and the Governor signed SB 1146
(Florez), Chapter 640, Statutes of 2010. The bill created the
Pilot Program for Affordable Credit-Building Opportunities to
increase the availability of affordable short-term credit and to
expand credit-building opportunities for individuals. According
to the June 18, 2010, Assembly Banking and Finance Committee
analysis the author stated the following need for SB 1146.
According to the author of SB 1146:
SB 318
Page 9
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 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.
SB 1146, sponsored by Progreso Financiero, established a pilot
program under the CFLL to fill the gap in loan products that
exist in the small dollar loan market. The pilot program
intends to fill this gap by allowing some flexibility on the
fees and interest rates associated with the loans, with an
enhanced underwriting process to determine borrower's repayment
ability, something often lacking for non-bank loans,
specifically payday loans. Additionally, the sponsor viewed 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 goal of the pilot program
is 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. A licensee under the pilot must also have a credit
SB 318
Page 10
education program that the consumer will undergo prior to
disbursement of loan proceeds. Furthermore, the debt-to-income
ratio of a borrower cannot exceed 50%. Lenders in the small
dollar market may attempt to use third parties to find
customers. These third parties are known as finders. These
finders have a relationship with the lender as they might be
business entities such as a grocery store or other retail
establishment. The idea behind using finders is that it is a
cost effective way to reach customers with needed a physical
storefront for the lender. The pilot program contains very
specific mandates and restrictions on finders, including caps on
the payments that the lender may make to the finder. At the
Assembly Banking and Finance Committee's February 2012 hearing
on this issue, testimony provided by a pilot participant
demonstrated that acquisition of cost effective capital is a
major obstacle in the small dollar lending environment.
The driving force behind the pilot program 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 a
relationship with a financial 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 may not have many options at
all.
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.
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
SB 318
Page 11
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.
On February 11, 2013 the Assembly Banking and Finance Committee
conducted an oversight hearing to examine the issue of small
dollar loans under the CFLL. That hearing was inspired by
concerns that low income, low credit consumers face daunting and
costly options when seeking short term credit. During committee
testimony, Commissioner of DOC offered the following comments
relevant to the issue current under consideration:
The Committee has inquired about the barriers of
access to small dollar credit at lower costs. The
leading barriers to access to affordable small-dollar
credit under the California Finance Lenders Law appear
to be (1) the lenders' lack of access to affordable
funds, resulting in unprofitable lending margins, and
(2) the statutory restrictions on charges and rates.
Based on discussions with licensee, industry
representatives, and anecdotal observations, it
appears that barriers exist to increasing access to
small-dollar credit while at the same time, keeping
the cost of credit affordable for consumers. Lenders
indicate that it is cost prohibitive to make small
dollar loans under the California Finance Lenders Law
because of the law's restriction on charges, the high
costs of capital to lender to make these loans and the
thin margins on generating loan volume? Many lenders
indicate that it is not cost effective to make
small-dollar loans even under the interest rates and
charges allowed under the pilot program.
In 2010, the Center for Financial Services Innovation (CFSI)
reviewed the subject of small dollar loans, including obstacles
to greater access and growing alternative approaches. CFSI
states that installment loans are costly to provide due to the
operation of physical stores and underwriting expenses.
Furthermore, they stated, "One industry representative estimates
that achieving breakeven with a $200 loan requires charging
borrowers an APR of about 250%. The breakeven APR drops to
approximately 145% if the volume of $250 loans reaches 1,000.
Larger loans in the amount of $2,500 would require APRs closer
SB 318
Page 12
to 44%, and the breakeven APR would drop to a projected 35% if
1,000 loans at that amount were made." On the other side of
this debate some argue that the high interest rates are not a
reflection of actual risk, but an attempt to exploit customers
for greater financial gain.
Small dollar lending is typically not fulfilled by mainstream
financial institutions like banks and credit unions.
Furthermore, the preceding economic downturn has tightened
credit for all consumers, specifically low to moderate income
families with median credit scores. As traditional forms of
credit, such as credit cards have become more restrictive, the
use of alternative means has increased. While the economic
downturn has restricted credit in some cases, credit cards
remain the primary source of credit use for consumers seeking to
meet short term needs, though it is estimated that almost 1/3rd
of consumers do not have a credit card. According to the
Federal Reserve, nationwide credit card debt is $858 billion
making it the third largest source of household indebtedness.
Given the large percentage of credit card use, small installment
loans and payday loans are a drop in the credit ocean, yet that
makes them no less important, especially for consumers that
cannot access a credit card. Whether it is a credit card, or
non-traditional means of credit it is clear that the utilization
of credit to make up for diminished income is not sustainable
for a borrower.
The unbanked or those without an 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.
SB 318
Page 13
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
unbanked 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 10 did
not have a checking or savings account.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0002492