BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 318
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          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;








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             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,








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               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  








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            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:








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             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  








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            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  








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            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.














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           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:








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               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  








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          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  








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          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  








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          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.









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          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 


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