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