Senate BillNo. 896


Introduced by Senator Correa

January 13, 2014


An act to add Sections 22066 and 22067 to the Financial Code, relating to finance lenders.

LEGISLATIVE COUNSEL’S DIGEST

SB 896, as introduced, Correa. Finance lenders: nonprofit organizations: zero interest loans: exemptions.

Existing law, the California Finance Lenders Law, provides for the licensure and regulation of finance lenders and brokers by the Commissioner of Business Oversight who is the chief officer of the Department of Business Oversight.

Existing law prohibits a person from engaging in the business of a finance lender or broker without obtaining a license from the commissioner. Under existing law, a finance lender includes any person who is engaged in the business of making consumer loans or making commercial loans and the business of making those loans includes lending money and taking, in the name of the lender, or in any other name, in whole or in part, as security for a loan, any contract or obligation involving the forfeiture of rights in or to personal property, the use and possession of which property is retained by other than the mortgagee or lender, or any lien on, assignment of, or power of attorney relative to wages, salary, earnings, income, or commission. Under existing law, a broker includes any person who is engaged in the business of negotiating or performing any act as broker in connection with loans made by a finance lender.

Existing law makes certain persons and entities exempt from, or not subject to, the law if certain requirements are met. In any proceeding, under this law, the burden of proving an exemption is upon the person or entity claiming it.

This bill would make exempt from this law a nonprofit organization that facilitates one or more zero interest loans with a minimum principal amount upon origination of $250 and a maximum principal amount upon origination of $2,500 if certain requirements are met, including, among other things, that the organization is exempt from federal income taxes, no part of the net earnings of the organization inures to the benefit of private persons, and that the loan terms meet certain requirements. The bill would authorize any organization wishing to operate pursuant to an exemption to file a specified application with, and pay a fee in an amount to be determined by, the commissioner. The bill would authorize the commissioner to refuse to grant an exemption, or to suspend or revoke an exemption, if he or she makes a specified finding and finds that such action is in the best interests of the public.

The bill would require an organization granted an exemption, referred to as an exempt organization, to, among other things, offer a borrower a voluntary credit education program or seminar at no cost to the borrower, report each borrower’s payment performance to at least one consumer reporting agency, and underwrite each loan and ensure that a loan is not made if the organization determines that the borrower’s total monthly debt service payments exceeds a specified amount.

This bill would make the law inapplicable to a nonprofit organization that partners with an exempt organization for the purpose of facilitating zero interest loans, if certain requirements are met, including, but not limited to, that this nonprofit organization, to be known as the partnering organization, meet specified requirements for federal income tax exemption, that no part of the net earnings of the organization shall inure to the benefit of private persons, and that the loan terms meet certain requirements. The bill would require the partnership of each exempt organization and each partnering organization to be formalized through a specified written agreement to be provided to the commissioner upon his or her request.

The bill would require each exempt organization to provide the commissioner with notice and certain information upon entering into a written agreement with a partnering organization. Upon a determination that a partnering organization has acted in violation of certain requirements, the bill would authorize the commissioner to, among other things, disqualify that partnering organization from facilitating zero interest loans, bar that partnering organization from performing services at one or more specific locations, terminate a written agreement, and prohibit the use of that partnering organization by all organizations granted exemptions if the commissioner determines it is in the public interest.

The bill would authorize the commissioner to examine each exempt organization and each partnering organization for compliance with these provisions upon reasonable notice. The bill would require any examined organization to make available to the commissioner all books and records requested by the commissioner. The bill would require the cost of any such examination to be paid by the exempt organization.

The bill would require every exempt organization whose exemption is approved to file an annual report with the commissioner on or before March 15 containing specified information. The bill would also require an exempt organization to include information regarding the loans facilitated by a partnering organization in this annual report.

On or before July 1 annually, the bill would require the commissioner to post a report on the department’s Internet Web site that summarizes information relating to exempt organizations, partnering organizations, and the facilitation of these zero interest loans including that information compiled by the commissioner from the annual reports submitted by the exempt organizations.

Existing constitutional provisions require that a statute that limits the right of access to the meetings of public bodies or the writings of public officials and agencies be adopted with findings demonstrating the interest protected by the limitation and the need for protecting that interest.

This bill would make legislative findings to that effect.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

P3    1

SECTION 1.  

Section 22066 is added to the Financial Code, to
2read:

3

22066.  

(a) The Legislature finds and declares that nonprofit
4organizations have an important role to play in helping individuals
5obtain access to affordable, credit-building small dollar loans.
6California law should refrain from creating statutory barriers that
7risk slowing the growth of these loans. This section shall be
8liberally construed to encourage nonprofit organizations to help
P4    1facilitate the making of zero interest loans, through lending circles
2and other programs and services that allow individuals to establish
3and build credit histories or to improve their credit scores.

4(b) For the purposes of this section, an organization described
5in subdivision (c) shall be known as an exempt organization, and
6an organization described in subdivision (d) shall be known as a
7partnering organization.

8(c) There shall be exempted from this division a nonprofit
9organization that facilitates one or more zero interest loans,
10provided all of the following conditions are met:

11(1) The organization is exempt from federal income taxes under
12Section 501(c)(3) of the Internal Revenue Code and is organized
13and operated exclusively for one or more of the purposes described
14in Section 501(c)(3) of the Internal Revenue Code.

15(2) No part of the net earnings of the organization inures to the
16benefit of a private shareholder or individual.

17(3) No broker’s fee is paid in connection with the making of
18the loan that is facilitated by the organization.

19(4) Any organization wishing to operate pursuant to an
20exemption granted under this section shall file an application for
21exemption with the commissioner, in a manner prescribed by the
22commissioner, and shall pay a fee to the commissioner, in an
23amount calculated by the commissioner to cover his or her costs
24to administer this section and Section 22067. The commissioner
25may refuse to grant an exemption, or to suspend or revoke a
26previously issued exemption if he or she finds that one or more of
27the provisions of this section were not met or are not being met
28by the organization and that denial, suspension, or revocation of
29the exemption is in the best interests of the public.

30(5) Every organization whose exemption is approved by the
31commissioner shall file an annual report with the commissioner
32on or before March 15 of each year, containing relevant information
33that the commissioner reasonably requires concerning lending
34facilitated by the organization within the state during the preceding
35calendar year at all locations at which the organization facilitates
36lending. The commissioner shall compile the information submitted
37pursuant to this paragraph for use in preparing the report required
38by Section 22067.

39(6) Any loan made pursuant to this section shall comply with
40the following requirements:

P5    1(A) The loan shall be unsecured.

2(B) No interest may be imposed.

3(C) An administrative fee may be charged in an amount not to
4exceed the following:

5(i) Seven percent of the principal amount, exclusive of the
6administrative fee, or ninety dollars ($90), whichever is less, on
7the first loan made to a borrower.

8(ii) Six percent of the principal amount, exclusive of the
9administrative fee, or seventy-five dollars ($75), whichever is less,
10on the second and subsequent loans made to that borrower.

11(D) An organization shall not charge the same borrower an
12administrative fee more than once in any four-month period. Each
13administrative fee shall be fully earned immediately upon
14consummation of a loan agreement.

15(E) Notwithstanding subdivision (a) of Section 22320.5 and in
16lieu of any other type of delinquency fee or late fee, an organization
17may require reimbursement from a borrower of up to ten dollars
18($10) to cover an insufficient funds fee incurred by that
19organization due to actions of the borrower. No organization shall
20charge more than two insufficient funds fees to the same borrower
21in a single month.

22(F) The following information shall be disclosed to the consumer
23in writing, in a type face no smaller than 12-point type, at the time
24of the loan application:

25(i) The amount to be borrowed, the total dollar cost of the loan
26to the consumer if the loan is paid back on time, including the sum
27of the administrative fee and principal amount borrowed, the
28corresponding annual percentage rate, calculated in accordance
29with Federal Reserve Board Regulation Z (12 C.F.R. 226.1), the
30periodic payment amount, the payment frequency, and the
31insufficient funds fee, if applicable.

32(ii) An explanation of whether, and under what circumstances,
33a borrower may exit a loan agreement.

34(G) The loan shall have a minimum principal amount upon
35origination of two hundred fifty dollars ($250) and a maximum
36principal amount upon origination of two thousand five hundred
37dollars ($2,500), and a term of not less than the following:

38(i) Ninety days for loans whose principal balance upon
39origination is less than five hundred dollars ($500).

P6    1(ii) One hundred twenty days for loans whose principal balance
2upon origination is at least five hundred dollars ($500), but is less
3than one thousand five hundred dollars ($1,500).

4(iii) One hundred eighty days for loans whose principal balance
5upon origination is at least one thousand five hundred dollars
6($1,500).

7(H) The loan shall not be refinanced.

8(I) Neither the organization nor any of its wholly owned
9subsidiaries shall attempt to collect a delinquent payment for a
10period of at least 30 days following the start of the delinquency
11before selling or assigning that unpaid debt to an independent party
12for collection.

13(7) Prior to disbursement of loan proceeds, the organization
14shall either (A) offer a credit education program or seminar to the
15borrower that has been previously reviewed and approved by the
16commissioner for use in complying with this section, or (B) invite
17the borrower to a credit education program or seminar offered by
18an independent third party that has been previously reviewed and
19approved by the commissioner for use in complying with this
20section. The borrower shall not be required to participate in either
21of these education programs or seminars. A credit education
22program or seminar offered pursuant to this paragraph shall be
23provided at no cost to the borrower.

24(8) The organization shall report each borrower’s payment
25performance to at least one consumer reporting agency that
26compiles and maintains files on consumers on a nationwide basis,
27upon acceptance as a data furnisher by that consumer reporting
28agency. For purposes of this section, a consumer reporting agency
29that compiles and maintains files on consumers on a nationwide
30basis is one that meets the definition in Section 603(p) of the
31federal Fair Credit Reporting Act (15 U.S.C. Sec. 1681a(p)). Any
32organization that is accepted as a data furnisher after being granted
33an exemption by the commissioner pursuant to this subdivision
34shall report all borrower payment performance since its inception
35of lending under the program, as soon as practicable after its
36acceptance into the program, but in no event more than six months
37after its acceptance into the program.

38(9) The organization shall underwrite each loan and shall ensure
39that a loan is not made if, through its underwriting, the organization
40determines that the borrower’s total monthly debt service payments,
P7    1at the time of loan origination, including the loan for which the
2borrower is being considered, and across all outstanding forms of
3credit that can be independently verified by the organization,
4exceed 50 percent of the borrower’s gross monthly household
5income except as specified in clause (iii) of subparagraph (D).

6(A) The organization shall seek information and documentation
7pertaining to all of a borrower’s outstanding debt obligations during
8the loan application and underwriting process, including loans that
9are self-reported by the borrower but not available through
10independent verification. The organization shall verify that
11information using a credit report from at least one consumer
12reporting agency that compiles and maintains files on consumers
13on a nationwide basis or through other available electronic debt
14verification services that provide reliable evidence of a borrower’s
15outstanding debt obligations.

16(B) The organization shall also request from the borrower and
17include all information obtained from the borrower regarding
18outstanding deferred deposit transactions in the calculation of the
19borrower’s outstanding debt obligations.

20(C) The organization shall not be required to consider, for
21purposes of debt-to-income ratio evaluation, loans from friends or
22family.

23(D) The organization shall also verify the borrower’s household
24income that the organization relies on to determine the borrower’s
25debt-to-income ratio using information from any of the following:

26(i) Electronic means or services that provide reliable evidence
27of the borrower’s actual income.

28(ii) Internal Revenue Service Form W-2, tax returns, payroll
29receipts, bank statements, or other third-party documents that
30provide reasonably reliable evidence of the borrower’s actual
31income.

32(iii)  A signed statement from the borrower stating sources and
33amounts of income, if the borrower’s actual income cannot be
34independently verified using electronic means or services, Internal
35Revenue Service Forms, tax returns, payroll receipts, bank
36statements, or other third-party documents. If income is verified
37using a signed statement from a borrower, a loan shall not be made
38if the borrower’s total monthly debt service payments, at the time
39of loan origination, including the loan for which the borrower is
P8    1being considered, and across all outstanding forms of credit, exceed
225 percent of the borrower’s gross monthly household income.

3(10) The organization shall notify each borrower, at least two
4days prior to each payment due date, informing the borrower of
5the amount due and the payment due date. Notification may be
6provided by any means mutually acceptable to the borrower and
7the organization. A borrower shall have the right to opt out of this
8notification at any time, upon electronic or written request to the
9organization. The organization shall notify each borrower of this
10right prior to disbursing loan proceeds.

11(11) Notwithstanding Sections 22311 to 22315, inclusive, no
12organization, in connection with, or incidental to, the facilitating
13of any loan made pursuant to this section, may offer, sell, or require
14a borrower to contract for “credit insurance” as defined in
15paragraph (1) of subdivision (a) of Section 22314 or insurance on
16tangible personal or real property of the type specified in Section
1722313.

18(12) No organization shall require, as a condition of making a
19loan, that a borrower waive any right, penalty, remedy, forum, or
20procedure provided for in any law applicable to the loan, including
21the right to file and pursue a civil action or file a complaint with
22or otherwise communicate with the commissioner or any court or
23other public entity, or that the borrower agree to resolve disputes
24in a jurisdiction outside of California or to the application of laws
25other than those of California, as provided by law. Any waiver by
26a borrower must be knowing, voluntary, and in writing, and
27expressly not made a condition of doing business with the
28organization. Any waiver that is required as a condition of doing
29business with the organization shall be presumed involuntary,
30unconscionable, against public policy, and unenforceable. The
31organization has the burden of proving that a waiver of any rights,
32penalties, forums, or procedures was knowing, voluntary, and not
33made a condition of the contract with the borrower.

34(13) No organization shall refuse to do business with or
35discriminate against a borrower or applicant on the basis that the
36borrower or applicant refuses to waive any right, penalty, remedy,
37forum, or procedure, including the right to file and pursue a civil
38action or complaint with, or otherwise notify, the commissioner
39or any court or other public entity. The exercise of a person’s right
40to refuse to waive any right, penalty, remedy, forum, or procedure,
P9    1including a rejection of a contract requiring a waiver, shall not
2affect any otherwise legal terms of a contract or an agreement.

3(14) This section shall not apply to any agreement to waive any
4right, penalty, remedy, forum, or procedure, including any
5agreement to arbitrate a claim or dispute, after a claim or dispute
6has arisen. Nothing in this section shall affect the enforceability
7or validity of any other provision of the contract.

8(d) This division does not apply to a nonprofit organization that
9partners with an organization granted an exemption pursuant to
10subdivision (c) for the purpose of facilitating zero interest loans,
11provided that the requirements of paragraphs (6) to (14), inclusive,
12of subdivision (c), and the following additional conditions are met:

13(1) The partnership of each exempt organization and each
14partnering organization shall be formalized through a written
15agreement that specifies the obligations of each party. Each written
16agreement shall contain a provision establishing that the partnering
17organization agrees to comply with the provisions of this section
18and any regulations that may be adopted by the commissioner
19pursuant to this section. Each such agreement shall be provided
20to the commissioner upon request.

21(2) Each partnering organization shall meet the requirements
22for federal income tax exemption under Section 501(c)(3) of the
23Internal Revenue Code and shall be organized and operated
24exclusively for one or more of the purposes described in Section
25501(c)(3) of the Internal Revenue Code.

26(3) No part of the net earnings of the partnering organization
27shall inure to the benefit of a private shareholder or individual.

28(4) Each exempt organization shall notify the commissioner
29within 30 days of entering into a written agreement with a
30partnering organization, on such form and in such manner as the
31commissioner may prescribe. At a minimum, this notification shall
32include the name of the partnering organization, the contact
33information for a person responsible for the lending activities
34facilitated by that partnering organization, and the address or
35addresses at which the organization facilitates lending activities.

36(5) Upon a determination that a partnering organization has
37acted in violation of this section or any regulation adopted
38thereunder, the commissioner may disqualify that partnering
39organization from performing services under this section, bar that
40organization from performing services at one or more specific
P10   1locations of that organization, terminate a written agreement
2between a partnering organization and an exempt organization,
3and, if the commissioner deems such action to be in the public
4interest, prohibit the use of that partnering organization by all
5 organizations granted exemptions by the commissioner pursuant
6to subdivision (c).

7(6) The exempt organization shall include information regarding
8the loans facilitated by the partnering organization in the annual
9report required pursuant to paragraph (5) of subdivision (c).

10(e) The commissioner may examine each exempt organization
11and each partnering organization for compliance with the
12provisions of this section, upon reasonable notice to the party
13responsible for the lending activities facilitated by that
14organization. Any organization so examined shall make available
15to the commissioner or his or her representative all books and
16records requested by the commissioner related to the lending
17activities facilitated by that organization. The cost of any such
18examination shall be paid by the exempt organization.

19(f) This section shall not apply to any loan of a bona fide
20principal amount of two thousand five hundred dollars ($2,500)
21or more as determined in accordance with Section 22251. For
22purposes of this subdivision, “bona fide principal amount” shall
23be determined in accordance with Section 22251.

24

SEC. 2.  

Section 22067 is added to the Financial Code, to read:

25

22067.  

(a) On or before July 1 of each year, the commissioner
26shall post a report on the department’s Internet Web site
27summarizing the information described in subdivision (b). The
28information disclosed to the commissioner for the commissioner’s
29use in preparing the report described in this section is exempted
30from any requirement of public disclosure by paragraph (2) of
31subdivision (d) of Section 6254 of the Government Code.

32(b) The report required by this section shall specify the time
33period to which the report corresponds, and shall include, but not
34be limited to, the following for that time period:

35(1) The number of organizations that applied for exemptions
36pursuant to subdivision (c) of Section 22066, and the number of
37organizations that entered into partnerships with exempt
38organizations in accordance with subdivision (d) of Section 22066.

39(2) The number of organizations granted exemptions and the
40types of exemptions granted.

P11   1(3) The reason or reasons for denying applications for
2exemptions, if applicable. This information shall be provided in a
3manner that does not identify the entity or entities denied.

4(4) The number of borrowers who applied for loans through
5exempt or partnering organizations, the number of borrowers
6granted loans facilitated by exempt or partnering organizations,
7the total amount loaned, and the distribution of loan lengths upon
8origination.

9(5) The number of borrowers who obtained more than one loan
10 through an exempt or partnering organization and the distribution
11of the number of loans per borrower.

12(6) Of the number of borrowers who obtained more than one
13loan facilitated by an exempt or a partnering organization, the
14percentage of those borrowers whose credit scores increased
15between successive loans, based on information from at least one
16major credit bureau, and the average size of the increase.

17(7) The income distribution of borrowers upon loan origination,
18including the number of borrowers who obtained at least one loan
19and who resided in a low-to-moderate-income census tract at the
20time of their loan application.

21(8) The number of borrowers who obtained loans facilitated by
22an exempt or a partnering organization for the following purposes,
23based on borrower responses at the time of their loan applications
24indicating the primary purpose for which the loan was obtained:

25(A) Medical.

26(B) Other emergency.

27(C) Vehicle repair.

28(D) Vehicle purchase.

29(E) To pay bills.

30(F) To consolidate debt.

31(G) To build or repair credit history.

32(H) To finance a purchase of goods or services other than a
33vehicle.

34(I) For other than personal, family, or household purposes.

35(J) Other.

36(9) The number of borrowers who self-report that they had a
37bank account at the time of their loan application, the number of
38borrowers who self-report that they had a bank account and used
39check-cashing services, and the number of borrowers who
P12   1self-report that they did not have a bank account at the time of
2their loan application.

3(10) (A) The performance of loans under Section 22066, as
4reflected by all of the following:

5(i) The number and percentage of borrowers who experienced
6at least one late payment lasting between seven and 29 days and
7who subsequently brought his or her loan current, and the
8distribution of principal loan amounts corresponding to those late
9payments.

10(ii) The number and percentage of borrowers who experienced
11at least one late payment lasting between 30 and 59 days and who
12subsequently brought his or her loan current, and the distribution
13of principal loan amounts corresponding to those late payments.

14(iii) The number and percentage of borrowers who experienced
15at least one late payment lasting 60 days or more and who
16subsequently brought his or her loan current, and the distribution
17of principal loan amounts corresponding to those late payments.

18(iv) The number and percentage of borrowers who experienced
19at least one late payment of greater than seven days and who did
20not subsequently bring his or her loan current.

21(v) Among loans that were ever late for seven days or more, the
22average number of times borrowers experienced a late payment
23of seven days or more.

24(11) The number and types of violations of Section 22066 by
25exempt organizations, which were documented by the
26commissioner.

27(12) The number and types of violations of Section 22066 by
28partnering organizations, which were documented by the
29commissioner.

30(13) The number of times the commissioner suspended or
31revoked an exemption granted to an exempt organization pursuant
32to paragraph (4) of subdivision (c) of Section 22066 and the
33number of times a partnering organization was sanctioned by the
34commissioner pursuant to paragraph (5) of subdivision (d) of
35Section 22066.

36(14) The number of complaints received by the commissioner
37about an exempt organization or a partnering organization, and
38the nature of those complaints.

39(15) Recommendations for improving the program.

P13   1

SEC. 3.  

The Legislature finds and declares that Section 2 of
2this act imposes a limitation on the public’s right of access to the
3meetings of public bodies or the writings of public officials and
4agencies within the meaning of Section 3 of Article I of the
5California Constitution. Pursuant to that constitutional provision,
6the Legislature makes the following findings to demonstrate the
7interest protected by this limitation and the need for protecting
8that interest:

9In order to allow the Commissioner of Business Oversight of
10the Department of Business Oversight to fully accomplish his or
11her goals, it is imperative to protect the interests of those persons
12submitting information to the department to ensure that any
13personal or sensitive business information that this act requires
14those persons to submit is protected as confidential information.



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