BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



           ----------------------------------------------------------------- 
          |SENATE RULES COMMITTEE            |                        SB 896|
          |Office of Senate Floor Analyses   |                              |
          |1020 N Street, Suite 524          |                              |
          |(916) 651-1520         Fax: (916) |                              |
          |327-4478                          |                              |
           ----------------------------------------------------------------- 
           
                                           
                                    THIRD READING


          Bill No:  SB 896
          Author:   Correa (D), et al.
          Amended:  5/14/14
          Vote:     21

           
           SENATE BANKING & FINANCIAL INST. COMM.  :  9-0, 4/9/14
          AYES:  Evans, Berryhill, Block, Correa, Hill, Hueso, Roth,  
            Torres, Vidak

           SENATE APPROPRIATIONS COMMITTEE  :  6-0, 4/28/14
          AYES:  De León, Gaines, Hill, Lara, Padilla, Steinberg
          NO VOTE RECORDED:  Walters


            SUBJECT  :    Finance lenders:  nonprofit organizations:   
                      zero-interest, low-cost loans:  exemptions

           SOURCE  :     Mission Asset Fund


           DIGEST  :    This bill authorizes a nonprofit organization that  
          meets certain criteria to apply to the Department of Business  
          Oversight (DBO) for an exemption from the California Finance  
          Lenders Law (CFLL) and requires a nonprofit organization granted  
          an exemption by DBO to comply with specified requirements  
          related to the loans it facilitates.  It further provides that  
          nonprofit organizations which partner with exempt nonprofits are  
          not subject to the CFLL, if they meet specified criteria and  
          comply with specified requirements.  

           Senate Floor Amendments  of 5/14/14 clarify that the  
          zero-interest loans which are the subject of the bill are  
                                                                CONTINUED





                                                                     SB 896
                                                                     Page  
          2

          low-cost (not zero-cost), and correct a provision of the bill  
          governing the length of time that must pass before a delinquent  
          loan may be sold or assigned to a third party.

           ANALYSIS :    

          Existing law:

           1. Provides for the CFLL, administered by DBO, which authorizes  
             the licensure of finance lenders, who may make secured and  
             unsecured consumer and commercial loans.  The following are  
             the key rules applied to consumer loans made pursuant to the  
             CFLL:  

              A.    CFLL licensees who make consumer loans under $2,500  
                are capped at interest rates which range from 12% to 30%  
                per year, depending on the unpaid balance of the loan.   
                Administrative fees are capped at the lesser of 5% of the  
                principal amount of the loan or $50.  

              B.    In addition to the requirements in #A above, CFLL  
                licensees who make consumer loans under $5,000 are  
                prohibited from imposing compound interest or charges; are  
                limited in the amount of delinquency fees they may impose  
                (delinquency fees are capped at a maximum of $10 on loans  
                10 days or more delinquent and $15 on loans 15 days or  
                more delinquent); are required to prominently display  
                their schedule of charges to borrowers; are prohibited  
                from splitting loans with other licensees; are prohibited  
                from requiring real property collateral, and are limited  
                to a maximum loan term of 60 months plus 15 days.

              C.    In addition to the requirements in #A and #B above,  
                CFLL licensees who make consumer loans under $10,000 are  
                limited in their ability to conduct other business  
                activities on the premises where they make loans; must  
                require loan payments to be paid in equal, periodic  
                installments; and must meet certain standards before they  
                may sell various types of insurance to the.

              D.    The terms of loans of $10,000 or above are not  
                restricted under the CFLL.

           1. Provides, until January 1, 2018, for the Pilot Program for  

                                                                CONTINUED





                                                                     SB 896
                                                                     Page  
          3

             Increased Access to Responsible Small Dollar Loans (SB 318,  
             Hill, Chapter 467, Statutes of 2013) within the CFLL.  

          This bill:

           1. Exempts from the CFLL a nonprofit organization (hereinafter  
             referred to as an exempt organization) that facilitates one  
             or more zero-interest, low-cost installment loans with  
             principal amounts between $250 and of $2,500, as follows: 

              A.    The organization will have to be exempt from federal  
                income taxes pursuant to Section 501(c)(3) of the Internal  
                Revenue Code, and no part of the net earnings of the  
                organization could inure to the benefit of a private  
                shareholder or individual.

              B.    The organization will have to file an application of  
                exemption with the Commissioner of Business Oversight  
                (Commissioner) and pay a fee to the Commissioner in an  
                amount calculated by the Commissioner to cover costs to  
                administer this bill.  

              C.    Once granted an exemption, an exempt organization  
                would have to file an annual report with the Commissioner,  
                containing relevant information that the Commissioner  
                reasonably requires regarding lending facilitated by that  
                organization and its nonprofit partners within the state  
                during the preceding calendar year.  

              D.    Loans made by the exempt organization will have to be  
                unsecured, zero-interest, low-cost loans, which will have  
                to be of certain minimum duration and be underwritten, as  
                specified.  The exempt organization will have to provide  
                specified disclosures to borrowers in connection with  
                these loans, report borrower payment history to at least  
                one consumer reporting agency that compiles and maintains  
                files on consumers on a nationwide basis, and would be  
                limited with respect to fees that could be charged to  
                borrowers in connection with these loans.  Loans could not  
                be refinanced; and delinquent loans may not be sold or  
                assigned to a third party for collection before at least  
                90 days following the start of the delinquency.  

                Generally speaking, lengths of the loans, underwriting  

                                                                CONTINUED





                                                                     SB 896
                                                                     Page  
          4

                requirements applied to the loans, disclosures provided to  
                borrowers, fees that could be charged to borrowers, and  
                other rules of the program will be identical to the rules  
                applicable to lenders accepted into the Pilot Program for  
                Increased Access to Responsible, Small Dollar Loans,  
                except as specified.

             The maximum APRs that could be charged under the interest  
             rate and fee structure allowed by this bill are as follows:



              ------------------------------------------------------------ 
             |          |                |                  |             |
             |   Loan   |  Minimum Loan  |     Maximum      |   Maximum   |
             |  Amount  |     Length     | Origination Fee  |Possible APR |
             |          |                |    Allowable     |             |
             |          |                |                  |             |
             |----------+----------------+------------------+-------------|
             |   $250   |    90 days     |      $17.50      |     42%     |
             |          |                |                  |             |
             |----------+----------------+------------------+-------------|
             |   $500   |    120 days    |       $35        |     33%     |
             |          |                |                  |             |
             |----------+----------------+------------------+-------------|
             |  $1,000  |    120 days    |       $70        |     33%     |
             |          |                |                  |             |
             |----------+----------------+------------------+-------------|
             |  $1,500  |    180 days    |       $70        |16%          |
             |          |                |                  |             |
             |          |                |                  |             |
              ------------------------------------------------------------ 

           1. Provides that the CFLL does not apply to a nonprofit  
             organization which partners with an exempt organization for  
             the purpose of facilitating zero-interest, low-cost loans,  
             provided that all of the following conditions are met:  

              A.    Requires the partnership between the exempt  
                organization and each partnering organization to be  
                formalized through a written agreement that specifies the  
                obligations of each of the parties, and which requires the  
                partnering organization to comply with all of the  
                loan-related provisions of this bill and any regulations  

                                                                CONTINUED





                                                                     SB 896
                                                                     Page  
          5

                the Commissioner may promulgate to administer this bill.

              B.    Requires the partnering organization to be a  
                501(c)(3), and no part of the net earnings of the  
                partnering organization could inure to the benefit of a  
                private shareholder or individual.

              C.    Requires the loans facilitated by the partnering  
                organization to comply with all of the loan requirements  
                summarized above.

              D.    Requires each exempt organization to notify the  
                Commissioner within 30 days of entering into a written  
                agreement with a partnering organization on a form  
                prescribed by the Commissioner.  At a minimum, this  
                notification will have to include the name of the  
                partnering organization, contact information for a person  
                responsible for the lending activities facilitated by that  
                partnering organization, and the address(es) at which the  
                organization facilitates lending activities.  

              E.    Requires each exempt organization to submit  
                information to the Commissioner regarding the loans  
                facilitated by the each of the nonprofit organizations  
                with which it partners for the Commissioner's inclusion in  
                the report described in #5 below.

           1. Gives the Commissioner the authority to examine each exempt  
             organization and each partnering organization for compliance  
             with the provisions of this bill; requires any organization  
             so examined to make available to the Commissioner or his/her  
             representative all books and records requested by the  
             Commissioner related to the lending activities facilitated by  
             that organization; and requires the cost of any such  
             examination to be paid by the exempt organization (thus  
             exempt organizations would pay for their examinations and for  
             the examinations of nonprofits with which they partner).

           2. Gives the Commissioner the authority to decline to grant an  
             exemption, suspend or revoke an exemption, terminate a  
             written agreement between a partnering organization and an  
             exempt organization, disqualify a partnering organization  
             from engaging in certain activities, bar a partnering  
             organization from facilitating lending at specific locations,  

                                                                CONTINUED





                                                                     SB 896
                                                                     Page  
          6

             and/or prohibit partnerships between exempt organizations and  
             other specific organizations, as specified, and as necessary  
             for the protection of the public.  

           3. Requires the Commissioner to annually post a report on DBO's  
             Internet Web site summarizing the following information:  

              A.    The number of organizations and partnerships that  
                apply for exemptions; 

              B.    The number of exemptions granted and the reasons for  
                denial, if any; 

              C.    The number of borrowers who applied for and were  
                granted loans; 

              D.    The total amount loaned and their length of terms;

              E.    The number of borrowers who applied for multiple  
                loans;

              F.    The percentage of those borrowers whose credit scores  
                increased and the average size of the increase;

              G.    The income distribution of borrowers up loan  
                origination, as specified;

              H.    The primary purpose of the loan as indicated by the  
                borrower at the time of the loan application; and

              I.    Several other criteria relating to borrowers' bank  
                accounts, late payments, revocations of exemptions, and  
                complaints received by DBO; as well as any recommendations  
                for improving the program.

           Background
           
          The CFLL authorizes the licensure of finance lenders for the  
          purposes of making secured and unsecured consumer and commercial  
          loans.  The CFLL, however, is silent on its application to  
          nonprofit corporations, and on how it regulates nonprofit  
          partnerships that facilitate these types of loans.  As a result,  
          there is reluctance in the community for nonprofit organizations  
          to participate in small-dollar loans.  The CFLL licensing  

                                                                CONTINUED





                                                                     SB 896
                                                                     Page  
          7

          process is currently not structured to promote the types of  
          lending activities that would be facilitated by nonprofit  
          organizations. 

          The lending circle model around which this bill is written was  
          developed by Mission Asset Fund, located in San Francisco, and  
          is based on the time-tested model used worldwide.  Lending  
          circles are generally groups of 10-12 people who are connected  
          by a common bond, and who agree to lend money to one another and  
          pay each other back in an organized fashion.  The lending circle  
          model has been used for many years in regions throughout the  
          world, primarily in cultures where money is scarce and  
          individuals are accustomed to pooling their resources to achieve  
          their economic goals.

           Prior legislation  .  SB 1146 (Florez, Chapter 640, Statutes of  
          2010), modified by 
          SB 318 (Hill, Chapter 467, Statutes of 2013), authorized the  
          pilot Program for Affordable Credit-Building Opportunities to  
          encourage socially-responsible, for-profit lenders to offer  
          installment loans in amounts under $2,500.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  No

          According to the Senate Appropriations Committee, preliminary  
          estimates are $95,000 annually, potentially offset by fee  
          revenue (Special Fund).

          Cost estimates result from requirements for amending existing  
          regulations, licensing new applicants, conducting examinations,  
          approving credit education programs, and compiling the annual  
          report.  This bill provides that fees from applicants will be  
          established at a level sufficient to cover all administration  
          costs.  Consequently, the actual costs and revenue will be  
          dependent on the number of participating organizations and could  
          be higher or lower than the preliminary estimate.

           SUPPORT  :   (Verified  5/15/14)

          Mission Asset Fund (source)
          State Controller John Chiang
          Asian Law Alliance
          Calexico Community Action Council, Inc.

                                                                CONTINUED





                                                                     SB 896
                                                                     Page  
          8

          California Association for Micro Enterprise Opportunity
          Californians for Shared Prosperity Coalition
          Center for Asset Building Opportunities
          Corporation for Enterprise Development
          EARN
          Family Independence Initiative
          Greenlining Institute
          National Council of La Raza
          Opportunity Fund
          Pilipino Workers Center of Southern California
          Progreso Financiero
          San Francisco Office of Financial Empowerment/SF Treasurer Jose  
          Cisneros
          San Francisco Supervisor David Campos
          Watts/Century Latino Organization

           ARGUMENTS IN SUPPORT :    The bill's sponsor, Mission Asset Fund,  
          writes that "Now is the time for the State of California to  
          recognize and enlist the nonprofit sector to do more in helping  
          underserved Californians gain access to affordable, responsible  
          financial products.  SB 896 will unleash the potential of  
          nonprofit organizations to turn underserved households into  
          visible, active and successful consumers in the financial  
          marketplace...The bill supports collaborations among nonprofits  
          that share resources to lower costs of lending services.  SB 896  
          removes regulatory uncertainty and ensures an orderly and  
          structured process for nonprofit organizations helping  
          underserved communities access affordable financial products and  
          services."

          Progreso Financiero, a sponsor of the first CFLL pilot program  
          to encourage responsible small dollar lending, writes "SB 896 is  
          consistent with the goal set forth for SB 318 - to increase  
          access to Californians to responsibly constructed, affordable  
          and credit-building loans...SB 896 attempts to identify and  
          promote non-profit lenders who adhere to the same responsible  
          lending practices defined in SB 318, and to reduce obstacles  
          that these non-profit lenders face.  The successful passage of  
          SB 896 will create more responsible and credit building  
          borrowing opportunities for Californians."


          MW:k  5/15/14   Senate Floor Analyses 


                                                                CONTINUED





                                                                     SB 896
                                                                     Page  
          9

                           SUPPORT/OPPOSITION:  SEE ABOVE

                                   ****  END  ****










































                                                                CONTINUED