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