BILL ANALYSIS Ó
SB 896
Page 1
Date of Hearing: June 23, 2014
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
SB 896 (Correa) - As Amended: May 14, 2014
SENATE VOTE : 33-0
SUBJECT : Finance lenders: nonprofit organizations:
zero-interest, low-cost loans: exemptions
SUMMARY : Exempts nonprofits that facilitate zero interest,
low-cost loans under specified circumstance from the California
Finance Lenders Law (CFLL). Specifically, this bill :
1)Applies the exemption to nonprofit organizations (hereinafter
referred to as exempt organizations) that facilitates one or
more zero-interest, low-cost installment loans with principal
amounts between $250 and $2,500, as follows:
a) The organization would 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 benefit a private shareholder or
individual.
i) The organization would have to file an application of
exemption with the Commissioner of Business Oversight
(commissioner) and would have to pay a fee to the
commissioner in an amount calculated by the commissioner
to cover costs to administer the bill.
ii) 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 non-profit partners within the state
during the preceding calendar year.
2)Provides that loans made by the exempt organization would have
to be unsecured, zero-interest loans, which would have to be of
certain minimum duration and be underwritten as specified (see
below). The exempt organization would have to provide
specified disclosures to borrowers in connection with these
loans, report borrower payment history to at least one consumer
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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, and prohibits loan refinance.
3)Specifies that the CFLL does not apply to a nonprofit
organization which partners with an exempt organization for the
purpose of facilitating zero-interest loans, provided that all
of the following conditions are met:
a) The partnership between the exempt organization and each
partnering organization would have 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 the bill and any regulations the commissioner
may promulgate to administer the bill;
b) The partnering organization would have to be a 501(c)(3),
and no part of the net earnings of the partnering
organization could benefit a private shareholder or
individual;
c) The loans facilitated by the partnering organization
would have to comply with all of the loan requirements
summarized above;
d) Each exempt organization would have 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 would 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 or addresses at
which the organization facilitates lending activities; and,
e) Each exempt organization would have to submit information
to the commissioner regarding the loans facilitated by each
of the nonprofit organizations with which it partners for
the commissioner's inclusion in the report described in
Number 6 below.
4)Authorizes the commissioner to examine each exempt organization
and each partnering organization for compliance with the
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provisions of the bill, requires any organization examined to
make available to the commissioner or his or her representative
all books and records requested by the commissioner related to
the lending activities facilitated by that organization, and
require 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 non-profits with
which they partner).
5)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, and/or
prohibit partnerships between exempt organizations and other
specific organizations, as specified, and as necessary for the
protection of the public.
6)Requires the commissioner to annually post a report on
Department of Business Oversight's (DBO) Internet web site
summarizing all the following information: the number of
organizations that applied for exemptions; the number of
organizations granted exemptions; the number of organizations
that entered into partnership with exempt organizations; the
reason or reasons applications for exemption were denied, if
applicable; the number of borrowers who applied for loans
through exempt or partnering organizations; the number of
borrowers who obtained loans facilitated by exempt or
partnering organizations; the total amount loaned; the
distribution of loan lengths upon origination; the number of
borrowers who obtained more than one loan facilitated by an
exempt or partnering organization and the distribution of the
number of loans per borrower; among the borrowers who obtained
more than one loan facilitated by an exempt or partnering
organization, the percentage of those borrowers whose credit
scores increased between successive loans and the average size
of that increase; the income distribution of borrowers upon
loan origination, as specified; the purposes for which loans
facilitated by an exempt or partnering organization were
obtained; the extent to which borrowers self-reported that they
had a bank account at the time of their loan application and
the extent to which these borrowers also used check-cashing
services; the performance of loans, as specified; the number
and types of violations of the provisions of the bill by exempt
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and partnering organizations; the number of times the
commissioner suspended or revoked an exemption granted to an
exempt organization or sanctioned a partnering organization;
the number of complaints received by the commissioner about an
exempt or a partnering organization and the nature of those
complaints; and recommendations, if any, for improving the
program.
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 (Financial Code Sections 22000 et
seq.). 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 (Sections 22303 and
22304). Administrative fees are capped at the lesser of 5% of
the principal amount of the loan or $50 (Section 22305);
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 (Section 22309); are
limited in the amount of delinquency fees they may impose
(Section 22320.5; 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 (Section 22325); are
prohibited from splitting loans with other licensees (Section
22327); are prohibited from requiring real property collateral
(Section 22330), and are limited to a maximum loan term of 60
months plus 15 days (Section 22334);
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 (Section 22154); must require
loan payments to be paid in equal, periodic installments
(Section 22307); and must meet certain standards before they
may sell various types of insurance to the borrower (Sections
22313 and 22314); and,
d) Generally speaking, the terms of loans of $10,000 or above
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are not restricted under the CFLL.
2)Until January 1, 2018, provides for the Pilot Program for
Increased Access to Responsible Small Dollar Loans within the
CFLL (Financial Code Section 22365 et seq.). Significant
elements of that program are summarized below.
FISCAL EFFECT : According to the Senate Appropriations Committee
analysis, preliminary estimates are $95,000 annually, potentially
offset by fee revenue (Special Fund).
COMMENTS :
In support of the bill the author's office provides:
SB 896 attempts to address two related problems: 1) the
lack of affordable, credit-building, small-dollar loans in
California in amounts under $2,500 and 2) the lack of legal
and regulatory certainty provided under California law to
nonprofit organizations that facilitate affordable,
credit-building, small-dollar loans.
The first problem is fairly well characterized.
Californians who lack credit scores or have very thin credit
files currently have very few affordable options when they
need to borrow money; credit cards and low interest rate
installment loans are commonly unavailable to them.
Californians with subprime credit scores also have few
options, and typically access payday lenders when their
incomes fail to match their spending needs.
The lack of choices available to borrowers who cannot
qualify for credit cards, bank, or credit union loans, and
who require credit with which to meet their expenses is
borne out by a comparison of the number of small dollar
value installment loans made each year in California with
the number of payday loans made each year. During 2012 (the
most recent year for which lending data are available for
all CFLL licensees), CFLL licensees made approximately
265,000 unsecured consumer loans with principal amounts
under $2,500. This compares with 12.3 million deferred
deposit transactions (payday loans), which were made by
licensed payday lenders during the same calendar year.
Although the Legislature has taken steps to help close this
gap (most recently through enactment of SB 318, Hill et al.,
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Chapter 467, Statutes of 2013), there is consensus among
for-profit businesses, not-for-profit organizations, and the
regulatory community that more should be done to encourage
affordable, credit-building, small dollar lending.
The second problem has not previously received Legislative
attention. One of the not-for-profit organizations that is
attempting to increase access to affordable,
credit-building, small-dollar loans is the Mission Asset
Fund, based in San Francisco. During the past five years,
MAF has facilitated approximately 2,000 affordable,
credit-building loans, totaling over $2.1 million, in
California. MAF's lending volume has increased each year
since inception, reaching $750,000 in the most recent year.
MAF serves borrowers directly, through its presence in the
San Francisco Bay Area, and indirectly, through partnerships
with other nonprofit organizations. It currently works with
nineteen different nonprofit partners across six different
states, including three different groups in Los Angeles.
SB 896 would authorize a non-profit organization that meets
certain criteria to apply with DBO for an exemption from the CFLL
and would require a non-profit organization granted an exemption
by DBO to comply with specified requirements related to the loans
it facilitates. SB 896 would further provide that non-profit
organizations which partner with exempt non-profits are not
subject to the CFLL, if they meet specified criteria and comply
with specified requirements.
The length of the loans, underwriting requirements applied to the
loans, disclosures provided to borrowers, fees that could be
charged to borrowers, and other rules of the program would be
identical to the rules applicable to lenders accepted into the
Pilot Program for Increased Access to Responsible, Small Dollar
Loans, except as shown in the table below.
-----------------------------------------------------------
| | Pilot Program | |
| | for Increased | |
| | Access to | |
| | Responsible, | SB |
| | Small Dollar |896 |
| | Loans | |
| | (SB 318, Chapter | |
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| | 467, Statutes of | |
| | 2013) | |
|-------------------+-------------------+-------------------|
| Entities | For-profits with | Non-profits with |
| Expected To | socially | socially |
| Utilize The Bill | responsible | responsible |
| | missions | missions |
|-------------------+-------------------+-------------------|
| Interest Rates | Capped at 36% on | |
| (Percentage) | the first $1,000 | |
| | borrowed and 32% | |
| | on principal | 0% |
| | amounts between | |
| | $1,001 and | |
| | $2,500. The 32% | |
| | rate can rise to | |
| | a maximum of 35% | |
| | as the prime | |
| | rate rises. | |
|-------------------+-------------------+-------------------|
| Origination Fees | Capped at the | |
| | lesser of 7% or | |
| | $90 on the first | Same as SB 318 |
| | loan to a | |
| | borrower; lesser | |
| | of 6% or $75 on | |
| | the second and | |
| | subsequent loans | |
| | to a borrower | |
|-------------------+-------------------+-------------------|
| Late Fees | Capped at $14 | An insufficient |
| | after 7 days or | funds fee capped |
| | $20 after 14 | at $10 may be |
| | days; actual | charged in lieu |
| | insufficient | of any other |
| | funds fee may | late fee or |
| | also be charged |delinquency fee |
| | to a borrower | |
|-------------------+-------------------+-------------------|
| Loan Amounts | $300 to $2,500 | $250 to |
| | |$2,500 |
|-------------------+-------------------+-------------------|
| Minimum Loan | 90 days for | |
| Lengths | loans <$500; 120 | |
| | days for loans | Same as SB 318 |
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| | $500 - $1,499; | |
| | 180 days for | |
| | loans $1,500 - | |
| | $2,500 | |
|-------------------+-------------------+-------------------|
| Underwriting | Income and debts | Same as SB 318 |
| Requirements | must be | with one |
| | independently | modification: |
| | verified by the | If a borrower's |
| | lender. Monthly | actual income |
| | debt service | cannot be |
| | payments, | independently |
| | including the | verified, a |
| | loan for which | signed statement |
| | the borrower is | from the |
| | being | borrower |
| | considered, may | regarding their |
| | not exceed 50% | monthly income |
| | of the | may be used, but |
| | borrower's gross | the |
| | monthly | debt-to-income |
| | household | cap drops from |
| | income. | 50% to 25%. |
|-------------------+-------------------+-------------------|
| Credit Education | Yes | Yes |
| Offered at Loan | | |
| Origination? | | |
|-------------------+-------------------+-------------------|
| Borrower Payment | | |
| History Reported | Yes | Yes |
| to Credit | | |
| Bureau? | | |
|-------------------+-------------------+-------------------|
| Refinancing | Yes, under | No |
| Allowed? | certain | |
| | circumstances | |
|-------------------+-------------------+-------------------|
| Disclosures | Yes; Must be in | Same as SB 318, |
| Provided at Loan | writing, type | except for the |
| Origination | size no smaller | statement that |
| | than 12 point | repaying a loan |
| | font: amount | early will lower |
| | borrowed, total | borrowing costs |
| | dollar cost of | (because SB 896 |
| | the loan to the | loans are |
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| | consumer if the | zero-interest, |
| | loan is paid | this statement |
| | back on time, |does not apply). |
| | APR, periodic | |
| | payment amount, | |
| | delinquency fee | |
| | schedule, and a | |
| | statement that | |
| | "repaying your | |
| | loan early will | |
| | lower your | |
| | borrowing costs | |
| | by reducing the | |
| | amount of | |
| | interest you | |
| | will pay. This | |
| | loan has no | |
| | prepayment | |
| | penalty." | |
|-------------------+-------------------+-------------------|
| Payment | Required 2 days | |
| Reminders | prior to each | Same as SB 318 |
| | payment due | |
| | date; borrower | |
| | may opt out if | |
| | he/she wishes | |
|-------------------+-------------------+-------------------|
| Annual Report to | | |
| DBO by Entities | Yes | Yes |
| Accepted into | | |
| the Program | | |
|-------------------+-------------------+-------------------|
| Annual Report by | Yes |Yes |
| DBO on Program | | |
| Performance | | |
-----------------------------------------------------------
Chart prepared by Senate Banking Committee
AB 896 is sponsored by Mission Asset Fund (MAF), based in San
Francisco that has facilitated over $2.5 million in social loans
through their Lending Circles program designed to increase wealth
and assets among low income people. The MAF Lending Circles
program was studied, beginning in 2011, by a team of researchers
from San Francisco State University's Cesar E. Chavez Institute.
The two year research study found that Lending Circle
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participants on average improved their credit scores 4 times
greater than non-participants: 168 points vs 41 points.
Participants also reduced debt and increased savings. The loans
made as part of the research study were found to save the
participants $42,636 in fees and interest due to the use of
zero-interest, low cost loans. The report is available at
http://cci.sfsu.edu/files/MAF%20Replication.pdf .
What are lending circles, and how do they work? The lending
circle model around which SB 896 is written was developed by MAF,
based on the time-tested model used worldwide, in multiple
cultures. Lending circles are groups of ten to twelve 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. Different cultures call these
circles by different names, including tandas or cundinas (in
Mexico), susus (throughout Africa), paluwagan (in the
Philippines), and lun-hui (in China).
The lending circle model works as follows: each individual in
the circle must agree to pay a certain amount to the group at a
frequency that is agreed upon by all members of the group (thus,
for example, each member of a ten-person lending circle could
agree to pay $100 to the group, once a month, generating $1,000
per month). A lottery is used to determine the order in which
members of each lending circle gain access to the payment
proceeds. In the example immediately above, each of the ten
members in the circle would be able to borrow $1,000 each month -
one borrower per month - until all ten members of the lending
circle had paid $1,000, and all had borrowed $1,000.
The key difference between lending circles facilitated by MAF and
the informal lending circles that have been used in other
cultures for decades is the formalized manner in which MAF
facilitates the lending. MAF is not the lender in its lending
circles; that role is played by the members of the circle.
However, MAF plays a vitally important role as facilitator of the
circles. It enters the picture in four ways. First, it helps
individuals who wish to form lending circles do so, by explaining
the rules, underwriting the members of each circle, and providing
the paperwork necessary to formalize the lending circle loan
agreements. Second, MAF offers free financial education to
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lending circle participants. The financial management training
classes offered by MAF are directly linked to credit, borrowing,
and savings topics that lending circle participants experience in
their circles. Third, MAF guarantees the loans. If any member
of a lending circle is unable to fulfill their loan agreement by
fully repaying their loan amount, MAF steps in to take up those
payments, thus ensuring that the other members of the circle, who
have made their payments, get fully repaid. In the alternative,
MAF helps the circle identify a replacement for the member of the
lending circle that dropped out, to ensure that the circle is
completed and all loans are fully repaid. Finally, MAF reports
borrower payment histories to at least one of the major credit
bureaus. This helps individuals who participate in lending
circles to establish, build, and/or repair their credit scores.
REGISTERED SUPPORT / OPPOSITION :
Support
Mission Asser Fund (Sponsor)
Asian Law Alliance
Calexico Community Action Council, Inc.
California Association for Micro Enterprise Opportunity (CAMEO)
California State Controller
Californians for Shared Prosperity Coalition
City and County of San Francisco
Corporation for Enterprise Development (CFED)
Earn
Greenlining Institute
National Council of La Raza
Opportunity Fund
Pilipino Workers Center of Southern California
Progreso Financiero
San Francisco Board of Supervisors, David Campos
San Francisco Office of Financial Empowerment
The Center for Asset Building Opportunities (CABO)
The Family Independence Initiative
Watts/Century Latino Organization
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
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