BILL ANALYSIS Ó
SB 896
Page 1
SENATE THIRD READING
SB 896 (Correa)
As Amended May 14, 2014
Majority vote
SENATE VOTE :33-0
BANKING & FINANCE 12-0 APPROPRIATIONS 16-0
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|Ayes:|Dickinson, Allen, |Ayes:|Gatto, Bigelow, |
| |Achadjian, Bonta, Chau, | |Bocanegra, Bradford, Ian |
| |Gatto, Harkey, Linder, | |Calderon, Campos, Eggman, |
| |Perea, Rodriguez, Weber, | |Gomez, Holden, Jones, |
| |Williams | |Linder, Pan, Quirk, |
| | | |Ridley-Thomas, Wagner, |
| | | |Lowenthal |
|-----+--------------------------+-----+--------------------------|
| | | | |
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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 Internal Revenue Code Section
501(c)(3), 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 this bill.
ii) Once granted an exemption, an exempt organization
would have to file an annual report with the
commissioner, containing relevant information that the
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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 reporting agency that compiles and maintains files on
consumers on a nationwide basis, 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
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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 6) below.
4)Authorizes the commissioner to examine each exempt
organization and each partnering organization for compliance
with the 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
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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 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 (FC)
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 (FC
Sections 22303 and 22304). Administrative fees are capped
at the lesser of 5% of the principal amount of the loan or
$50 (FC 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 (FC
Section 22309); are limited in the amount of delinquency
fees they may impose (FC 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
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charges to borrowers (FC Section 22325); are prohibited
from splitting loans with other licensees (FC Section
22327); are prohibited from requiring real property
collateral (FC Section 22330), and are limited to a maximum
loan term of 60 months plus 15 days (FC 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 (FC Section 22154); must
require loan payments to be paid in equal, periodic
installments (FC Section 22307); and must meet certain
standards before they may sell various types of insurance
to the borrower (FC Sections 22313 and 22314); and,
d) Generally speaking, the terms of loans of $10,000 or
above 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 (FC Section 22365 et seq.). Significant elements of that
program are summarized below.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, annual Corporations Fund costs to DBO of
approximately $95,000, largely recoverable through fee revenue.
COMMENTS :
In support of this 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
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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), 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.
This bill would authorize a non-profit organization that meets
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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. This bill 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, and Small
Dollar Loans.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0004217