BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON
                         BANKING AND FINANCIAL INSTITUTIONS
                            Senator Steven Glazer, Chair
                                2015 - 2016  Regular 

          Bill No:             AB 268         Hearing Date:    June 15,  
          2016
           ----------------------------------------------------------------- 
          |Author:    |Dababneh                                             |
          |-----------+-----------------------------------------------------|
          |Version:   |June 6, 2016    Amended                              |
           ----------------------------------------------------------------- 
           ----------------------------------------------------------------- 
          |Urgency:   |No                     |Fiscal:    |Yes              |
           ----------------------------------------------------------------- 
           ----------------------------------------------------------------- 
          |Consultant:|Eileen Newhall                                       |
          |           |                                                     |
           ----------------------------------------------------------------- 
          
                Subject:  California Finance Lenders Law:  violations


           SUMMARY       Authorizes new rates, fees, and lending practices for  
          unsecured, consumer-purpose installment loans made under the  
          California Finance Lenders Law (CFLL) in principal amounts of  
          $3,000 or less, as specified.  
          
           DESCRIPTION
             
            1.  Establishes a new article under the CFLL, applicable to  
              unsecured consumer loans with a maximum principal balance  
              upon origination of $3,000 or less.

           2.  Provides that this new article does not apply to loans made  
              pursuant to the Pilot Program for Increased Access to  
              Responsible, Small-Dollar Loans (the pilot program), and  
              provides that any sections of the CFLL, which are in  
              conflict with the new article, do not apply to loans made  
              pursuant to the new article.  

           3.  Requires loans made pursuant to the new article to meet all  
              of the following criteria:

               a.     Interest must accrue on a simple-interest basis,  
                 through the application of a daily periodic rate to the  
                 unpaid principal balance.

               b.     Prepayment penalties and balloon payments are  







          AB 268 (Dababneh)                                       Page 2  
          of ?
          
          
                 prohibited.

               c.     Licensees must disclose the annual percentage rate  
                 (APR), periodic payment amount, and total finance charge  
                 to each prospective borrower in writing at the time of  
                 loan application and must inform the consumer that he or  
                 she has the right to rescind his or her loan by the end  
                 of the business day following the date the loan is  
                 consummated, as specified.

               d.     Loans must have minimum lengths and maximum  
                 allowable charges, as follows:

                     --------------------------------------------- 
                    |   Amount    |  Minimum   |Maximum Allowable |
                    |  Borrowed   |Loan Length |     Charges      |
                    |             |   (days)   |                  |
                    |-------------+------------+------------------|
                    | Up to $149  | No minimum |   15% of loan    |
                    |             |            |      amount      |
                    |-------------+------------+------------------|
                    | $150 - $300 |     30     |   15% of loan    |
                    |             |            |amount            |
                    |-------------+------------+------------------|
                    | $301 - $600 |     60     |   12% of loan    |
                    |             |            |      amount      |
                    |-------------+------------+------------------|
                    |   $601 -    |     90     |   10% of loan    |
                    |   $1,000    |            |      amount      |
                    |-------------+------------+------------------|
                    |  $1,001 -   |    120     | 12.5% per month  |
                    |   $1,800    |            |   on remaining   |
                    |             |            | unpaid principal |
                    |             |            |     balance      |
                    |-------------+------------+------------------|
                    |  $1,801 -   |    180     |10% per month per |
                    |   $2,500    |            |     month on     |
                    |             |            | remaining unpaid |
                    |             |            |principal balance |
                    |-------------+------------+------------------|
                    |  $2,501 -   |    365     | 10% per month on |
                    |   $3,000    |            | remaining unpaid |
                    |             |            |principal balance |
                    |             |            |                  |








          AB 268 (Dababneh)                                       Page 3  
          of ?
          
          
                     --------------------------------------------- 

               e.     Licensees must reduce the interest rate on a loan  
                 with a principal amount between $1,001 and $3,000 and a  
                 monthly interest rate in excess of 8.25% per month after  
                 every three on-time payments made by a borrower, until  
                 the rate is reduced to 36% APR.

               f.     Licensees must give a discounted rate to a borrower  
                 who has made on-time payments and successfully completed  
                 a previous loan.

               g.     Licensees must underwrite each loan to determine a  
                 borrower's ability and willingness to repay that loan  
                 according to its terms.  A licensee may not make a loan  
                 if it determines through its underwriting that a  
                 borrower's total monthly debt service payments at the  
                 time of origination, including the loan for which the  
                 borrower is being considered, and across all outstanding  
                 forms of credit that can be independently verified, will  
                 exceed 50% of the borrower's gross monthly income.  

                    i.          In making this determination, a licensee  
                     must verify the information provided by the borrower  
                     using a credit report from at least one of the  
                     national credit reporting agencies or an alternative  
                     credit reporting agency approved by the Commissioner  
                     of Business Oversight (commissioner).

                    ii.        Notwithstanding the aforementioned  
                     requirements, a licensee may use a proprietary  
                     underwriting model approved by the commissioner to  
                     determine a borrower's ability to repay. 

               h.     Licensees must report each borrower's payment  
                 performance to at least one national credit reporting  
                 agency or to an alternative credit reporting agency  
                 designated by the commissioner.  Licensees must inform  
                 each borrower of the name of the agency or agencies to  
                 which it will report the borrower's payment history.

               i.     A borrower who is unable to successfully repay a  
                 loan of up to $600 may request, and a licensee must  
                 provide, a no-cost repayment plan which converts the loan  








          AB 268 (Dababneh)                                       Page 4  
          of ?
          
          
                 from a minimum length of 90 days to a minimum length of  
                 120 days.

               j.     Licensees may charge an administrative fee equal to  
                 the lesser of 6% of the principal amount of a loan or  
                 $75, on any loan whose monthly interest rate is less than  
                 8.25% per month.  Administrative fees may be charged no  
                 more frequently than once every six months in connection  
                 with a new loan origination and no more frequently than  
                 once every eight months in connection with a refinanced  
                 loan.

               aa. Licensees may charge a delinquency fee of up to $12 for  
                 a period in default not less than 7 days or up to $18 for  
                 a period in default not less than 14 days.  No more than  
                 one delinquency fee may be imposed per delinquent  
                 payment, no more than two delinquency fees may be imposed  
                 during any period of 30 consecutive days, and no  
                 delinquency fee may be imposed on a borrower who is 180  
                 days or more past due, if that fee would result in the  
                 sum of the borrower's remaining unpaid principal balance,  
                 accrued interest, and delinquency fees exceeding 180% of  
                 the original principal amount of the borrower's loan. 

               bb. Licensees may refinance loans, subject to restrictions  
                 that are identical to those imposed on pilot program  
                 lenders.

               cc. Licensees may use the services of referral partners,  
                 pursuant to rules that are similar to those imposed on  
                 pilot program lenders with respect to their use of  
                 finders (the pilot calls these individuals finders, while  
                 this bill calls them referral partners).  The following  
                 represent the key differences between the provisions of  
                 this bill applicable to referral partners and the  
                 provisions of the pilot program with respect to finders:   


                    i.          The pilot program requires licensees to  
                     ensure that a loan is not consummated until the  
                     licensee has completed a two-way communication, as  
                     defined, with a loan applicant. This bill lacks a  
                     similar requirement.  









          AB 268 (Dababneh)                                       Page 5  
          of ?
          
          
                    ii.        The pilot program requires finders who will  
                     disburse loan proceeds, accept loan payments, or  
                     provide loan disclosures on behalf of licensees to be  
                     licensed, as specified.  This bill includes those  
                     licensing requirements, but additionally authorizes  
                     the commissioner to allow licensees to use referral  
                     partners in the aforementioned capacities, if those  
                     referral partners register with the commissioner in a  
                     manner and on a form prescribed by the commissioner.   


                    iii.       The pilot program caps the compensation  
                     that may be paid by licensees to finders, and  
                     requires licensees to calculate the compensation paid  
                     to finders on a per loan basis, to ensure that the  
                     total amount does not exceed $65 per loan, nor does  
                     it exceed the sum of the origination fee plus  
                     interest charges paid by a borrower in connection  
                     with that loan.  This bill caps the total  
                     compensation that may be paid by a licensee to a  
                     referral partner at $65 per loan, on average,  
                     assessed annually, and does not prohibit the  
                     compensation paid per loan from exceeding the sum of  
                     the origination fee plus interest charges paid by a  
                     borrower in connection with a loan.    

               dd. No person in connection with or incidental to the  
                 making of any loan made pursuant to the bill may require  
                 a borrower to contract for credit insurance, as defined,  
                 or for insurance on tangible personal or real property,  
                 as defined.  

               ee. Licensees are subject to identical prohibitions  
                 regarding waivers of rights and discrimination against  
                 borrowers as those are pilot program lenders.  


           EXISTING LAW
           
           4.  Provides for the CFLL (Financial Code Sections 22000 et  
              seq.), administered by the Department of Business Oversight  
              (DBO).  The CFLL includes separate rules applicable to  
              consumer installment loans (Financial Code Sections 22200  
              through 22470) and commercial loans (Financial Code Sections  








          AB 268 (Dababneh)                                       Page 6  
          of ?
          
          
              22500 through 22650).  The following are the key rules  
              applied to consumer loans made pursuant to the CFLL:  

               a.     CFLL licensees who make unsecured or secured 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, 22304, and 22308).  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 unsecured or secured consumer loans under  
                 $5,000 are prohibited from imposing compound interest or  
                 charges (Section 22309); 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 or $15 on loans 15 days or more delinquent);  
                 required to prominently display their schedule of charges to  
                 borrowers (Section 22325); prohibited from splitting loans  
                 with other licensees (Section 22327); prohibited from  
                 requiring real property collateral (Section 22330), and  
                 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 unsecured or secured 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);  

               d.     Generally speaking, the terms of consumer loans of  
                 $10,000 or above are not restricted under the CFLL.

           5.  In lieu of the rates and fees summarized in 1a immediately  
              above, CFLL licensees accepted to participate in the pilot  
              program may make unsecured consumer loans in amounts between  
              $300 and $2,500 (Financial Code Sections 22365 through 22381).   
              Pilot program loans are capped at interest rates that currently  
              range from 32.25% to 36% per year, depending on the unpaid  
              principal balance of the loan.  Administrative fees are capped  
              at the lesser of 7% or $90 on the first loan made by a lender to  








          AB 268 (Dababneh)                                       Page 7  
          of ?
          
          
              a borrower and at the lesser of 6% or $75 on the second and  
              subsequent loans made to a borrower by the same lender.  Late  
              fees are capped at a maximum of $14 on loans that are at least 7  
              days delinquent or a maximum of $20 on loans that are at least  
              14 days delinquent.  Lenders are required to adhere to rigorous  
              underwriting requirements; notify borrowers of amounts due prior  
              to payment due dates; offer borrower's credit education prior to  
              loan disbursement; report each borrower's payment performance to  
              at least one consumer reporting agency that compiles and  
              maintains files on consumers on a nationwide basis; and submit  
              detailed data regarding borrower performance to DBO on an annual  
              basis.  

           COMMENTS
         
          1.  Purpose:   AB 268 is intended to reform the unsecured lending  
              provisions of the CFLL up to $3,000, by replacing the  
              existing provisions of the CFLL applicable to these loans  
              with new rates, charges, and fees.

           2.  Background:   This bill was introduced in an attempt to  
              increase the small dollar credit options available to  
              persons who are struggling to make ends meet, and are unable  
              to obtain low-interest credit cards, bank or credit union  
              loans, or other forms of relatively low-cost credit.   
              Relatively few installment loans are made in California with  
              principal amounts under $2,500 (345,796 unsecured  
              installment loans of less than $2,500 were made during 2014,  
              relative to 12.4 million payday loans made during the same  
              period).  The relatively small number of small dollar  
              installment loans made in California represents a challenge  
              to the significant population of people who are unable to  
              access affordable credit through banks and credit unions.   
              Californians who lack credit scores, or have very thin  
              credit files or damaged credit, currently have very few  
              affordable options when they need to borrow money.  Credit  
              cards are often unavailable to this population, or, if  
              available, bear very high interest rates and fees.  When  
              their spending needs outpace their incomes, these  
              Californians commonly turn to payday loans, auto title  
              loans, or high-interest rate, unsecured installment loans.   
              All three of these options come with high costs, and none  
              rewards timely loan repayment with a credit score increase.   









          AB 268 (Dababneh)                                       Page 8  
          of ?
          
          

          Although California created a pilot program in 2010 to increase  
              the number of affordable, responsible, small dollar  
              installment loans made in amounts of up to $2,500, that  
              program has been slow to grow.  According to this bill's  
              author, "thus far, few licensees are in the pilot program  
              and most of the loan volume is conducted by one company  
              (Oportun) that helps build credit for borrowers with thin or  
              no credit files.  Lending to this market space is vital but  
              does not help consumers that may have damaged credit but  
              still need a loan."  Although the pilot program has shown  
              promise in helping borrowers who qualify for its loans  
              obtain and improve their credit scores, borrowers who cannot  
              qualify for pilot program loans are left without installment  
              loan options from licensed California lenders.  

          The characteristics and needs of the population on which this  
              bill is focused were described in a 2012 study by the Center  
              for Financial Services Innovation (CFSI) titled, "A Complex  
              Portrait:  An examination of Small-Dollar Credit Consumers"  
              (  http://www.cfsinnovation.com/CMSPages/GetFile.aspx?guid=f937 
              e096-abcf-46cc-84d0-1c6c3aec2d3e  ).  In that study, CFSI  
              surveyed over 1,100 small dollar credit (SDC) consumers and  
              an additional 500 non-SDC consumers for comparison.  CFSI  
              defined a SDC consumer as one who had used a payday loan,  
              pawn loan, direct deposit advance, auto title loan, or  
              non-bank installment loan of $5,000 or less at least once  
              during the prior 12 months.  Among CFSI's key findings   a)  
              only 27% of SDC consumers had a credit card, while 61% of  
              non-SDC consumers had one; b) the top three uses for an SDC  
              product included utility bills, general living expenses, and  
              rent; 3) the top three reasons for funds shortage included  
              living expenses consistently greater than income, bill or  
              payment due before paycheck received, and unexpected events  
              such as emergency expenses or income drops; 4) users of very  
              short-term loans were almost twice as likely as other SDC  
              consumers to borrow for routine expenses such as utility  
              bills or general living expenses; 5) in addition to  
              borrowing, SDC consumers also reported cutting back on their  
              general spending and going without something they needed in  
              order to address their cash shortfalls; 6) while 66% of SDC  
              consumers had no savings, more than half of those with  
              savings chose not to use it all and preferred to rely on  
              credit, instead; and 7) the top three loan attributes that  








          AB 268 (Dababneh)                                       Page 9  
          of ?
          
          
              mattered most to SDC consumers were quick access to money,  
              ability to qualify, and clear terms.

          This bill is an attempt by the author to attract more  
              small-dollar credit providers to the California marketplace,  
              and to encourage them to responsibly offer credit to the  
              significant population of California consumers who are  
              struggling to make ends meet, and who cannot qualify for  
              lower-cost credit options.   
           
           3.  Pending Consumer Financial Protection Bureau (CFPB)  
              Regulations:   On June 2, 2016, the CFPB released  
              long-awaited draft regulations for certain short-term and  
              longer-term credit products  
              (http://files.consumerfinance.gov/f/documents/Rulemaking_Payd 
              ay_Vehicle_Title_Certain_High-Cost_Installment_Loans.pdf).   
              The CFPB's rule is intended to prohibit several practices in  
              the small dollar credit lending markets that the CFPB  
              believes have had detrimental effects on consumers.  In  
              releasing its draft regulations, CFPB explained that it "has  
              serious concerns that risky lender practices in the payday,  
              auto title, and payday installment markets are pushing  
              borrowers into debt traps.  Chief among these concerns is  
              that consumers are being set up to fail with loan payments  
              that they are unable to repay.  Faced with unaffordable  
              payments, consumers must choose between defaulting,  
              reborrowing, or skipping other financial obligations like  
              rent or basic living expenses like food and medical care.   
              The CFPB is concerned that these practices also lead to  
              collateral damage in other aspects of consumers' lives such  
              as steep penalty fees, bank account closures, and vehicle  
              seizures."  

          The CFPB's draft regulations propose one set of rules for  
              short-term covered loans, as defined; a different set of  
              rules for longer-term covered loans, as defined; and rules  
              related to payment practices, loan tracking requirements,  
              and record retention requirements, which apply to lenders  
              that make covered loans of any type.  Although a detailed  
              summary of the draft CFPB regulations is beyond the scope of  
              this analysis, a brief overview of the CFPB's proposal is  
              relevant because, as noted below, the loans covered by the  
              CFPB rules overlap to some extent with the loans covered by  
              this bill.  








          AB 268 (Dababneh)                                       Page 10  
          of ?
          
          

               a.     Covered short-term loans:  The CFPB defines a  
                 covered short-term loan under its draft proposal as one  
                 extended for personal, family, or household purposes, in  
                 which the consumer is required to pay substantially the  
                 entire amount of the loan within 45 days of loan  
                 consummation.  Because this bill establishes no minimum  
                 loan length for loans of up to $149 and a minimum loan  
                 length of 30 days for loans of up to $300, loans of up to  
                 $300 that are made pursuant to the provisions of this  
                 bill also meet the CFPB's definition of covered  
                                                                         short-term loans.  As described immediately below, if the  
                 CFPB rules are enacted as proposed, the provisions of  
                 this bill that apply to loans with principal amounts  
                 below $300 will be inconsistent with those federal rules.

               The draft CFPB rules prohibit a lender from making a  
                 short-term covered loan or increasing the credit  
                 available under a covered short-term loan, unless the  
                 lender first makes a reasonable determination that the  
                 consumer will have the ability to repay that loan  
                 according to its terms.  To make a reasonable  
                 determination of a consumer's ability to repay a covered  
                 loan, a lender must obtain the consumer's written  
                 statement regarding the amount and timing of the  
                 consumer's net income receipts and the amount and timing  
                 of payments required for categories of the consumer's  
                 major financial obligations, and must obtain independent  
                 verification evidence, specified in the regulations,  
                 regarding income and expenses.  

               Using both sets of data, the lender must make a reasonable  
                 projection of the amount and timing of a consumer's net  
                 income and payments for major financial obligations and  
                 must reasonably conclude that:  (1) the consumer's  
                 residual income will be sufficient for the consumer to  
                 make all required loan payments and meet basic living  
                 expenses, as defined, during the contractual term of the  
                 loan; and (2) the consumer will be able to make payments  
                 required for major financial obligations as they fall  
                 due, make any remaining payments under the loan, and meet  
                 basic living expenses for 30 days after having made the  
                 highest payment due under the loan on its due date (which  
                 generally means for 30 days following the conclusion of  








          AB 268 (Dababneh)                                       Page 11  
          of ?
          
          
                 the loan term).  

               The underwriting requirements contained in the draft CFPB  
                 rules are much more expansive and detailed than those  
                 contained in this bill.  For example, the CFPB rule  
                 requires lenders to consider certain information this  
                 bill does not require be considered (such as a consumer's  
                 housing expenses and major financial obligations),  
                 requires lenders to consider a consumer's ability to meet  
                 their basic living expenses for 30 days after having  
                 repaid their loan (not required by this bill), and  
                 requires lenders to presume that a borrower cannot afford  
                 a covered short-term loan, if a borrower meets one of  
                 three presumptions of unaffordability specified in the  
                 draft regulations (this bill includes no such  
                 presumptions of unaffordability).  

               Although the CFPB rules for short-term covered loans do  
                 provide for limited conditional exemptions that allow  
                 lenders to extend short-term covered loans without making  
                 ability-to-repay determinations, the requirements  
                 applicable to these conditional exemptions envision  
                 determinations that are beyond the scope and requirements  
                 of this bill.

               b.     Covered longer-term loans:  The CFPB defines a  
                 covered longer-term loan under its draft proposal as one  
                 extended for personal, family, or household purposes, in  
                 which the consumer is not required to repay substantially  
                 the entire amount of the loan within 45 days of  
                 consummation, the total cost of credit for the loan  
                 exceeds a rate of 36% a year as measured at the time of  
                 loan consummation, and the lender either obtains a  
                 leveraged payment mechanism or vehicle security at the  
                 same time as or within 72 hours after the consumer  
                 receives the entire amount of funds he or she is entitled  
                 to receive under the loan.  A leveraged payment mechanism  
                 is one in which the lender has the right to initiate a  
                 transfer of money from a consumer's checking, savings, or  
                 prepaid account to satisfy a loan obligation; has the  
                 contractual right to obtain payment directly from the  
                 consumer's employer or consumer's other source of income;  
                 or requires the consumer to repay the loan through a  
                 payroll deduction or deduction from another source of  








          AB 268 (Dababneh)                                       Page 12  
          of ?
          
          
                 income.

               The following represent the APRs of loan subject to the  
                 provisions of this bill, as measured at the time of loan  
                 consummation, as well as the minimum loan lengths allowed  
                 under this bill's provisions.  As the table below shows,  
                 any loan of over $600, which is made under this bill's  
                 provisions, and which carries the maximum allowable  
                 charges and minimum allowable loan length permitted by  
                 the bill, will be considered a covered longer-term loan  
                 by the CFPB, if the lender obtains a leveraged payment  
                 mechanism with which to secure loan repayment.  If the  
                 CFPB rules are enacted as proposed, the provisions of  
                 this bill that apply to those loans will be inconsistent  
                 with the federal rules.


                  ---------------------------------------------------------- 
                 |             |$301-$600|$601-$1000|$1001-$1800|  $1801 -  |
                 |             |         |          |           |   $3000   |
                 |-------------+---------+----------+-----------+-----------|
                 |APR assuming |         |          |           |           |
                 |minimum loan |   73%   |   41%    |   150%    |   120%    |
                 |length and   |         |          |           |           |
                 |max          |         |          |           |           |
                 |allowable    |         |          |           |           |
                 |charges      |         |          |           |           |
                 |-------------+---------+----------+-----------+-----------|
                 |Minimum loan | 60 days | 90 days  | 120 days  | 180 days  |
                 |length       |         |          |           |           |
                 |-------------+---------+----------+-----------+-----------|
                 |Maximum      | 12% of  |  10% of  | 12.5% per |  10% per  |
                 |charges a    |principal|principal |   month   |month      |
                 |lender may   |         |          |           |           |
                 |impose       |         |          |           |           |
                  ---------------------------------------------------------- 

                 The CFPB's draft rule imposes nearly identical  
                 underwriting requirements on lenders with respect to  
                 covered longer-term loans as it imposes on lenders with  
                 respect to covered short-term loans.  For this reason,  
                 the underwriting requirements for longer-term loan that  
                 are contained in the draft CFPB rules are much more  
                 expansive and detailed than the underwriting requirements  








          AB 268 (Dababneh)                                       Page 13  
          of ?
          
          
                 for these loans that are contained in this bill.  

                 Although the CFPB rules for covered longer-term loans do  
                 provide for limited conditional exemptions that allow  
                 lenders to extend longer-term covered loans without  
                 making an ability-to-repay determination, the structure,  
                 interest rates, and allowable administrative fees for  
                 those loans are very different than those envisioned by  
                 this bill.  

                 Of note, the CFPB's longer-term covered loan rules do  
                 contemplate use of proprietary underwriting models, as is  
                 proposed in this bill.  However, the CFPB's rules limit  
                 the use of such models to loans that carry a modified  
                 total cost of credit of not more than 36%, not including  
                 an origination fee that represents a reasonable  
                 proportion of the lender's cost of underwriting loans.   
                 In contrast, this bill allows the use of proprietary  
                 underwriting models approved by the commissioner, without  
                 regard to the interest rate of the loan on which that  
                 model is being used.  The CFPB's rules also require that  
                 any proprietary underwriting model used by a lender  
                 generate a portfolio default rate no greater than 5% per  
                 year, a requirement that is missing from this bill.   
                 Finally, the CFPB's rules require lenders to refund  
                 origination fees to any borrower who is underwritten  
                 using a proprietary underwriting model that generates a  
                 portfolio default rate higher than 5% per year, a  
                 requirement this bill lacks.  

               c.     Payment Practices, Loan Tracking, and Record  
                 Retention:  The draft CFPB rules also require lenders  
                 making covered loans to notify consumers before each  
                 attempt to withdraw payment for a covered loan from a  
                 consumer's checking, savings, or prepaid account; limit  
                 the number of times that lenders making covered loans may  
                 debit a consumer's account for payment, if an attempt to  
                 withdraw payment fails due to insufficient funds; require  
                 lenders to report loan performance to registered  
                 information systems, which are defined in the CFPB rules;  
                 require lenders to develop written policies and  
                 procedures reasonably designed to ensure compliance with  
                 the proposal's requirements; and require lenders to  
                 retain evidence of compliance for 36 months following the  








          AB 268 (Dababneh)                                       Page 14  
          of ?
          
          
                 date on which a covered loan ceases to be an outstanding  
                 loan.  None of these consumer protections is contained in  
                 this bill, although none of this bill's provisions appear  
                 to be inconsistent with any of these rules.

           4.  Further Refinement:   This bill's author acknowledges that  
              the bill before this Committee is a work in progress, which  
              requires a level of further revision, clarification, and  
              refinement that exceeds the time available to this Committee  
              in which to consider the bill.  If this Committee wishes to  
              move AB 268 forward to allow its author to continue working  
              on the measure, with the idea of calling the bill back for a  
              re-hearing after it has been further refined, it may wish to  
              obtain a commitment from the author to address the following  
              issues:

               a.     If this bill is enacted, there will be four sets of  
                 rules for consumer-purpose loans made under the CFLL (the  
                 existing rate structure that applies to both secured and  
                 unsecured loans of up to $2,500; the pilot program that  
                 can be used in lieu of the existing rate structure on  
                 unsecured loans of up to $2,500; the existing set of  
                 rules applicable to both secured and unsecured loans over  
                 $2,500; and the rules established by this bill, which  
                 will apply to unsecured loans of up to $3,000, except  
                 where these rules conflict with other rules).  Although  
                 this bill contains language which provides that "any  
                 other sections in this division that are in conflict with  
                 this article shall not apply to these loans," it would be  
                 enormously helpful to consumers, licensees, the  
                 commissioner, and stakeholders if this bill were explicit  
                 regarding the sections of existing law that will and will  
                 not apply to loans made pursuant to the article of law  
                 being created by this bill.  

               This clarification would also be helpful to further the  
                 author's stated intent to replace the existing provisions  
                 of the CFLL applicable to unsecured loans in amounts of  
                 up to $3,000 with the provisions of this bill.  As  
                 drafted, AB 268 appears to add its provisions as an  
                 alternative to existing rates and fees, rather than  
                 replace them.  

               b.     The rate structure this bill proposes for principal  








          AB 268 (Dababneh)                                       Page 15  
          of ?
          
          
                 amounts of up to $1,000 would benefit from revision to  
                 eliminate unintended consequences (page 4, lines 6  
                 through 16).  As shown in the table below, this bill's  
                 step-type rate structure on principal amounts of up to  
                 $1,000 establishes perverse incentives that impose lower  
                 borrowing costs on borrowers that borrow more money for a  
                 longer period of time than it imposes on borrowers that  
                 borrow less money for a shorter period of time.  For  
                 example, a $320 loan will cost $38 and provide a borrower  
                 access to that money for 60 days, while a $280 loan will  
                 cost $42 and provide a borrower access to that money for  
                 only 30 days; the same sorts of inconsistencies affect  
                 loan amounts bracketing $600.

           ------------------------------------------------ 
          |              |  Up to  |$301 -     |$601 -     |
          |              |  $300   |$600       |$1,000     |
          |--------------+---------+-----------+-----------|
          |Maximum       | 15% of  |  12% of   |  10% of   |
          |charges a     |principal| principal | principal |
          |lender may    |         |           |           |
          |impose        |         |           |           |
          |--------------+---------+-----------+-----------|
          |What the      |         |           |           |
          |borrower will |  Up to  |$36 to $72 |  $60 to   |
          |owe           |   $45   |           |   $100    |
          |--------------+---------+-----------+-----------|
          |Minimum loan  |         |           |           |
          |length        | 30 days |  60 days  |90         |
          |              |         |           |days       |
          |              |         |           |           |
           ------------------------------------------------ 

               c.     Amendments would also be helpful to clarify whether  
                 loans made in amounts of up to $1,000 may be paid back  
                 over multiple installments, and, if so, the minimum and  
                 maximum allowable frequency of those installments.  

               d.     This bill requires lenders to "reduce the interest  
                 rate after every three on-time payments until the rate is  
                 reduced to 36% APR" on loan amounts between $1,000 and  
                 $3,000, whose interest rates exceed 8.25% per month (page  
                 4, lines 29 through 35).  This language would benefit  
                 from clarification to resolve the following questions:   








          AB 268 (Dababneh)                                       Page 16  
          of ?
          
          
                 What is the minimum frequency with which lenders must  
                 collect payments on installment loans of this size?  By  
                 what amount must the interest rate be reduced?  Must it  
                 be reduced by the same amount after every three on-time  
                 payments or can a lender reward longer-term successful  
                 borrowers with larger reductions?  Must the on-time  
                 payments be consecutive (i.e., does the clock reset to  
                 zero once a borrower experiences a late payment)?  Does  
                 the reference to interest rates in excess of 8.25% per  
                 month refer to the initial interest rate imposed at loan  
                 origination?  

               Calculating the range of full-loan costs and APRs of loans  
                 with principal amounts above $1,000, using the rate and  
                 fee structure proposed in this bill, will be impossible  
                 until these questions are answered.  

               e.     This bill provides that "a borrower who has made  
                 on-time payments and successfully completed a previous  
                 loan shall receive a discounted rate for subsequent  
                 loans" (page 4, lines 36 through 38)  This language would  
                 benefit from clarification to resolve the following  
                 questions:  Is one lender is required to honor on-time  
                 payments made by a borrower on a loan obtained from a  
                 different lender?  To which loans does this provision  
                 apply (all loans or only loans above $1,000)?  What is  
                 meant by "on-time payments" (does this mean that all  
                 payments due on a loan must have been made timely or  
                 could a borrower have experienced and then cured one or  
                 more delinquencies and remain eligible for a discounted  
                 rate on a subsequent loan)?  

               f.     This bill allows for an administrative fee to be  
                 charged on any loan that is made with a rate of less than  
                 8.25% per month (page 5, lines 21 through 26).  It is  
                 unclear whether the author intends for this provision to  
                 apply to all loans made pursuant to the new article or  
                 only to loans with principal amounts above $1,000.  It  
                 would also be helpful to amend this language to clarify  
                 that the 8.25% per month threshold refers to the interest  
                 rate upon origination. 

               g.     Language regarding late fees refers to periods "in  
                 default," an artifact of language in Section 22320.5 of  








          AB 268 (Dababneh)                                       Page 17  
          of ?
          
          
                 the Financial Code, which was corrected in the pilot  
                 program to refer to periods "in delinquency."  An  
                 amendment is suggested to replace the words "in default"  
                 with "in delinquency" (page 5, lines 36 through 39).  

               h.     This bill requires licensees to report borrower  
                 payment performance to at least "one of the national  
                 credit reporting agencies" (page 6, lines 17 through 20).  
                  The pilot program more correctly refers to "a consumer  
                 reporting agency that compiles and maintains files on  
                 consumers on a nationwide basis" and defines such an  
                 agency as "one that meets the definition in Section  
                 603(p) of the federal Fair Credit Reporting Act (15 USC  
                 Sec. 1681a(p))."  This bill would benefit from the  
                 substitution of language similar to that used in the  
                 pilot program.  

               Similarly, if they wish to do so, this bill allows  
                 licensees to report borrower payment performance to "any  
                 alternative consumer credit reporting agency designated  
                 by the commissioner in the United States."  When  
                 contacted by Committee staff, a representative of  
                 Clarity, the country's largest specialty credit bureau  
                 focusing on nonprime consumers, confirmed that his  
                 company is also subject to the federal Fair Credit  
                 Reporting Act (FCRA).  Staff suggests clarifying the  
                 language around alternative consumer credit reporting  
                 agencies by requiring that any alternative agency  
                 designated by the commissioner be subject to FCRA  
                 requirements.  Doing so will provide consumers whose data  
                 is reported to an alternative bureau the protections  
                 afforded by the FCRA.

               i.     As discussed in more detail above, the underwriting  
                 requirements of this bill are inconsistent with the draft  
                 CFPB regulations for covered short-term and longer-term  
                 loans and may require revision to minimize future  
                 potential conflict.   However, if this bill's  
                 underwriting requirements are viewed independently of the  
                 CFPB rules (as may be appropriate given the potential for  
                 significant changes to those rules before they are  
                 finalized), there are issues that would benefit from  
                 correction and clarification.  The biggest of these  
                 issues involves the language which states,  








          AB 268 (Dababneh)                                       Page 18  
          of ?
          
          
                 "notwithstanding this section, a licensee may use a  
                 proprietary underwriting model, approved by the  
                 commissioner, to determine a borrower's ability to repay"  
                 (page 6, lines 36 through 39).

               As currently drafted, this bill provides no guidance to the  
                 commissioner regarding what program elements or  
                 performance requirements constitute the minimum allowable  
                 to warrant approval of a proprietary underwriting model  
                 by commissioner.  The bill also fails to provide the  
                 commissioner with express authority to rescind her  
                 approval of a proprietary underwriting model, if that  
                 model proves ill-equipped to appropriately vet the  
                 ability and willingness of borrowers to repay their  
                 loans.  The bill is also silent on the steps that must be  
                 taken by licensees that update and refine their approved  
                 underwriting models.  Must an underwriting model be  
                 re-submitted for approval each time it is updated to  
                 reflect additional performance data on a lender's  
                 customers?  Finally, this bill is silent on the extent to  
                 which the components of a lender's proprietary model will  
                 be subject to Public Records Act requests directed to the  
                 commissioner.  If the author intends for these  
                 proprietary models to remain confidential, an amendment  
                 providing for that confidentiality will be necessary.  

               Subdivision (l), which contains the underwriting language,  
                 would also benefit from technical corrections (page 6,  
                 lines 24 through 39).  Paragraph (1) of subdivision (l)  
                 refers to underwriting a borrower's ability and  
                 willingness to repay a loan (see line 25), while  
                 paragraph (2) refers only to underwriting a borrower's  
                 ability to repay (see lines 32 and 33).  The phrase  
                 "notwithstanding this section" on lines 36 and 37 should  
                 also be replaced by the phrase "notwithstanding this  
                 paragraph."  

               j.     The language on page 11, line 6 that refers to  
                 subdivision (d) of Section 22373 needs correction to  
                 refer, instead, to subdivision (c) of Section 22352. 

               aa.       There are several elements of the pilot program  
                 that have been excluded from this new article.  This  
                 Committee may wish to ask the author to explain why he  








          AB 268 (Dababneh)                                       Page 19  
          of ?
          
          
                 has chosen to exclude all of the following  
                 consumer-friendly elements of the pilot program from this  
                 bill:  (1) enhanced borrower disclosures at the time of  
                 loan application; (2) an offer of free credit education  
                 prior to loan disbursement; (3) borrower notification at  
                 least two days prior to each payment due date regarding  
                                                                           the amount due and the due date, (4) requirement for  
                 lenders to develop and implement policies and procedures  
                 designed to respond to questions raised by applicants and  
                 borrowers regarding their loans; (5) detail regarding  
                 which data sources are required to verify a borrower's  
                 gross monthly income and debt obligations; and (6)  
                 prohibitions against offers or sales of and referrals to  
                 persons who offer or sell credit insurance and insurance  
                 on tangible personal or real property in connection with  
                 loans.  

               It would also be helpful to understand the logic behind the  
                 differences in this bill's referral partner provisions  
                 relative to the finder provisions of the pilot program.  

               bb.       Finally, this Committee may wish to ask the  
                 author to address two questions regarding the scope of  
                 the bill.  First, what is the logic of choosing $3,000 as  
                 this bill's upper cutoff, when both the pilot program and  
                 Financial Code Sections 22303, 22304, and 22308 use  
                 $2,500 as their cutoff?  Second, what is the logic of  
                 limiting this bill to unsecured loans, when the CFLL  
                 applies to both secured and unsecured loans.  

           5.  Summary of Arguments in Support:   

               a.     The Online Lending Alliance (OLA) supports the  
                 author's efforts to expand the availability of credit to  
                 California consumers under the CFLL in the  
                 currently-underserved $300 to $2,500 market and is  
                 supportive of his ongoing efforts to create a regulatory  
                 framework in that space that would be economically viable  
                 for companies beyond those few operating under the small  
                 dollar loan pilot program.  "As regulated CFLL-licensed  
                 lenders, our companies would very much like to lend in  
                 this market segment.  The amendment circulated June 6th,  
                 however, present several significant problems as  
                 drafted." OLA offers a series of concerns and  








          AB 268 (Dababneh)                                       Page 20  
          of ?
          
          
                 recommendations.

               OLA's recommendations:  The bill should be limited to loan  
                 amounts below $2,500 and amended to clarify that it does  
                 not affect loans made under the Deferred Deposit  
                 Transaction Law (payday loan law).  The bill should be  
                 clarified to ensure that proprietary underwriting  
                 analytics remain confidential, and to ensure that any  
                 regulatory review of underwriting standards is  
                 outcome-based and consistent with emerging CFPB  
                 ability-to-repay requirements.  The rate structure in the  
                 bill should be simplified significantly, and the  
                 mandatory rate reduction concept should be limited to  
                 subsequent loans that are obtained from the same lender.   
                 The bill should be amended to allow for the use of online  
                 referral partners.  Finally, OLA urges the Committee to  
                 avoid enacting legislation that is duplicative of and/or  
                 inconsistent with pending CFPB rules for small dollar  
                 lending, arbitration waivers, and bank overdraft  
                 policies.

               b.     Although Advance America has concerns regarding the  
                 lower loan amounts authorized by this bill, the interest  
                 rate calculations, and the complex nature of the interest  
                 rate reductions mandated by the bill, the company  
                 supports the author's desire to create a viable loan  
                 product under $3,000 that will create a more robust,  
                 regulated marketplace in California.  Advance America  
                 believes that AB 268 is worthy of passage out of this  
                 Committee, to allow the author to continue refining his  
                 legislation.  

           6.  Summary of Arguments in Opposition:    A coalition of 36  
              consumer advocacy groups, legal aid organizations, and  
              economic development organizations submitted a joint letter  
              of opposition identifying several key concerns with the  
              bill, all of which serve to weaken the current protections  
              in the CFLL for loans between $300 and $2,500.  Among the  
              organizations' concerns:  Loans between $300 and $2,500  
              could have effective APRs significantly higher than what is  
              currently permitted by the CFLL.  The ability-to-repay  
              underwriting criteria in the bill do not include rental  
              housing costs, a major omission given California's current  
              affordable housing crisis.  The bill will allow lenders to  








          AB 268 (Dababneh)                                       Page 21  
          of ?
          
          
              use unspecified proprietary underwriting models and to  
              employ referral partners who are not subject to state  
              licensure or federal oversight, despite their ability to  
              perform core functions, such as disbursing loan proceeds and  
              taking consumers' payments.  Finally, the bill will allow  
              lenders to offer credit insurance, an add-on product that  
              can inflate the cost of a loan.

          The organizations also point to CFPB's draft rule to regulate  
              payday, car title, and installment loans.  "In light of  
              these significant changes underway, we question whether it  
              is sensible to consider a major overhaul of the CFLL with AB  
              268 as the vehicle, which substantially weakens existing  
              consumer protections for these loans between $300 and  
              $2,500.  This Committee is being asked to advance a major  
              piece of legislation, the substance of which has been in  
              print for less than a week, with barely three months left in  
              our current session...In the next legislative session, we  
              ask you to consider addressing existing problems across all  
              types of high-cost loans, building off of the CFPB's minimum  
              federal standards.  By doing so, you will help level the  
              playing field and allow for safer, more affordable,  
              responsible lending alternative to emerge in California."  
               
          7.  Prior and Related Legislation:   

               a.     SB 1146 (Florez), Chapter 640, Statutes of 2010:   
                 Authorized California's original small-dollar loan pilot  
                 program within the CFLL, named the Pilot Program for  
                 Affordable Credit-Building Opportunities.  Allowed  
                 lenders approved to participate in the pilot program to  
                 charge higher interest rates and fees on loans of up to  
                 $2,500 than those authorized under CFLL.  Required pilot  
                 program lenders to rigorously underwrite their loans,  
                 offer credit education at no cost to their borrowers, and  
                 report borrower payment history to at least one major  
                 credit bureau.  Required detailed reporting of loan  
                 outcomes to DBO.  Originally scheduled to sunset on  
                 January 1, 2015, but was replaced by the Pilot Program  
                 for Increased Access to Responsible Small Dollar Loans,  
                 as described immediately below.  

               b.     SB 318 (Hill), Chapter 467, Statutes of 2013:   
                 Replaced the Pilot Program for Affordable,  








          AB 268 (Dababneh)                                       Page 22  
          of ?
          
          
                 Credit-Building Opportunities with the Pilot Program for  
                 Increased Access to Responsible Small Dollar Loans.   
                 Retained several aspects of the original pilot, including  
                 the underwriting requirements, offers of free credit  
                 education, reports to at least one major credit bureau,  
                 and detailed reporting of program loan outcomes, but  
                 modified other aspects of the original pilot program.   
                 These modifications increased the maximum interest rates  
                 and fees that pilot lenders could charge, allowed pilot  
                 lenders to originate new loans and to refinance loans  
                 more frequently than under the original pilot, and  
                 eliminated several administrative and licensing rules  
                 that were serving as bureaucratic barriers to the success  
                 of the original pilot.  Scheduled to sunset on January 1,  
                 2018.  

               c.     SB 235 (Block), Chapter 505, Statutes of 2015:   
                 Expanded the activities in which pilot program finders  
                 could engage on behalf of pilot program lenders.  
                 Authorized finders to disburse loan proceeds to  
                 borrowers, receive loan payments from borrowers, and  
                 provide notices and disclosures to borrowers, as  
                 specified, and provided pilot program lenders with  
                 greater flexibility in the ways in which they may  
                 compensate their finders.  

               d.     SB 984 (Hueso), 2015-16 Legislative Session:   
                 Extends the sunset date on the pilot program to January  
                 1, 2023.

           
          LIST OF REGISTERED SUPPORT/OPPOSITION
            
          Support
           
          Advance America
          Online Lending Alliance

           Opposition
               
          API Legal Outreach
          Asian Law Alliance
          Asian Pacific Planning & Policy Council
          California Capital Financial Development Corporation








          AB 268 (Dababneh)                                       Page 23  
          of ?
          
          
          California Reinvestment Coalition
          Center for Responsible Lending
          Community Legal Services of East Palo Alto
          Consumer Action
          Consumers Union
          Courage Campaign
          Dreams for Change
          East Bay Community Law Center
          Fresno Community Development Financial Institution
          Greenlining Institute
          Law Foundation of Silicon Valley
          Little Tokyo Service Center
          Mexican American Opportunity Fund
          Mission Economic Development Agency
          My Path
          National Council of La Raza
          NEW Economics for Women
          Nuestra Casa de East Palo Alto
          Opportunity Fund
          Presente.org
          Public Counsel
          Public Good Law Center
          Public Law Center
          Religious Action Center of Reform Judaism
          Rural Community Assistance Corporation
          Silicon Valley Debug
          Thai Community Development Center
          Valley Economic Development Center
          West Valley Community Services
          Working Partnerships USA
          Wrigley is Going Green
          Youth Leadership Institute


                                      -- END --