BILL ANALYSIS                                                                                                                                                                                                    





                             SENATE JUDICIARY COMMITTEE
                         Senator Hannah-Beth Jackson, Chair
                            2015 - 2016  Regular  Session


          SB 235 (Block)
          Version: February 17, 2015
          Hearing Date:  April 28, 2015
          Fiscal: Yes
          Urgency: No
          BCP


                                        SUBJECT
                                           
                 Small dollar loans:  finder duties and compensation

                                      DESCRIPTION  

          Existing law establishes, until January 1, 2018, the Pilot  
          Program for Increased Access to Responsible Small Dollar Loans  
          for the purpose of allowing greater access to responsible  
          installment loans in principal amounts of at least $300 and less  
          than $2,500 administered by the Commissioner of Business  
          Oversight.  

          This bill would expand the services that a finder is authorized  
          to perform to include, among other things, disbursement of loan  
          proceeds to, and receipt of loan payments from, the borrower.   
          This bill would also strike the provision that caps a finder's  
          fee and, instead, authorizes payment of finder compensation  
          pursuant to a schedule that is mutually agreed upon by the  
          licensee and the finder.

                                      BACKGROUND  

          On September 30, 2010, Governor Schwarzenegger signed SB 1146  
          (Florez, Chapter 640,
          Statutes of 2010) to create the Pilot Program for Affordable  
          Credit-Building Opportunities.  That program sought to increase  
          the availability of credit-building opportunities and to expand  
          financial education for individuals, particularly unbanked or  
          under-banked persons.  That four-year pilot project began on  
          January 1, 2011, and would have ended on January 1, 2015.  









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          Subsequently, SB 318 (Hill and Steinberg, Chapter 467, Statutes  
          of 2013) sought to expand the number of lenders offering loans  
          between $300 and $2,500 by, among other things, streamlining  
          procedures and increasing the amounts of various fees that may  
          be charged under the program.  To accomplish that goal, SB 318  
          enacted modified provisions of the SB 1146 as the Pilot Program  
          for Increased Access to Responsible Small Dollar Loans.  That  
          pilot is currently set to sunset on January 1, 2018. 

          Under the Pilot Program for Increased Access to Responsible  
          Small Dollar Loans, participating lenders are able to enlist  
          "finders" to work on behalf of the lender to connect potential  
          borrowers with the lender.  The pilot program both restricts the  
          activities, and compensation, of finders operating under the  
          authorization of the pilot program.  This bill seeks to improve  
          the viability of the pilot program by removing the cap on  
          compensation that may be paid to finders, and, authorizing  
          finders to perform various activities, including disbursing loan  
          proceeds, receiving loan payments, and providing any notice or  
          disclosure required to be provided to the borrower.

                                CHANGES TO EXISTING LAW
           
           Existing law  , the California Finance Lenders Law (CFLL),  
          administered by the Department of Corporations (DOC), authorizes  
          the licensure of finance lenders, who may make secured and  
          unsecured consumer and commercial loans.  (Fin. Code Sec. 22000  
          et seq.)

           Existing law  provides that CFLL licensees who make consumer  
          loans under $2,500 are capped at interest rates which range from  
          12 percent to 30 percent per year, depending on the unpaid  
          balance of the loan.  (Fin. Code Secs. 22303, 22304.)   
          Administrative fees are capped at the lesser of five percent of  
          the principal amount of the loan or $50.  (Fin. Code Sec.  
          22305.)  

          Existing law  , until January 1, 2018, authorizes the Pilot  
          Program for Increased Access to Responsible Small Dollar Loans  
          within the California Finance Lenders Law (CFLL), administered  
          by the Department of Business Oversight (DBO).  (Fin. Code Sec.  
          22365 et seq.)  CFLL licensees that are approved by the  
          Commissioner of Business Oversight (commissioner) to participate  
          in the pilot program are allowed to receive charges for a loan  
          subject to an annual simple interest rate not to exceed:  (1)  







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          the lesser of 36 percent or the sum of 32.75 percent plus the  
          United States prime lending rate on the portion of the balance,  
          including, but not in excess of, $1,000; and (2) the lesser of  
          36 percent or the sum of 28.75 percent plus the United States  
          prime lending rate on the portion of balance in excess of  
          $1,000, but less than $2,500.  (Fin. Code. Sec.  22370.)

           Existing law  allows CFLL licensees operating under the pilot  
          program to use one or more "finders," which are defined as an  
          entity that, at the finders' physical address, brings a licensee  
          and a prospective borrower together for the purpose of  
          negotiating a loan contract.  (Fin. Code Sec. 22371.)  Existing  
          law allows those finders to perform one or more of the following  
          services at the finder's physical location for the business:
           distributing, circulating, using or publishing preprinted  
            written materials relating to loans;
           providing written factual information about loan terms,  
            conditions, or qualification requirements to a prospective  
            borrower that has been either prepared by the licensee or  
            reviewed and approved in writing by the licensee.  A finder  
            may discuss that information with a prospective borrower but  
            may not provide counseling or advice;
           notifying a prospective borrower of the information needed in  
            order to complete a loan application without providing  
            counseling or advice;
           entering information provided by the prospective borrower into  
            an application form or onto a preformatted computer database  
            without providing counseling or advice;
           assembling credit applications and other materials obtained in  
            the course of a credit application transaction for submission  
            to the lender;
           contacting the lender to determine the status of a loan  
            application;
           communicating a response that is returned by the licensee's  
            automated underwriting system to a borrower; and
           obtaining a borrower's signature on documents prepared by the  
            licensee and delivering final copies of the documents to the  
            borrower.  (Fin. Code Sec. 22372(a).)

           Existing law  prohibits finders from engaging in any of the  
          following activities:
           providing counseling or advice to a borrower or prospective  
            borrower;
           providing loan-related marketing material that has not  
            previously been approved by the pilot lender to a borrower or  







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            prospective borrower;
           interpreting or explaining the relevance, significance, or  
            effect of any of the marketing materials or loan documents the  
            finder provides to a borrower or prospective borrower;
           negotiating the price, length, or any other loan terms between  
            a pilot lender and a prospective borrower (unless separately  
            licensed as a finance broker under the CFLL); and
           advising a prospective borrower or a pilot lender as to any  
            loan term (unless separately licensed as a finance broker  
            under the CFLL).  (Fin. Code Sec. 22372(b).)

           Existing law  further provides that any person who performs one  
          or more of the following activities is a broker, rather than a  
          finder:
           negotiating the price, length, or any other loan term between  
            a licensee and a prospective borrower;
           advising either a prospective borrower or a licensee as to any  
            loan term;
           offering information pertaining to a single prospective  
            borrower to more than one licensee, except as specified; and
           personally contracting or providing services to a borrower or  
            prospective borrower at any place other than the finder's  
            physical location for business.  (Fin. Code Sec. 22372(c).)

           Existing law  requires a finder, at the time of receiving or  
          processing an application, to provide the following statutory  
          notice, in no smaller than 10-point type:

            Your loan application has been referred to us by [Name of  
            Finder]. We may pay a fee to [Name of Finder] for the  
            successful referral of your loan application. IF YOU ARE  
            APPROVED FOR THE LOAN, [NAME OF LICENSEE] WILL BECOME YOUR  
            LENDER, AND YOU WILL BE BUILDING A RELATIONSHIP WITH [NAME  
            OF LICENSEE]. If you wish to report a complaint about [Name  
            of Finder] or [Name of Licensee] regarding this loan  
            transaction, you may contact the Department of Business  
            Oversight, Division of Corporations at 1-866-ASK-CORP  
            (1-866-275-2677), or file your complaint online at  
            www.corp.ca.gov.  (Fin. Code Sec. 22373.)

           Existing law  permits a finder to be compensated by the  
          licensee pursuant to a written agreement and subjects the  
          compensation to the following requirements:
           no fee shall be paid to a finder in connection with a loan  
            application until and unless the loan is consummated;







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           no fee shall be paid to a finder based upon the principal  
            amount of the loan;
           no fee paid to a finder shall exceed the following amounts:
             o    $45 per loan for the first 40 loans originated each  
               month; and
             o    $40 per loan for any subsequent loans originated  
               during that month; and
           the finder's location and other information has been  
            reported to the commissioner and the finder has not been  
            barred from providing services at that location by the  
            commissioner.  (Fin. Code Sec. 22374.)
           
          This bill  would additionally allow a finder, at the finder's  
          physical location for business, to provide the following  
          services on behalf of the licensee for any loan for which the  
          finder performed finding activities:
           disbursing loan proceeds to a borrower, if that method of  
            disbursement is acceptable to the borrower.  Any loan  
            disbursement made by the finder would be deemed to be made by  
            the licensee on the date the funds are disbursed or otherwise  
            made available by the finder to the borrower, as specified;
           receiving loan payment or payments from the borrower, if this  
            method of payment is acceptable to the borrower:
             o    any loan payment made by a borrower to a finder shall be  
               applied to the borrower's loan and deemed received by the  
               licensee as of the date the payment is received by the  
               finder;
             o    a finder who receives loan payments shall deliver or  
               cause to be delivered to the borrower at the time that the  
               payment is made by the borrower, a plain and complete  
               receipt showing all of the following:
                     date of payment; 
                     total payment amount made; and
                     corresponding loan account upon which the payment is  
                 being applied;
             o    a borrower who submits a loan payment to a finder shall  
               not be liable for any failure or delay by the finder in  
               transmitting the payment to the licensee; and
           providing any notice or disclosure required to be provided to  
            the borrower by the licensee.
           
          This bill  would provide that compensation may be paid in  
          accordance with a compensation schedule that is mutually agreed  
          to by the licensee and the finder.








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           This bill  would strike the provisions in existing law that would  
          cap the compensation of a finder by a licensee.

                                        COMMENT
           
          1.    Stated need for the bill  

          According to the author:

            Recognizing California's shortage of affordable,  
            credit-building loans, the California Legislature authorized  
            a small-dollar loan pilot program in 2010 (SB 1146, Florez,  
            Chapter 640, Statutes of 2010).  The Legislature modified  
            that pilot program in 2013, based on pilot participants'  
            first two years of experience, with the aim of attracting  
            more lenders to the program and increasing the viability of  
            lenders participating in the pilot (SB 318, Hill, Chapter  
            467, Statutes of 2013).  SB 235 proposes to modify one  
            element of the 2010 pilot that has not yet been updated to  
            reflect knowledge gained through pilot participants'  
            experience:  the finder provisions.  

            As envisioned in the 2010 legislation, finders are third  
            parties who can work on behalf of pilot program lenders to  
            identify prospective borrowers and connect them with the  
            lenders, helping to lower pilot program lenders' costs of  
            customer acquisition.  Until very recently, however, no  
            pilot program licensee had utilized the finder authority  
            granted in the 2010 legislation, because the finder  
            provisions have proven too rigid for the realities of the  
            small dollar loan marketplace.  SB 235 is premised on the  
            belief that the finder provisions require revision, if the  
            pilot program is to achieve its full potential.  

            . . .  Recently, the Insikt Corporation, parent company of  
            Lendify, a new entrant to the pilot program, devised a way  
            to utilize finders as an integral part of its business  
            model.  However, Insikt has run into two bureaucratic  
            hurdles in its attempts to implement Lendify's finder  
            roll-out.  First, although existing law authorizes finders  
            to engage in several specific activities (generally  
            involving the distribution of information about pilot  
            program loans and acting as a communications link between  
            prospective borrowers and pilot program lenders), existing  
            law is silent on whether finders may disburse loan proceeds  







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            or required disclosures to approved borrowers or accept  
            periodic loan payments from borrowers.  Insikt's business  
            model seeks to give borrowers the freedom to decide how and  
            from whom they wish to receive their loan proceeds and how  
            and to whom they wish to make their periodic payments -  
            flexibility that current law fails to authorize, but which  
            this bill would.

            Second, the original 2010 legislation authorized only one,  
            very simplified method of finder compensation:  a per-loan  
            fee paid by a pilot program licensee to a finder at the time  
            of loan consummation (the 2010 legislation capped fees at  
            the somewhat arbitrary levels of $45 per loan for the first  
            40 loans originated each month at a finder's location and  
            $40 per loan for any subsequent loans originated during that  
            month at a finder's locations).  These simple compensation  
            schemes fail to reflect the realities of today's financial  
            services marketplace.  Both Insikt and its finders would  
            prefer to utilize a compensation schedule that treats  
            finders as partners in Insikt's loan portfolio.  Insikt is  
            seeking the flexibility to pay its finders as its program  
            loans are repaid, rather than up front, and to compensate  
            finders based on negotiated amounts that reflect the size of  
            Insikt's performing loan portfolio, rather than a set amount  
            per loan.  These proposed changes would not revise the  
            requirements in existing law that finders be compensated  
            only for consummated loans, nor the prohibition against  
            compensating finders based on the principal amount of a  
            loan; both of those consumer protections would remain.

          Insikt Inc., sponsor, further asserts that "the finder  
          provisions . . . have not met their goal of attracting new  
          entrants to the Pilot Program and, as a result, are limiting  
          access to a noble credit product for underbanked and underserved  
          Californians."

          2.    Finder services  

          Under existing law, lenders participating in the Pilot Program  
          for Increased Access to Responsible Small Dollar Loans are  
          authorized to use finders, but, those finders may only perform  
          specified services for the licensee.  Those services include  
          distributing written materials relating to loans, providing  
          factual information of loan terms, notifying a borrower about  
          information needed to complete a loan application, and entering  







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          information into an application.  Finders are prohibited from,  
          among other things, providing counseling and loan-related  
          marketing material not approved by the licensee.  This bill  
          would additionally allow a finder to: (1) disburse loan  
          proceeds, if that method is acceptable to the borrower; (2)  
          receive loan payments from the borrower, if the method is  
          acceptable to the borrower; and (3) provide any notice or  
          disclosure required to be provided to the borrower by the  
          licensee.  

          Insikt, sponsor, notes that the objective of the pilot program  
          was to enable as many lenders as possible to provide underserved  
          consumers with responsible small dollar loans, but the ability  
          to reach customers is being severely hampered by existing law,  
          which is silent on some essential duties that a finder should be  
          able to perform on behalf of a lender.  Accordingly, this bill  
          seeks to facilitate the use of finders by allowing the finder to  
          provide additional services on behalf of the lender, and,  
          removing the existing cap on compensation that a finder may  
          receive.

          Insikt contends that "borrowers should have the freedom to  
          decide how and from whom they receive loan proceeds and how and  
          to whom they wish to make their payments - flexibility that  
          current law fails to authorize, but this bill would enable."   
          Check Agencies of California, in support, notes that existing  
          law does not expressly permit finders to disburse loans nor  
          accept payments made by borrowers at finder locations and  
          states:

            When we first applied to be a finder (in partnership with  
            Lendify), we were initially declined by the Department of  
            Business Oversight [(DBO)] because of our intention to  
            disburse loans and take payments (which is a natural  
            expectation of any customer who applies for a loan with us).  
             As a CFL regulated by the DBO, we were ultimately approved  
            as a finder with the ability to disburse funds and receive  
            payments, but not without risk.  We are concerned that  
            without a legislative fix to the finder provision in the  
            Pilot Program[,] our plans to provide customers access to  
            lower cost Pilot Programs loans could be jeopardized.

          Alternatively, Oportun (formerly known as Progreso Financiero),  
          a participant in the pilot program who has made approximately  
          $1.3 billion in responsible small dollar loans to nearly 500,000  







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          Californians, and expresses concern that this bill would take a  
          step backward on what has been achieved under the pilot program  
          by "allow[ing] (with very little practical [restraints],  
          requirements or other protections) independent third parties to  
          conduct activities that would almost certainly require a  
          license, specified training, oversight, or other consumer  
          protections in any other lending context." Similarly, Center for  
          Responsible Lending (CRL) and Consumers Union (CU), in  
          opposition, note that this bill would transform finders into a  
          very different kind of role than the one initially envisioned  
          and assert:

            Given the new expanded role this bill would give to a  
            finder, it seems difficult to imagine that a finder would  
            not be put in the position of providing some counseling or  
            explanation to a potential borrower.  So, either you have a  
            finder who is illegally serving as an unlicensed broker, or  
            you have a loan transaction occurring in a context in which  
            the borrower is interacting with a person who is prohibited  
            from properly assisting him or her in the decision-making  
            process.  Either way, this is problematic.  Moreover DBO  
            would have limited ability to monitor a finder's loan level  
            transactions to ensure that the law's provisions are being  
            followed, especially when finders are not subject to any  
            licensure requirements.

          From a policy standpoint, the services that this bill would  
          authorize a finder to provide - disbursing loan proceeds,  
          receiving loan payments, and providing notices and disclosures -  
          would appear to make the finder look more and more like an  
          actual lender.  To address the issues raised as a result of  
          authorizing finders to perform additional services, the author  
          offers amendments to:  (1) require the finders performing these  
          additional services to be licensed as under one of 16 specified  
          licenses; (2) require a finder that disburses loan proceeds to  
          deliver a receipt to the borrower showing the date of  
          disbursement, amount disbursed, loan number, and information  
          about how to contact the lender; (3) require a finder that  
          receives loan payments to include the lender's contact  
          information on the receipt in case there are any questions; and  
          (4) make conforming changes to the existing written disclosure  
          notice which must be provided by finders and, in case of  
          questions that the finder is not permitted to answer, require  
          the finder to make a good faith effort to assist an applicant in  
          making direct contact with the lender before the loan is  







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          consummated.  The author further offers amendments to require a  
          finder that disburses or receives loan payments to maintain  
          records of all the disbursements for at least two years, or  
          until one month after the completion of a regular examination by  
          the commissioner.  With these amendments, the bill would ensure  
          that finders who do provide these services have a license, and,  
          provide multiple opportunities for the finder to inform the  
          borrower of the lender's contact information.

          Staff notes that, by requiring the finder to have some sort of  
          license in order to perform the additional services authorized  
          by this bill, those amendments appear to resolve much of the  
          concerns raised by CRL and CU.  While requiring these finders to  
          be licensed appears appropriate, it is unclear why certain  
          licensees (such as real estate agents and brokers) would be  
          acting as a finder disbursing loan proceeds.  Accordingly, the  
          author offers amendments to address this concern.

          3.  Finder Compensation  

          Due to concerns about the use of finders, under the existing  
          pilot, finders are prohibited from receiving a fee in excess of  
          either $45 or $40, depending on the number of loans originated  
          each month at the finder's location.  This bill would, instead,  
          remove that cap and provide that compensation may be paid in  
          accordance with a compensation schedule that is mutually agreed  
          to by the licensee and the finder.  Insikt, in support, contends  
          that lenders and finders "should be free to negotiate their own  
          compensation that reflects the reality of today's financial  
          services marketplace while maintaining important consumer  
                                                                                protections to ensure that costs are not passed on to the  
          consumer.  If borrowers are paying the same rates, why does it  
          matter how two parties divide the pie?"

          CRL and CU express concern that "without some reasonable limits  
          on finders' compensation, we fear that finders will be motivated  
          to aggressively market loans to borrowers in a range of  
          settings, such as retail environments where they are already  
          trying to complete a sale of a related product or service."  In  
          response to those concerns, the author offers amendments to cap  
          the amount of the fee at $70 per finder per loan (not per month,  
          but over the life of the loan), and, to provide that the total  
          compensation paid by a licensee to a finder over the life of the  
          loan shall not exceed the sum of the origination fee and  
          interest charges paid by the borrower.  While those amendments  







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          would effectively increase the allowable fee by either $25 or  
          $30, the author contends that such an increase is appropriate  
          given the additional services that finders would be providing  
          pursuant to this bill.  Despite the increase, it should be noted  
          that finders' fees in the pilot program are not charged to the  
          customer and, instead, must be absorbed by the lender. 

          4.   Increased reporting requirements with respect to finders  

          In further response to the concerns raised above, the author  
          offers amendments to require licensees to include the following  
          additional information in the already mandated reports to the  
          commissioner: (1) licensing details of the finder; and (2) for  
          each finder, delinquency and default rates, and the number and  
          dollar amount of late fees assessed to borrowers on consummated  
          loans.  The amendments would also give the commissioner  
          authority to disqualify a finder from performing services if  
          warranted by the reported data.  In addition to providing  
          additional consumer protection, the data reported could be  
          helpful to evaluate any future proposed extension of the January  
          1, 2018 sunset for the pilot program.


           Support  :  Avanza Inc.; Check Agencies of California; LendUp;  
          uTax Software

           Opposition  :  Center for Responsible Lending; Consumers Union

                                        HISTORY
           
           Source  :  Insikt, Inc.

           Related Pending Legislation  :  None Known

           Prior Legislation :

          SB 318 (Hill and Steinberg, Ch. 467, Stats. 2013) See  
          Background.

          SB 1146 (Florez, Ch 640, Stats. 2010) See Background.

           Prior Vote  :  Senate Banking and Financial Institutions Committee  
          (Ayes 7, Noes 0)
                                          
                                   **************







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