BILL ANALYSIS Ó
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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