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. SB 235 (Block) Page 2 of ? 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) SB 235 (Block) Page 3 of ? 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 SB 235 (Block) Page 4 of ? 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; SB 235 (Block) Page 5 of ? 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. SB 235 (Block) Page 6 of ? 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 SB 235 (Block) Page 7 of ? 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 SB 235 (Block) Page 8 of ? 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 SB 235 (Block) Page 9 of ? 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 SB 235 (Block) Page 10 of ? 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 SB 235 (Block) Page 11 of ? 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) ************** SB 235 (Block) Page 12 of ?