BILL ANALYSIS                                                                                                                                                                                                    




           ----------------------------------------------------------------- 
          |SENATE RULES COMMITTEE            |                        SB 235|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
          |327-4478                          |                              |
           ----------------------------------------------------------------- 


                                   THIRD READING 


          Bill No:  SB 235
          Author:   Block (D)
          Amended:  5/5/15  
          Vote:     21  

           SENATE BANKING & F.I. COMMITTEE:  7-0, 4/15/15
           AYES:  Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell

           SENATE JUDICIARY COMMITTEE:  6-0, 4/28/15
           AYES:  Jackson, Anderson, Hertzberg, Leno, Monning, Wieckowski
           NO VOTE RECORDED:  Moorlach

           SENATE APPROPRIATIONS COMMITTEE:  Senate Rule 28.8

           SUBJECT:   Small dollar loans: finder duties and compensation.


          SOURCE:    Insikt, Inc.


          DIGEST:  This bill authorizes finders under the Pilot Program  
          for Increased Access to Responsible Small Dollar Loans (pilot  
          program) to disburse loan proceeds to borrowers, receive loan  
          payments from borrowers, and provide notices and disclosures to  
          borrowers, as specified; increases allowable finder  
          compensation; and provides pilot program lenders greater  
          flexibility in the way(s) in which they compensate their  
          finders.


          ANALYSIS:   


          Existing Law:









                                                                     SB 235  
                                                                    Page  2




          1)Until January 1, 2018, authorizes the pilot program within the  
            California Finance Lenders Law (CFLL), administered by the  
            Department of Business Oversight (DBO; Financial Code Sections  
            22365 et seq.).

          2)Authorizes CFLL licensees that are approved by the  
            Commissioner of Business Oversight (commissioner) to  
            participate in the pilot program to use the services of one or  
            more finders.  Defines a finder for purposes of the pilot  
            program as an entity that, at the finder's physical location  
            for business, brings a pilot program lender and a prospective  
            borrower together for the purpose of negotiating a loan  
            contract (Financial Code Section 22371).

          3)Authorizes finders to perform up to eight different types of  
            activities for a pilot program lender at the finder's physical  
            location for business.  These activities generally involve  
            distributing information about pilot program loans to  
            prospective borrowers and acting as a communications link  
            between prospective borrowers and pilot program lenders  
            (Financial Code Section 22372).

          4)Prohibits finders from engaging in activities that require a  
            broker's license.  Prohibited activities generally involve  
            providing advice to borrowers and negotiating loan terms  
            (Financial Code Section 22372).

          5)Authorizes pilot program lenders to compensate finders  
            pursuant to a written agreement, subject to specified  
            limitations.  These limitations generally prohibit payment for  
            unconsummated loans, prohibit lenders from passing on finder's  
            fees to borrowers, and cap the maximum size of finder's fees  
            at specified amounts (Financial Code Section 22374).  

          6)Requires each pilot program lender that utilizes the services  
            of one or more finders to inform the commissioner regarding  
            the identities of and contact information for their finders;  
            pay an annual finder registration fee to the commissioner to  
            cover the commissioner's costs to regulate their finders; and  
            submit an annual report to the commissioner, containing  
            whatever information the commissioner requests related to the  








                                                                     SB 235  
                                                                    Page  3



            finder's finding activities (Financial Code Section 22375). 

          7)Authorizes the commissioner to examine the operations of each  
            finder.  Gives the commissioner authority to disqualify a  
            finder from performing services under the pilot program, bar a  
            finder from performing services at one or more specific  
            locations, terminate a written agreement between a finder and  
            a pilot program lender, and prohibit the use of a finder by  
            all pilot program lenders accepted to participate in the pilot  
            program, if the commissioner determines that the finder has  
            violated the pilot program rules or regulations (Financial  
            Code Section 22377).

          This bill:


          1)Authorizes finders under the pilot program to provide the  
            following additional services on behalf of pilot program  
            lenders with which they have a written agreement, if the  
            finders are licensed as financial service providers under one  
            of thirteen different state or federal laws specified in the  
            bill:  

             a)   Disbursing loan proceeds to a borrower, if this method  
               of disbursement is acceptable to the borrower, and  
               receiving loan payments from a borrower, if this method of  
               payment is acceptable to the borrower. 

               i)     Any loan disbursement made by a finder to a borrower  
                 is deemed made by the pilot program lender on the date  
                 that funds are disbursed or otherwise made available by  
                 the finder to the borrower.  Any loan payment made by a  
                 borrower to a finder is deemed received by the pilot  
                 program lender as of the date the payment is received by  
                 the finder.  

            ii)    A finder that disburses loan proceeds or accepts loan  
                 payments must provide a receipt to the borrower  
                 containing specified information, together with a  
                 statement informing the borrower that "if you have any  
                 questions about your loan, now or in the future, you  
                 should direct those questions to [name of pilot program  








                                                                     SB 235  
                                                                    Page  4



                 lender] by [insert at least two different ways in which a  
                 borrower may contact the pilot program lender]."

            iii)   The finder must maintain records of all disbursements  
                 made and loan payments received for a period of at least  
                 two years or until one month following the completion of  
                 a regular examination by the commissioner, whichever is  
                 later.

             a)   Providing any notice or disclosure required to be  
               provided by the lender to the borrower.

          1)Replaces the reference to finder's "fees" in existing law with  
            a reference to finder's "compensation;" increases the maximum  
            amount of compensation a pilot program lender may pay its  
            finder to the lesser of $70 per loan or the sum of the  
            origination fee and interest charges paid by the borrower to  
            the lender over the life of the loan; and clarifies that this  
            compensation may be paid at the time of consummation, over  
            installments, or in a manner otherwise agreed upon by a pilot  
            program lender and a finder.  


          2)Requires pilot program lenders that use finders to submit  
            specific information to the commissioner regarding the  
            performance of loans consummated with the use of finders, and  
            authorizes the commissioner to use this information when  
            deciding whether a finder should be disqualified from  
            performing services for one or more pilot program lenders.  


          Background:


          Relatively few installment loans are made in California with  
          principal amounts under $2,500.  This represents a challenge to  
          the significant population of people in California 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  








                                                                     SB 235  
                                                                    Page  5



          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.  

          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 lender 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.  
           

          Comments:

          Recently, the Insikt Corporation, 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 utilize finders.  First,  
          although existing law authorizes finders to engage in several  
          specific activities, existing law is silent on whether finders  
          may disburse loan proceeds or required disclosures to approved  
          borrowers or accept periodic loan payments from borrowers.   
          Insikt's business model seeks to give borrowers the freedom to  








                                                                     SB 235 
                                                                    Page  6



          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 lender 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.  
           Insikt is seeking the flexibility to pay its finders more than  
          the amounts authorized in existing law and to pay its finders as  
          program loans are repaid, rather than up front.  

          Prior and Related Legislation:


          1)SB 1146 (Florez, Chapter 640, Statutes of 2010) authorized  
            California's original small-dollar loan pilot program, 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.  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, on January 1, 2014.  

          2)SB 318 (Hill, Chapter 467, Statutes of 2013) replaced the  
            Pilot Program for Affordable, 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,  








                                                                     SB 235  
                                                                    Page  7



            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, allow 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.   
            Sunsets on January 1, 2018.  



          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   Yes


          SUPPORT:   (Verified5/15/15)


          Insikt, Inc. (source)
          Avanza 
          Check Agencies of California 
          LendUp
          Silicon Valley Leadership Group
          uTax Software


          OPPOSITION:   (Verified5/15/15)


          Center for Responsible Lending
          Consumers Union


          ARGUMENTS IN SUPPORT:     Insikt, Inc., source of SB 235,  
          believes that "borrowers should have the freedom to decide how  
          and from whom they receive their loan proceeds and how and to  
          whom they wish to make their payments - flexibility that current  
          law fails to authorize, but which this bill would enable.  A  
          customer's ability to obtain loan proceeds and make loan  
          payments expeditiously and in a convenient manner is simply a  
          fundamental customer need."  Furthermore, failure to provide  








                                                                     SB 235  
                                                                    Page  8



          additional flexibility around finder compensation agreements  
          risks discouraging potential partnerships between pilot program  
          lenders and finders, to the ultimate detriment of consumers, who  
          will find themselves with less, rather than more, access to  
          pilot program loans.  


          Check Center, a finder partner of Insikt, writes "It's hard to  
          contemplate making a loan to a borrower without giving them a  
          convenient way of repaying that loan.  In our experience,  
          underbanked consumers operate largely in cash and are accustomed  
          to paying for many of their bills in cash.  Any provision that  
          prohibits borrowers from making in-person loan payment unfairly  
          disadvantages underbanked families and, thus, in our opinion,  
          defeats the purpose of the pilot program."


          ARGUMENTS IN OPPOSITION:     The Center for Responsible Lending  
          (CRL) and Consumers Union (CU) support the general goal of  
          expanding access to credit, but believe that such expansions  
          must be both affordable and responsible. Both groups are opposed  
          to SB 235.  CRL and CU are seeking three amendments, at a  
          minimum.  First, they would like to limit the new finder  
          activities authorized by the bill to persons who are already  
          licensed in a field pertaining to financial transactions (e.g.,  
          depository and nondepository lenders, money transmitters, check  
          sellers, bill payers, proraters, escrow agents, pawnbrokers,  
          insurance brokers, and real estate licensees).  Second, the  
          organizations would like to require that finders who disburse  
          loan proceeds or receive loan payments be required to maintain  
          records of all disbursements made and payments received for a  
          period of at least three years.  Finally, they are concerned  
          about the wholesale removal of any limits or structure around  
          the compensation of finders.  "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."



          Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102








                                                                     SB 235  
                                                                    Page  9



          5/20/15 16:13:12


                                   ****  END  ****