BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 235|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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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:
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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
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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
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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
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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
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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,
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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
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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
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