BILL ANALYSIS Ó SB 235 Page 1 Date of Hearing: June 22, 2015 ASSEMBLY COMMITTEE ON BANKING AND FINANCE Matthew Dababneh, Chair SB 235 (Block) - As Amended May 5, 2015 SENATE VOTE: 39-0 SUBJECT: Small dollar loans: finder duties and compensation. SUMMARY: Expands activities allowed for finders under the Pilot Program for Increased Access to Responsible Small Dollars Loans (Pilot). Specifically, this bill: 1)Authorizes finders under the Pilot to provide the following services, in addition to those currently allowed under existing law, on behalf of pilot 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) Disburse 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. Any loan disbursement made by a finder to a borrower is deemed made by the pilot 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 SB 235 Page 2 pilot lender as of the date the payment is received by the finder; and, b) Provide any notice or disclosure required to be provided by the lender to the borrower. 2)Specifies that a finder that disburses loan proceeds or accepts loan payments must provide a receipt to the borrower containing specified information including a statement of the following, "If you have any questions about your loan, now or in the future, you should direct those questions to [name of Pilot program lender] by [insert at least two different ways in which a borrower may contact the pilot lender]." 3)Requires the finder to 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 of Business Oversight (commissioner), whichever is later. 4)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 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 lender and a finder. 5)Provides that a borrower who submits a loan payment to a finder under this subdivision shall not be liable for any failure or delay by the finder in transmitting the payment to the licensee. 6)Requires pilot 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 SB 235 Page 3 finder should be disqualified from performing services for one or more pilot lenders. EXISTING LAW: 1)Until January 1, 2018, authorizes the Pilot 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 to participate in the Pilot to use the services of one or more finders. Defines a finder for purposes of the Pilot as an entity that, at the finder's physical location for business, brings a pilot 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 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 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 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). SB 235 Page 4 6)Requires each pilot 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 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, bar a finder from performing services at one or more specific locations, terminate a written agreement between a finder and a pilot lender, and prohibit the use of a finder by all pilot lenders accepted to participate in the Pilot, if the commissioner determines that the finder has violated the Pilot rules or regulations (Financial Code Section 22377). FISCAL EFFECT: Unknown COMMENTS: According to the author: 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 SB 235 Page 5 available, bear 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. AB 235 is sponsored by Insikt Corporation, parent company of Lendify, a new entrant to the Pilot. Insikt has devised a way to utilize finders as an integral part of its business model in order to reduce overhead costs and expand access to capital. In attempting to operate this model Insikt has faced some challenges with the existing statute authorizing the Pilot. SB 235 Page 6 Existing law is silent on whether finders may disburse loan proceeds or collect loan payments. The model Insikt uses seeks to give consumers a choice as to the location they want to make payments on their loan and even where they want to receive loan disbursal. In this capacity the use of finders allows the licensee to have a network of lending and repayment centers at varied locations with the costs associated with a branch office model. The original 2010 legislation authorized only one method of finder compensation: a per-loan fee paid by a Pilot program licensee to a finder at the time of loan consummation at $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 location. At the time of its creation the finder's provision under the Pilot was envisioned as a way to utilize retailers or small businesses as potential loan pipelines to assist with connecting borrower with lender. However, the restrictions put in place that effectively limit compensation negotiations between lender and finder have left this an unused provision of the Pilot. Insikt would like to pay its finders as loans are repaid, rather than upfront and to compensate finders based on negotiated amounts rather than on a per loan basis. Existing law prohibits finder's compensation from being passed on to the borrower so the borrower is not affected by whatever the fee may be. Recent amendments have removed the ability to negotiate finder compensation and instead have revised the existing fee per loan cap up from $45 to $70. Finally, existing law requires finders to report specific information to the commissioner of DBO. SB 235 would expand that information to include certain loan performance metrics relating to loans facilitated by finders. Filling the Void. SB 235 Page 7 Consumers in need of small dollar credit or to build their credit score and history have had little in the way of mainstream options available. Few banks or credit unions offer small dollar loans instead relying on overdraft protection programs. Some banks offered pay check advance products but due to regulatory and consumer group pressure they no longer offer those options. Some research reveals that users of non-traditional lending products also have credit cards, though it is unclear what the annual percentage rate and balance on the available card might be. The clear fact is that for the no credit/low credit consumer credit options are expensive and may not serve the actual need of the borrower. Prior to the Pilot lending within the space of $300-$2,500 was not meaningful. The CFLL contained interest rate restrictions up to $2,500 with virtually no restrictions above this amount. This effectively created an incentive for loans outside of the interest rate caps above $2,500 and on the lower end up to $300 for payday loans. The Pilot was created in 2010 to open up the lending market between $300 and $2,500 by loosening some of the interest rate caps in the CFLL and instead required extensive underwriting in exchange for increased interest and fees. The Pilot has required tweaks as evidenced by SB 318 (Hill) of 2013 and this bill currently under consideration. To make these loans work innovation and creativity are key components needed to drive down overhead and loan acquisition costs. The goal of the original Pilot was to create a competitive market place what would provide affordable loans to consumers that could compete and eventually overtake more costly options. Currently, six Pilot lenders are operational with Oportun (formally Progresso Financial) the leading Pilot lender. In total, since its inception approximately 200,000 Pilot loans have been made, most of them by Oportun. In context, almost three million payday loans are made per year and approximately 300,000 loans under the CFLL are made with no interest rate cap. According to the Consumer Financial Protection Bureau, 20% of Americans have no credit score or history and this percentage don't SB 235 Page 8 include those consumers that can't get affordable loans due to damaged credit. The Pilot has been used as the touchstone of a smart and responsible lending product that can potentially fulfill a need for consumers to build credit and get access to affordable loans. No other lending law has been subject to the requirements and scrutiny as the Pilot. Not a detail has been left untouched in how a pilot lender must operate right down to its agreements with potential finders. SB 235 seeks to revise the duties of finders in order to help a Pilot licensee utilize creativity and technology to make loans work in this market. Groups in opposition have raised concerns throughout the legislative process, many of these concerns have been addressed via amendments taken in the Senate. However, opponents still have concerns, though the specifics of these issues have not been disclosed to the committee. Effectively, the argument is "we are concerned because they are concerned," Opponents have stated that they share concerns raised by one of the pilot lenders yet the committee hasn't been provided with a specific list of issues left for discussion. Based on a joint, Center for Responsible Lending (CRL) and Consumer's Union letter received by the committee on June 18th, 2015 the specifics of the outstanding issues and negotiations are to be conducted at a later time. Effectively the committee has been robbed of its ability to contemplate and discuss these issues in a meaningful manner either in the analysis or at the committee hearing. Normally, this could lead to legislation finding its way stalled in the process, but in this case such an approach would only harm a potentially meaningful update to the Pilot as is contained in SB 235. With this in mind the committee may wish to consider calling this bill back in the future to review subsequent changes. Previous Legislation . SB 235 Page 9 1)SB 1146 (Florez), Chapter 640, Statutes of 2010: Authorized California's original small-dollar loan Pilot program within the CFLL, 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, 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. Suggested amendments: Committee staff has identified a few issues and suggest changes. 1)A finder is required, when an applicant has a question that SB 235 Page 10 the finder is prohibited from answering about the loan to assist the applicant in making direct contact with the lender. At a minimum this includes assisting the applicant in communicating with the lender in real time via telephone, video chat or instant messaging. It is unclear how the finder is supposed to "assist" the applicant in making contact with the licensee. Would handing over the telephone to the applicant be sufficient? What about directing the applicant to a computer screen to engage in a chat session. How does the applicant know that the entity they are chatting with is the lender? This process could create confusion and the potential for liability depending on how one views providing "assistance" and the level of trust the applicant may have in this process. It may be more appropriate to streamline this requirement, as done in other financial situations and simply require the finder to provide the applicant with a telephone number where the applicant can directly call the lender should they have questions the finder is unable to answer. Additionally, in order to prepare for situations in which a lender may have innovative ways to fulfil this requirement, rather than codify in statute the technology that can be used, it may be more appropriate to allow the commissioner of DBO to approve alternative methods. With that, the following amendment is recommend: Page 6, Lines 35-37 would read as follows: If the loan applicant has questions about the loan that the finder is not permitted to answer, the finder shall make a good faith effort to assist the applicant in making direct contact with the lender before the loan is consummated. This good faith effort shall, at a minimum, consist of providing the applicant with the telephone number of the licensee where the applicant can speak to a representative of the licensee during normal business hours.assisting the applicant in communicating with the lender in real time via telephone, video chat, or instant messaging.The licensee may offer an alternative method of meeting the requirements of this SB 235 Page 11 subparagraph if the alternative is approved by the commissioner 2)Some additional changes are necessary for technical and consistency reasons. Page 8, lines 22-27 includes changes to the existing law requirement that finders submit a report to the commissioner. The new requirements include information about delinquency and default rates, and number of late fees assessed to borrowers. This is substantially similar to information that must be reported by Pilot licensees under existing law. Staff recommends amendments that require the finder report to include the loan level information required of licensees. (c) Submit an annual report to the commissionerincluding any including, for each finder, the information listed in paragraph (12) And subparagraph (A) of paragraph (13) of Section 22380.delinquency and default rates, number and dollar amount of late fees assessed to borrowers on consummated loans, and any other information pertaining to each finder and the licensee's relationship and business arrangementswith each finder as the commissioner may by regulation require.3)In relation to #2, under existing law, Financial code 22380(b) the report compiled in relation to information that licensees must provide is exempt from public disclosure. Again, this is standard treatment of sensitive information that is often provided to regulators. Therefore staff recommends the following: Page 8, after line 27 insert " The information disclosed to the commissioner for the report described in this subsection is exempted from any requirement of public disclosure by paragraph (2) of subdivision (d) of Section 6254 of the Government Code SB 235 Page 12 REGISTERED SUPPORT / OPPOSITION: Support Insikt (Sponsor) Avanza Inc. Check Agencies of California, Inc. LendUp Silicon Valley Leadership Group uTax Software, LLC Opposition Center for Responsible Lending (CRL) Consumers Union (CU) SB 235 Page 13 Analysis Prepared by:Mark Farouk / B. & F. / (916) 319-3081