BILL ANALYSIS                                                                                                                                                                                                    



                                                                     SB 235


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          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  








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               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  








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            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).  









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          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  








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            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.    








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          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.








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           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  








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          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  .









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          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  








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            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  








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            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 commissioner  including an  y
            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 arrangements   with 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  











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          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)












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          Analysis Prepared by:Mark Farouk / B. & F. / (916)  
          319-3081