BILL ANALYSIS Ó
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