BILL ANALYSIS Ó
Date of Hearing: July 6, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
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
pilot lender as of the date the payment is received by the
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
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
finder should be disqualified from performing services for one
or more pilot lenders.
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).
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
The Legislature and Governor in 2010 enacted the Affordable
Credit Building Opportunities Pilot Program (ACBO), placing it
under the CFLL. The goal was to increase consumers' access to
capital by encouraging development of a more robust small
dollar loan market in California. The ACBO - established by SB
1146 (Florez) - took effect January 1, 2011. Its provisions
applied to consumer loans of $250 to $2,499. To incentivize
lenders' participation, the ACBO allowed them to charge
borrowers marginally higher interest rates, and larger
origination and delinquency fees than those permitted for CFLL
consumer loans of that size made outside the program.
A low lender participation rate led to ACBO's demise. It was
replaced by the Pilot, created in 2013 under SB 318 (Hill). The
Pilot - Financial Code section 22365 et seq. - took effect
January 1, 2014. It will remain in effect until January 1,
2018, unless extended by the Legislature and Governor.
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
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
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.
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
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.
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
include those consumers that can't get affordable loans due to
DBO recently released (June 2015) a report, Report of Activity
Under Small Dollar Loan Programs, on the performance of the ACBO
and the Pilot covering January 1, 2011 to December 31, 2014.
The data presented in the report includes loans arranged without
a finder as finder activity was very limited and not reported
until 2014. The following are highlights from the report:
Loan applications - Borrower applications increased by 58.5
percent over the period, from 207,092 in 2011 to 328,198 in
2014. The loan approval rate increased from 39 percent in 2011
to 50 percent in 2014.
Aggregate principal - The annual total principal of loans
made increased by 83.8 percent over the period, from $97.9
million in 2011 to $179.9 million in 2014.
Dollar amounts - Loans made in the $300-$499 range fell by
42.3 percent over the period, from 1,518 in 2011 to 876 in
2014. Loans made in the highest range, from $1,500 to $2,499,
increased by 106 percent, from 21,349 to 43,975.
Interest rates - Of the 6,560 loans made in the $300-$499
range over the period, 73.9 percent carried an annual
percentage rate (APR) of 40 percent to 49.99 percent. In the
$500-$999 range, 43.4 percent carried APRs of 40 percent to
49.99 percent, while 25.2 percent had APRs of 35 percent to
39.99 percent. In the $1,500-$2,499 range, the APR
distribution was more even. In that category, 42.8 percent of
the loans had APRs of 35 percent to 39.99 percent, while 19.6
percent had APRs of 30 percent to 39.99 percent, 18.2 percent
had APRs of 40 percent to 49.99 percent, and 15.6 percent had
APRs of 25 percent to 29.99 percent.
Delinquencies - Of the 164,300 loans made in 2014, 22.5
percent were delinquent for seven days to 29 days, 7.3 percent
were delinquent for 30 days to 59 days, and 3.9 percent were
delinquent for 60 days or more.
Multiple loans - The number of borrowers who took out more
than one loan jumped dramatically from 2011 to 2012. Since
then, however, the upward trajectory has been less steep.
The number went from 2,189 in 2011 to 10,804 in 2012. From
2012 through 2014, the number rose by 21.6 percent, to
13,136. Of the 13,136 multiple-loan borrowers in 2014,
12,999 took out two loans.
Credit scores - The share of multiple-loan borrowers who
obtained higher credit scores on subsequent loans averaged
61 percent annually over the four-year period. The average
size of the increase for those borrowers jumped from 34
points in 2011 to 355 points in 2014.
Loan term - In 2014, of the 164,300 loans made, 50.9 percent
were for 360 days or more. The ratios for other terms: 120
days to 179 days, essentially 0 percent (only two loans); 180
days to 269 days, 20.2 percent; and 270 days to 359 days, 28.8
Borrower income - Of the 486,287 loans from 2011-2014, 18.4
percent were made in low-income neighborhoods. The ratios for
other neighborhood income levels: moderate-income, 45.4
percent; middle-income, 21.1 percent; and upper-income, 4.4
percent. The annual low-income ratio increased from 16.6
percent in 2011 to 19.5 percent in 2014.
Loan purpose - Of the 164,300 loans made in 2014, borrowers
took out 45 percent (74,026) to build or repair credit. Ratios
for other purposes: medical or other emergency, 18.4 percent;
pay bills, 12.7 percent; consolidate debt, 5.7 percent;
non-vehicle purchase, 5.3 percent; vehicle purchase, 2.7
percent; vehicle repair, 2.6 percent; other, 6.4 percent.
This bill was originally scheduled to be heard on June 22, 2015
but was pulled from hearing to give the author, sponsor and
proponents time to discuss several outstanding issues. The
committee analysis previously commented that it was unclear as
to what issues were left on the table for discussion and
negotiation. In the last two weeks interested parties have
conducted several negotiation sessions to discuss the remaining
issues of disagreement. Based on the substance of those
discussions, staff believes that the major issues are the
1)AB 235 gives finders new duties that they do not have under
existing law. These duties include the ability to disburse
loan proceeds and collect loan payments. Existing law
prohibits the finder from answering the borrower's questions
about specific loan terms. As an alternative, the bill
envisions that the finder would assist the borrower with
communicating with the lender to get those questions answered.
The form and timing of that communication have been issues of
dispute. The discussions have led to a resolution that, with
some suggested staff changes, are reflected under "suggested
2)The second major issue concerns finder compensation.
Currently, SB 235 caps the finder compensation at $70 per
loan. Opponents and the sponsor have discussed various
approaches to compensation including a cap with an additional
authorization for a $1-$2 fee for each payment accepted.
Other alternatives include a lower cap that would be in the
aggregate versus a loan level cap. Opponents are concerned
that an increase in finder compensation could potentially lead
to bad actors entering the pilot as finders. Staff notes 1)
Finder compensation may not be charged to the borrower; 2) The
bill requires that finders must be licensed under one of
several existing licensing laws therefor affording additional
review by their regulator; 3) No other lending law includes
the restrictions and oversight included in the Pilot both for
lenders and finders; and 4) There are far easier places to
potentially rip off consumers than under the Pilot.
The sponsor has offered language that would lower the dollar
amount of the cap to $60 but have the cap apply on an
aggregated basis. The finder compensation structure remains
the most contentious issue and at this time is best left to
further discussions to find a reasonable compromise that
balances consumer protection with realistic expectations
concerning the cost structure of loans under the pilot.
Committee staff suggest the following amendments:
1)As mentioned in the comments under the "negotiations" section
a finder is required, when an applicant has a question that
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. The analysis for the June 22nd hearing
highlighted the difficulties with this approach. Based on
discussions between interested parties, staff recommends the
following amendments to address this issue:
Add new section amending Section 22370 of the Financial Code
concerning the requirement of licensees that states:
(f) The licensee shall develop and implement policies and
procedures designed to respond to questions raised by
applicants and borrowers regarding their loans, including
those involving finders, and to address customer complaints as
soon as reasonably practicable.
Provide a way for finders to assist communication between the
borrower and the lender. Page 6, Lines 31-37 would read as
(b) 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
the applicant in communicating with the lender in real time
via telephone, video chat, or instant messaging. assisting the
applicant in communicating with the licensee as soon as
reasonably practicable, which shall at a minimum include a
"two-way communication." For purposes of this section "two way
communication" includes telephone, email or another form of
communication that allows the applicant to communicate with
(c)Using the policies developed pursuant to subdivision (f) of
Section 22370, the licensee shall ensure that a loan is not
consummated until the licensee has completed a "two-way
communication" with the applicant. Sending a voicemail or
electronic message to the applicant, without a prior or
subsequent response from the applicant, shall not constitute a
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
(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
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
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
4)Staff recommends a technical amendment to remove an outdated
reference to the Division of Corporations and update the
telephone number and website address:
22373.(a) At the time the finder receives or processes an
application for a program loan, the finder shall provide
the following statement to the applicant, on behalf of the
licensee, in no smaller than 10-point type, and shall ask
the applicant to acknowledge receipt of the statement in
"Your loan application has been referred to us by [Name
of Finder]. We may pay a fee to [Name of Finder] for the
successful referral of your loan application. IF YOU ARE
APPROVED FOR THE LOAN, [NAME OF LICENSEE] WILL BECOME
YOUR LENDER, AND YOU WILL BE BUILDING A RELATIONSHIP WITH
[NAME OF LICENSEE]. If you have any questions about your
loan, now or in the future, you should direct those
questions to [name of licensee] by [insert at least two
different ways in which a borrower may contact the
licensee]. If you wish to report a complaint about [Name
of Finder] or [Name of Licensee] regarding this loan
transaction, you may contact the Department of Business
Oversight, Division of Corporations at 1-866-ASK-CORP
(1- 866-275-2677 ) , or file your complaint online at
www. corp dbo . ca.gov ."
5)A provision that prohibits a finder from discussing certain
items with a borrower may conflict with another section that
expressly allows a finder to discuss certain information.
Therefore staff recommends the following:
Page 5, strike lines 23-25.
(3) Interpreting or explaining the relevance, significance, or
effect of any of the marketing materials or loan documents the
finder provides to a borrower or prospective borrower.
6)The following are technical corrections and updates requested
by the sponsor to certain receipt and disclosures required to
be offered by the finder.
Page 4, line 11 strike "number" and insert "identification"
(iii) The corresponding loan account identification number .
Page 4, lines 32-37 amend as follows:
(i) The name of the finder.
(i) The date of payment.
(ii) The total payment amount received made .
(iii) The date of payment.
(iv) The corresponding loan account identification number
upon which the
payment is being applied.
(v) The loan balance prior to and following
application of the payment.
(vi) The amount of the payment that was applied to
principal, interest, and fees.(
(vii) The type of payment (e.g., cash, ACH, check,
money order, debit card, other).
Previous Legislation .
1)SB 1146 (Florez), Chapter 640, Statutes of 2010: Authorized
Californias 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.
REGISTERED SUPPORT / OPPOSITION:
Check Agencies of California, Inc.
Silicon Valley Leadership Group
uTax Software, LLC
Center for Responsible Lending (CRL)
Consumers Union (CU)
Analysis Prepared by:Mark Farouk / B. & F. / (916)