BILL ANALYSIS                                                                                                                                                                                                    

                                                                     SB 235

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          Date of Hearing:  July 6, 2015


                               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  


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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



          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.


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          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  


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            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.    
          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  


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          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  


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          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  
          damaged credit.  

           Pilot Performance.

          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. 


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           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. 


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           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  


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          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  


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            concerning the cost structure of loans under the pilot.

           Suggested amendments:

           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  


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            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  assisting  
            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  
            the licensee.  

             (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  
            "two-way communication."  

          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  


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            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  

            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.

           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  


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               "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  
               [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  .  ."

          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.


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               (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  


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            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.  



          Insikt (Sponsor)

          Avanza Inc.

          Check Agencies of California, Inc.


          Silicon Valley Leadership Group

          uTax Software, LLC



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          Center for Responsible Lending (CRL)

          Consumers Union (CU)

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