BILL ANALYSIS Ó
SB 235
Page 1
Date of Hearing: July 14, 2015
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
SB
235 (Block) - As Amended July 8, 2015
As Proposed to be Amended
SENATE VOTE: 39-0
SUBJECT: SMALL DOLLAR LOANS: FINDER DUTIES AND COMPENSATION
KEY ISSUE: SHOULD THE FEES FOR FINDERS USED BY PROVIDERS OF
SMALL DOLLAR LOANS UNDER THE SMALL DOLLAR LOAN PILOT PROGRAM BE
INCREASED FROM $40 TO $65 FOR LOAN MARKETING SERVICES AND SHOULD
A $2 PER TRANSACTION FEE BE ALLOWED FOR LOAN SERVICING?
SYNOPSIS
This bill, as proposed to be amended, seeks to expand the
small-dollar loan pilot program for consumer loans in principal
amounts of $300 to $2,500. The original Small-Dollar Loan Pilot
program, established in 2010, was based on a model developed by
Progreso Financiero (Progreso), a company based in Mountain
View, California that offered short-term, unsecured loans of
$250 to $2,500 directed primarily to Latino borrowers who lacked
credit scores. In 2013, the pilot program lenders returned to
the Legislature seeking to change some of the provisions of the
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program. The lenders argued that the terms of the pilot were so
restrictive that the lender participants were not able to earn a
profit. The Legislature allowed the program to be re-vamped, as
requested, because the pilot program lenders were offering a
small loan product for which there was strong demand and the
program provided a valuable resource to consumers with very few
good alternatives for borrowing money. The main change to the
program in 2013 was raising the maximum interest rate that could
be charged to borrowers, increased from 30 percent to 36
percent. After the 2013 change, several of the pilot program
participants were able to increase their profits and service
more borrowers.
One of the pilot program lenders, Insikt, who is the sponsor of
this bill, would like to utilize finders (third-party businesses
that work on behalf of pilot program lenders to connect
prospective borrowers with pilot program lenders) as an integral
part of its business model. The goal is to grow the
small-dollar loan market and to provide small dollar loan
services to more borrowers in more communities. According to
Insikt, current law does not allow them to pay enough money to
finders to interest them in acting as finders. Current law
imposes a cap of $45 for the first 40 loans originated by a
finder in a year; and after the first 40 loans, the finder can
only make $40 per loan. The provisions of this bill would allow
pilot program lenders to pay increased fees to finders for
marketing and servicing of loans to borrowers, but would not
allow those fees or costs to be passed to borrowers in any way.
This bill adds additional reporting requirements for the pilot
program lenders to assist the Department of Oversight in its
regulation of small dollar lenders and their associated finders.
The bill clarifies that those reports from lenders to the
Commissioner of the Department of Oversight are already exempt
from public disclosure under the Public Records Act. This bill
also increases the number of consumer protection provisions for
borrowers, especially in the interactions between borrowers and
finders. This bill passed the Senate unanimously, is supported
by several small dollar lenders, and has no known opposition.
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SUMMARY: Authorizes finders under the Small Dollar Loan
Program to provide additional services on behalf of pilot
program lenders. Specifically, this bill:
1)Authorizes finders who are licensed as financial service
providers, under one of thirteen different state or federal
laws, to disburse loan proceeds to borrowers, and receive
small dollar loan payments from borrowers, if borrowers chose
this method of disbursement or loan payment.
2)Deems any loan disbursement made by a finder to a borrower to
be a loan made by the pilot program lender on the date that
funds are disbursed or otherwise made available by the finder
to the borrower.
3)Deems the date when any loan payment is made by a borrower to
a finder to be the date when the payment is received by the
pilot program lender.
4)Requires that a finder who disburses loan proceeds to a
borrower, or accepts loan payments from a borrower must
provide a receipt to the borrower containing specified
information, together with a statement informing the borrower
that "if you have any questions about your loan, now or in the
future, you should direct those questions to [name of pilot
program ender] by [insert at least two different ways in which
the borrower may contact the pilot program lender]."
5)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 the Department of Business
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Oversight.
6)Requires the finder to provide any notice or disclosure that
the law requires the lender to provide to the borrower.
7)Increases the maximum amount of compensation a pilot program
lender may pay its finder to the lesser of either $65 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.
8)Allows a pilot program lender to pay a $2 servicing fee to a
finder who receives a borrower's loan payment on the lender's
behalf.
9)Requires pilot program lenders that use finders to submit
specific information to the Commissioner of the Department of
Business Oversight regarding the performance of loans that are
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 program lenders.
EXISTING LAW:
1)Provides that the California Finance Lenders Law (CFLL),
administered by the Department of Corporations (DOC),
authorizes the licensure of finance lenders, who make secured
and unsecured consumer and commercial loans. (Financial Code
Section 22000 et seq. All further statutory references are to
the California Financial Code, unless otherwise indicated.)
2)Provides that consumer loans under $2,500 are capped at
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interest rates which range from 12 percent to 30 percent per
year, depending on the unpaid balance of the loan; and that
administrative fees are capped at the lesser of five percent
of the principal amount of the loan, or $50. (Sections 22303
- 22305.)
3)Authorizes, until January 1, 2018, the Pilot Program for
Increased Access to Responsible Small Dollar Loans within the
California Finance Lenders Law (CFLL), administered by the
Department of Business Oversight (DBO). (Section 22365 et
seq.)
4)Provides that CFLL licensees who are approved by the
Commissioner of DBO (Commissioner) for participation in the
pilot program are allowed to receive charges for a loan
subject to an annual simple interest rate not to exceed: (1)
the lesser of 36 percent or the sum of 32.75 percent plus the
United States prime lending rate on the portion of the
balance, including, but not in excess of, $1,000; and (2) the
lesser of 36 percent or the sum of 28.75 percent plus the
United States prime lending rate on the portion of balance in
excess of $1,000, but less than $2,500. (Section 22370.)
5)Allows CFLL licensees operating under the pilot program to use
one or more "finders" that are defined as entities which, at
the finders' physical address, bring licensees and prospective
borrowers together for the purpose of negotiating loan
contracts. (Section 22371.)
6)Allows finders to perform one or more of the following
services at the finder's physical location for the business:
a) Distributing, circulating, using or publishing
preprinted written materials relating to loans;
b) Providing written factual information about loan terms,
conditions, or qualification requirements to a prospective
borrower that has been either prepared by the licensee or
reviewed and approved in writing by the licensee. A finder
may discuss that information with a prospective borrower
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but may not provide counseling or advice;
c) Notifying a prospective borrower of the information
needed in order to complete a loan application without
providing counseling or advice;
d) Entering information provided by the prospective
borrower into an application form or onto a preformatted
computer database without providing counseling or advice;
e) Assembling credit applications and other materials
obtained in the course of a credit application transaction
for submission to the lender;
f) Contacting the lender to determine the status of a loan
application;
g) Communicating a response that is returned by the
licensee's automated underwriting system to a borrower; and
h) Obtaining a borrower's signature on documents prepared
by the licensee and delivering final copies of the
documents to the borrower. (Section 22372(a).)
7)Prohibits finders from engaging in any of the following
activities:
a) Providing counseling or advice to a borrower or
prospective borrower;
b) Providing loan-related marketing material that has not
previously been approved by the pilot lender to a borrower
or prospective borrower;
c) 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;
d) Negotiating the price, length, or any other loan terms
between a pilot lender and a prospective borrower (unless
separately licensed as a finance broker under the CFLL);
and
e) Advising a prospective borrower or a pilot lender as to
any loan term (unless separately licensed as a finance
broker under the CFLL). (Section 22372(b).)
8)Provides that any person who performs one or more of the
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following activities is a broker, rather than a finder:
a) Negotiating the price, length, or any other loan term
between a licensee and a prospective borrower;
b) Advising either a prospective borrower or a licensee as
to any loan term;
c) Offering information pertaining to a single prospective
borrower to more than one licensee, except as specified;
and
d) Personally contracting or providing services to a
borrower or prospective borrower at any place other than
the finder's physical location for business. (Section
22372(c).)
9)Requires a finder, at the time of receiving or processing an
application, to provide the following statutory notice, in no
smaller than 10-point type:
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 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.ca.gov. (Section 22373.)
10)Permits a finder to be compensated by the licensee pursuant
to a written agreement and subjects the compensation to the
following requirements:
a) No fee shall be paid to a finder in connection with a
loan application until and unless the loan is
consummated;
b) No fee shall be paid to a finder based upon the
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principal amount of the loan;
c) No fee paid to a finder shall exceed the following
amounts:
i) $45 per loan for the first 40 loans originated
each month; and
ii) $40 per loan for any subsequent loans originated
during that month; and
d) The finder's location and other information have been
reported to the commissioner and the finder has not been
barred from providing services at that location by the
Commissioner. (Section 22374.)
11)Requires each licensee that utilizes the services of one or
more finders to inform the Commissioner regarding the
identities of and contact information for their finders, as
specified; 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. (Section 22375.)
12)Authorizes the Commissioner to examine the operations of
each finder to ensure that the activities of the finder are
in compliance with the pilot program and it's implementing
regulations, and requires the costs of the Commissioner's
examination of each finder to be charged to the licensee
with which the finder has its agreement. Provides that any
violation of the pilot program or its regulations by a
finder or a finder's employee is attributed to the lender.
(Section 22377.)
13)Gives the Commissioner authority to disqualify a finder
from performing services under the pilot program, bar a
finder from performing services at one or more specific
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locations, terminate a written agreement between a finder
and a pilot program lender, and prohibit the use of a finder
by all licensees accepted to participate in the pilot
program, if the Commissioner determines that the finder has
violated the pilot program rules or regulations.
Additionally authorizes the Commissioner to impose an
administrative penalty of up to $2,500 for violations of the
pilot program that are committed by a finder. (Section
22377.)
14)Provides that applications filed with any state agency
responsible for the regulation or supervision of the
issuance of securities or of financial institutions,
including, but not limited to, banks, savings and loan
associations, industrial loan companies, credit unions, and
insurance companies. (Government Code Section 6254(d)(1).)
FISCAL EFFECT: As currently in print this bill is keyed fiscal.
COMMENTS: History of the Small-Dollar Loan Program. The
Department of Business Oversight (formerly the Department of
Corporation) administers the CFLL and licenses finance lenders
who make secured and unsecured consumer and commercial loans
under that law. The Department of Corporation's (DOC) "2008
Annual Report on the Operation of Finance Companies Licensed
under the CFLL" indicates that, in 2008, licensees made 96,665
consumer loans under $2,500. Of this amount, 81,790 were
unsecured loans. In contrast, during that same time period,
payday lenders made over 11 million payday loans. (DOC, 2008
Annual Report on the Operation of Deferred Deposit Originators
under the California Deferred Deposit Transaction Law.)
In an effort to create a responsible alternative to payday
loans, the Legislature in SB 1147 (Florez), Chap. 640, Stats.
2010, established a pilot program until January 1, 2015 that
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allowed CFLL licensees to offer a new type of small-dollar
consumer loan that met specified requirements. The small-dollar
loan pilot program was based on the small-dollar loan model of
Progreso Financiero (Progreso), a company based in Mountain
View, California which offered short-term, unsecured loans of
$250 to $2,500 directed to Latino borrowers who lacked credit
scores. Progreso made its loans through 27 retail locations in
California, all of which were located inside ethnic supermarkets
and pharmacies. At that time, the company, which was created in
2005, had made 40,000 loans totaling $36 million with an average
loan of $900 and an average term of nine months.
At the time, concerns were raised that any relaxation of
existing rules for loan products targeted to those who lack or
have more risky credit histories naturally created the need for
appropriate safeguards to prevent any potential abuse by lenders
in the newly created market. Accordingly, that bill was crafted
in collaboration with consumer advocates in an effort to
anticipate and preclude as many pitfalls as stakeholders were
able to identify. In particular, that bill contained provisions
regarding late fees, finder's fees, insurance products, and
assuring as much accuracy as possible in determining an
applicant's debt for the purpose of meeting the debt-to-income
ratio requirements.
Expanding the Original Small-Dollar Loan Program. Premised on
the notion that the existing small loan pilot rules authorized
by SB 1146 did not allow the loan companies to make enough money
to continue with the program, SB 318 (Hill and Steinberg), Chap.
467, Stats. 2013, sought to expand the number of lenders
offering loans between $300 and $2,500 by, among other things,
streamlining procedures and increasing the amounts of various
fees that could be charged under the program. To accomplish
that goal, SB 318 modified provisions of SB 1146 as the Pilot
Program for Increased Access to Responsible Small Dollar Loans.
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The rationale for expanding the program was that pilot lenders
were offering a small loan product for which there was strong
demand and very few good alternatives. The thought was that if
the pilot program lenders were more profitable, lending in this
segment of the market would increase. If those loans were made
responsibly, increased lending would be beneficial for consumers
in addition to being profitable for lenders. These loans
offered an alternative to payday loans, offering amounts above
the payday loan limit of $300 and with significantly lower
interest rates. These two program target different potential
borrowers -- payday loans are not underwritten and are therefore
most appealing to customers with damaged credit, while pilot
loans are required to be underwritten and therefore target
customers with little or no credit histories, rather than those
with bad credit histories. Also, the pilot lenders program
required that the borrowers be educated about credit and
borrowing, designed to help these borrowers increase their
credit scores. As a result of the expanded pilot program,
Progreso Financiero (which has since changed its name to
Opportun) and other smaller-sized program participants have been
able to increase their profits from their participation in the
program. According to a letter from Opportun, dated April 8,
2015, the company writes: "Opportun has made approximately $1.3
billion in responsible small dollar loans to nearly 500,000
Californians and have done so at rates and terms that are
dramatically less than alternatives that were available to those
borrowers absent the Pilot."
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
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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, Chap. 640, Stats.
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, Chap. 467, Stats. 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.
Increase in the use of Finders. Insikt Corporation, the sponsor
of this bill and a new pilot program lender, has devised a way
to utilize "finders" in its business model to promote and
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service its small-dollar loan program and to provide services to
more borrowers. However, Insikt believes there are two
impediments to its attempts to expand. First, although the use
of finders is allowed under existing law, the law is silent on
whether finders may disburse loan proceeds, whether finders must
provide required disclosures to approved borrowers, and whether
finders may accept loan payments from borrowers. Second, the
existing finder compensation that small dollar lenders are
allowed to pay finders ($45 per loan for the first 40 loans
originated monthly; and then $40 per loan for each subsequent
loan within the same month) is too low to attract enough finders
to facilitate their business model. This bill would allow
finders to disburse loan proceeds, provide required disclosures
to approved borrowers, and accept loan payments from borrowers.
This bill would also increase the per-loan compensation of a
finder from $40 or $45 to $65 per loan, regardless of the number
of loans originated within a month. This bill would allow a
lender to compensate a finder by $2 for each loan payment that
the finder receives on the lender's behalf. None of the
compensation paid to the finder is allowed to be charged to the
borrower, so the borrower's interest rates would remain the same
under the provisions of this bill as they are under existing
law.
Public Records Act Exemption. Documents are generally open to
the public pursuant to the California Public Records Act (PRA)
unless a document is exempt under the PRA, or another provision
of the law. (See Government Code 6254 et seq.) Any limitation
to public access is always of great concern because the public
is presumed to have a right to access information and records
that are in the possession of a public agency.
A small dollar pilot program lender, under the provisions of
this bill, is required to submit an annual report to the
Commissioner of the Department of Business Oversight that
includes, for each finder, the following information: (1) the
number and percentage of borrowers who obtained one or more
program loans on which late fees were assessed; (2) The total
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amount of late fees assessed; (3) The average late fee assessed
by dollar amount and as a percentage of the principal amount
loaned; and (4) 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.
The information disclosed to the Commissioner in this annual
report is exempt from public disclosure because it is an
application filed with the DBO, the regulator of loan
associations. (Government Code Section 6254(d)(1).) Considering
that information in the report includes specific fees that are
assessed by each finder, operating on behalf of a pilot program
lender, the information in the report appears to be the same
information that is exempt, under existing law, from disclosure
to the public.
Oversight and Additional Consumer Protections Added by this
bill. The oversight of the small-dollar loan pilot program will
remain within the purview of the DBO. Several consumer
protections have been added by the provisions of this bill,
including the following:
1)The pilot program lender is required to develop and implement
policies and procedures designed to respond to questions
raised by applicants and borrowers regarding their loans,
including those involving finders, and must address customer
complaints as soon as reasonably practicable.
2)The responsibility for monies disbursed to a borrower and
payments collected from a borrower are paced squarely on the
finder and the pilot program lender. The bill's provisions
that protect borrowers when interacting with finders include:
a) Any loan disbursement made by a finder will be deemed
made by the licensee on the date the funds are disbursed or
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otherwise made available by the finder to the borrower.
b) A finder that disburses loan proceeds to a borrower must
provide to the borrower at the time loan proceeds are
disbursed, a plain and complete receipt showing all of the
following: (1) The date of disbursement; (2) The total
amount disbursed; (3) The corresponding loan account
identification; (4) a statement, prominently displayed in a
type size equal to or greater than the type size used to
display the other items on the receipt: "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]."
c) Any loan payment made by a borrower to a finder must be
applied to the borrower's loan and deemed received by the
pilot program lender as of the date the payment is received
by the finder.
d) A finder that receives loan payments must deliver or
cause to be delivered to the borrower at the time that the
payment is made, a plain and complete receipt showing all
of the following:(1) The name of the finder; (2) The total
payment amount received; (3) The date of payment; (4) The
corresponding loan account identification upon which the
payment is being applied; (5) The loan balance prior to and
following application of the payment; (6) The amount of the
payment that was applied to principal, interest, and fees;
(7) The type of payment, such as cash, automated clearing
house (ACH) transfer, check, money order, or debit card;
(8) a statement, prominently displayed in a type size equal
to or greater than the type size used to display the other
items on the receipt: "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]."
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e) A borrower who submits a loan payment to a finder will
not be liable for any failure or delay by the finder in
transmitting the payment to the pilot program lender.
f) A finder that disburses or receives loan payments must
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, whichever is later.
3)A pilot program lender that utilizes the service of a finder
must do all of the following: provide the name, business
address, and licensing details of the finder and all locations
at which the finder will perform services to the Commissioner.
Author's Amendments: After a series of negotiations with the
stakeholders regarding finders' compensation, the author has
proposed the following amendments:
On page 7, line 25, after "finder" insert "for the services
set forth in subdivision (a) of Section 22372"
On page 7, line 26, strike "seventy dollars (70)" and insert
"sixty-five ($65)"
On page 7, line 28, after "finder," insert "plus $2 per
payment
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received by the finder on behalf of the licensee for the
duration of the loan, when the finder receives borrower loan
payments on the licensee's behalf in accordance
with subdivision (b) of Section 22372."
ARGUMENTS IN SUPPORT: In support of the bill, the sponsor
Insikt writes:
Accordingly, Insikt seeks the flexibility to negotiate
compensation schemes that ultimately work for both parties.
Otherwise, we risk discouraging potential partnerships to
the ultimate detriment of consumers who will find
themselves with less access to Pilot Program loans. To be
clear, these changes would not revise any other provisions,
including important customer protections and requirements
for credit education. With these changes, Insikt and other
participants will be well positioned to enter into
partnerships with finders that will increase the
availability of Pilot Program loans in underbanked
communities throughout California.
REGISTERED SUPPORT / OPPOSITION:
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Support
Insikt (sponsor)
Silicon Valley Leadership Group
Check Center
Listo Inc.
uTax Software, LLC.
LendUp
Opposition
None on file
Analysis Prepared by:Khadijah Hargett / JUD. / (916)
319-2334