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 SB 235 Page 2 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. SB 235 Page 3 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 SB 235 Page 4 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 SB 235 Page 5 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 SB 235 Page 6 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 SB 235 Page 7 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 SB 235 Page 8 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 SB 235 Page 9 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 SB 235 Page 10 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. SB 235 Page 11 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 SB 235 Page 12 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 SB 235 Page 13 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 SB 235 Page 14 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 SB 235 Page 15 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]." SB 235 Page 16 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 SB 235 Page 17 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: SB 235 Page 18 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