BILL ANALYSIS                                                                                                                                                                                                    

                            Senator Steven Glazer, Chair
                                2015 - 2016  Regular 

          Bill No:             SB 984         Hearing Date:    April 6,  
          |Author:    |Hueso                                                |
          |Version:   |February 10, 2016                                    |
          |Urgency:   |No                     |Fiscal:    |Yes              |
          |Consultant:|Eileen Newhall                                       |
          |           |                                                     |
             Subject:  Pilot Program for Increased Access to Responsible  
                           Small Dollar Loans:  extension

           SUMMARY       Deletes the January 1, 2018 sunset date on the Pilot  
          Program for Increased Access to Responsible Small Dollar Loans  
          (Program), strikes the word "pilot" from the Program's name, and  
          deletes the requirement that the Commissioner of Business  
          Oversight (commissioner) weigh in on whether the Program should  
          be continued after January 1, 2018 in her January 1, 2017 report  
          on Program utilization.
            1.  Deletes the Program's January 1, 2018 sunset date.

           2.  Strikes the word "pilot" from the Program's name.

           3.  Deletes the requirement that the commissioner include  
              recommendations regarding whether the Program should be  
              continued after January 1, 2018 in the report on Program  
              utilization she is required to submit to the Legislature by  
              January 1, 2017.

           EXISTING LAW
           4.  Until January 1, 2018, authorizes the Program within the  
              California Finance Lenders Law (CFLL), administered by the  
              Department of Business Oversight (DBO; Financial Code  


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              Sections 22365 et seq.).  Generally speaking, the Program  
              authorizes lenders who have been vetted by DBO to charge  
              somewhat higher interest rates and fees on loans of  
              principal amounts up to $2,500 than are allowed under the  
              CFLL.  The Program also authorizes Program lenders to use  
              finders, as specified.  Program lenders must perform  
              rigorous underwriting, provide extensive borrower  
              disclosures, offer borrowers credit education prior to the  
              disbursement of loan funds, and report borrower payment  
              history to at least one major credit bureau - requirements  
              that do not apply to CFLL licensees which are not Program  

          1.  Purpose:   This bill is sponsored by Oportun, Inc. (formerly  
              Progreso Financiero) to provide Program participants and  
              prospective Program participants with more regulatory  
              certainty.  This bill's author states, "The Pilot has proven  
              itself.  It is time to remove the temporary status of the  
              Pilot and make it a permanent option for Californians that  
              need this particular loan.  California should send an  
              immediate, clear signal that it wants Pilot lending to  
              continue and remove the sunset."

           2.  Background:   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.  

          In an attempt to increase the availability of affordable,  
              credit-building installment loans made in California in  
              amounts below $2,500, the California Legislature authorized  


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              a small-dollar loan pilot program in 2010 (Program; SB 1146,  
              Florez, Chapter 640, Statutes of 2010).  The Legislature  
              modified the Program in 2013 and again in 2015, with the aim  
              of attracting more lenders to join the Program and  
              increasing the availability of Program loans across the  
              state (SB 318, Hill, Chapter 467, Statutes of 2013 and SB  
              235, Block, Chapter 505, Statutes of 2015).  

          Existing law requires the commissioner to issue periodic reports  
              regarding the Program, to give the Legislature and  
              interested parties information regarding Program usage and  
              informing efforts to improve the Program's effectiveness.   
              The first such report was issued in June 2015, and covered  
              the period January 1, 2011 through December 31, 2014.  The  
              second such report is due by January 1, 2017.  

          As summarized below, the first report contains information that  
              can be used to study the impact of SB 1146 and SB 318 on  
              utilization of the Program.  The second report, due by  
              January 1, 2017, is expected to include information  
              regarding the impact of SB 235 on the Program.

           3.  Highlights of DBO's First Report on the Program:   Full text  
              of DBO's first "Report of Activity Under Small Dollar Loan  
              Pilot Programs," dated June 2015, is available at  
              rogram%20Report%202015%20Final.pdf  .  

          To date (see table immediately below), nine lenders have been  
              approved to participate in the Program, relative to a CFLL  
              licensee population of just over 5,000.  

          |              |2011          |2012          |2013          |2014          |2015          |Total         |
          |Beginning     |0             |0             |0             |1             |5             |              |
          |number of     |              |              |              |              |              |              |
          |applications  |              |              |              |              |              |              |
          |Applications  |3             |2             |1             |7             |1             |14            |
          |received      |              |              |              |              |              |              |
          |Applications  |1             |2             |0             |3             |3             |9             |
          |approved      |              |              |              |              |              |              |


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          |Applications  |0             |0             |0             |0             |0             |0             |
          |rejected      |              |              |              |              |              |              |
          |Applications  |2             |0             |0             |0             |0             |2             |
          |voluntarily   |              |              |              |              |              |              |
          |withdrawn     |              |              |              |              |              |              |
          |Year-end      |0             |0             |1             |5             |3             |              |
          |applications  |              |              |              |              |              |              |
          |pending       |              |              |              |              |              |              |
          |CFL license   |0             |0             |0             |0             |1             |1             |
          |surrendered   |              |              |              |              |              |              |
          |Total         |1             |3             |3             |6             |8             |              |
          |participants  |              |              |              |              |              |              |
          |at year-end   |              |              |              |              |              |              |

              Through 2014, only one lender (Oportun) made the vast  
              majority of Program loans.  For example, Oportun made  
              164,300 Program loans during 2014, while all of the other  
              Program lenders combined made 44 Program loans.  

              Thus, the findings summarized below, although they refer to  
              the Program, should be understood as reflecting the  
              performance of Oportun's loans.  The report due by January  
              1, 2017, which is expected to include data for 2015 and a  
              portion of 2016, should reflect greater lending activity by  
              other Program participants and should, therefore, provide a  
              more comprehensive window into the performance of the  
              Program and the need, if any, for changes to it.

              According to DBO's June 2015 report, the dollar volume of  
              loans made under the Program has risen each year of the  
              Program's existence, from $98 million in 2011 (82,000 loans)  
               to $180 million in 2014 (164,000 loans).  Approximately  
              half of all applicants for Program loans are approved, a  
              rate that has remained fairly constant during the past two  
              years.  Over 60% of Program loans are made to persons who  
              live in low- and moderate-income census tracts.  The vast  
              majority of Program loans are negotiated in Spanish.


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              Nearly half of all borrowers who obtain Program loans do so  
              to build or repair their credit, and available evidence  
              suggests that they are successful in this regard.  Although  
              DBO's report only tracks credit score changes among  
              borrowers who obtain more than one Program loan (and is thus  
              a small subset of all borrowers), approximately 60% of the  
              borrowers studied saw their credit scores increase  
              significantly (by between 320 and 380 points, depending on  
              the year).  Even when borrowers whose scores did not  
              increase between loans are factored in, the results are  
              striking; borrowers' credit scores increased on average  
              between 185 and 235 points after obtaining a Program loan.  

              The second and third most popular reasons borrowers obtained  
              Program loans were to pay for emergencies and to pay bills.

              Over 70% of Program loans are for amounts between $500 and  
              $1,500.  Only 1% are for amounts below $500.  Virtually all  
              loans are at least six months in length; about half are for  
              loan terms of over one year.  

              Short-term delinquencies among Program borrowers are  
              relatively common, but long-term delinquencies are  
              relatively rare.  In 2014, 22% of all program loans were  
              delinquent for between one week and one month, but only 4%  
              were delinquent for 60 days or more.  

              The number of complaints about Program lenders is quite low.  
               Over the four years covered by DBO's report, reflecting  
              over 485,000 loans, DBO received only eight complaints.  

          4.  Program Loans Comprise Forty-Eight Percent Of All Unsecured  
              CFLL Consumer Loans Under $2500:   Although the number of  
              Program loans has increased each year the Program has been  
              in existence (from 82,000 loans in 2011 to 164,000 in 2014),  
              the Program still represents less than half of all unsecured  
              consumer loans made under the CFLL in amounts under $2,500.   

             |                                | 2011 | 2012  | 2013  | 2014  |
             |Number of Program loans         |81,781|115,387|124,819|164,300|
             |                                |      |       |       |       |


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             |Program loans as a percentage   |      |       |       |       |
             |of all unsecured consumer loans | 32%  |  44%  |  44%  |  48%  |
             |made under the CFLL in amounts  |      |       |       |       |
             |<$2,500                         |      |       |       |       |
             |Program loans as a percentage   | 13%  |  15%  |  14%  |15%    |
             |of all consumer loans made      |      |       |       |       |
             |under the CFLL                  |      |       |       |       |

              At the present time, it appears too early to tell whether  
              the Program will grow in size relative to the CFLL without  
              further changes, either to the Program or the CFLL.    
          5.  Summary of Arguments in Support:   

               a.     Oportun is sponsoring this bill for three primary  
                 reasons.  First, "the [Program] is doing good work and  
                 helping people.  If the [Program] is allowed to sunset,  
                 much of the lending currently done under the Program goes  
                 away or evolves into something that is much less  
                 beneficial to the hundreds of thousands of borrowers who  
                 have benefitted from the Program and the even greater  
                 number that could benefit in the future...With a total of  
                 over three quarters of a billion dollars loaned since the  
                 Program's existence, it provides a very attractive  
                 alternative in the market that should be celebrated and  

               Second, the sunset date discourages new entrants to the  
                 Program.  "Businesses, particularly those that are  
                 contemplating substantial investment like what is  
                 required to successfully make [Program] loans in any  
                 meaningful volume need certainty and reassurance that the  
                 program will continue.  At this point with the sunset,  
                 the Program doesn't have or provide certainty.  Few  
                 businesses are willing to gather the capital necessary,  
                 hire employees, obtain locations and incur the many  
                 additional business expenses for the chance to perhaps  
                 lend for a period of slightly over a year or even two  

               Third, the sunset date discourages current Program  


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                 participants from investing and growing.  "For Program  
                 participants that need to make decisions about how and in  
                 which states to grow, the Program has a prominent and  
                 clear expiration date that is now less than two years  
                 away.  This is a very real impediment to current Program  
                 lenders that wish to and intend to grow...Does one  
                 continue to expand here in California or more prudently  
                 look at other states where the ability to lend is more  
                 certain and reliable?"  

               In conclusion, Oportun observes, "During its establishment  
                 and later revisions, the Program has been reviewed,  
                 revised, negotiated, and improved.  The  
                 simply the best lending for consumers available in its  
                 space, by almost any measure.  And if allowed to  
                 continue, will likely be the most socially positive  
                 lending in the foreseeable future...the Program has  
                 matured and developed very positive momentum and growth.   
                 This momentum and the lending that is taking place is now  
                 at risk because of the coming sunset."  

               b.     The Center for Financial Services Innovation,  
                 Silicon Valley Leadership Group, Silicon Valley Community  
                 Foundation, Brightline Defense Project, Nisei Farmers  
                 League, and others sent very similar letters of support  
                 for the bill.  Their key arguments in support of the  
                 measure:  "The California Small Dollar Loan Pilot has  
                 enabled many thin-file or no-file borrowers to obtain  
                 credit and build their credit score.  It has also enabled  
                 many families to access smaller amounts of credit -  
                 between $250 and $2,499 - and it has encouraged more  
                 lenders to offer these loans.  However, with fewer than  
                 10 lenders offering these loans, the presence of a sunset  
                 could be having an impact on new lenders' decisions to  
                 participate in the program.  Removing the sunset is an  
                 important response to the plight of those who need small  
                 loans as a way to build or repair their credit history,  
                 cover short term emergencies, or invest in a business.   
                 We know that access to capital is a key ingredient of  
                 financial health, and financially underserved people  
                 should have healthy options."  

               The Greenlining Institute and Pacoima Beautiful write, "the  
                 Pilot Program was designed to increase the number of  


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                 responsibly-constructed credit-building small dollar  
                 loans to those with limited access.  Prior to the Pilot,  
                 consumers with thin or no credit histories had limited  
                 options when it came to safe, responsible loans.  Widely  
                 available options could put borrowers in a worse  
                 financial situation: predatory lending forces many  
                 working families into a vicious cycle of debt, preventing  
                 them from ever building assets and denying them the  
                 opportunity to build or repair their credit  
                 histories...The Pilot Program puts into place much needed  
                 consumer protections, APR and fee caps that lending  
                 businesses support and that incentivize businesses to  
                 make small-dollar loans...The plight of those who  
                 desperately need small loans as a way to build or repair  
                 their credit history and cover short-term emergencies or  
                 invest in a business make removal of the sunset vital.   
                 We know that access to capital is a key ingredient of  
                 California's financial health, and financially  
                 underserved people should have healthy options."
               c.     Capital Good Fund, a nonprofit Community Development  
                 Financial Institution based in Providence, Rhode Island,  
                 has not applied to participate in California's small  
                 dollar loan pilot program, because of the program's  
                 sunset date.  "Our interest in SB 984 stems from our plan  
                 to expand our products services - small dollar personal  
                 loans and one-on-one financial and health coaching - to  
                 low-income Californians.  As we consider this expansion,  
                 one of the factors is the regulatory environment, and  
                 uncertainty about the status of the Pilot Program makes  
                 it difficult for us to make a final decision.  Even  
                 though we are a nonprofit, we still need to charge rates  
                 that can cover our costs, and absent the Pilot we may  
                 struggle to do so...SB 984 would make it more likely that  
                 we begin making loans in California and, more  
                 importantly, that hundreds of thousands of Californians  
                 have access to equitable credit."  

           6.  Summary of Arguments in Opposition:    

               a.     Insikt, a lender that joined the Program in 2014,  
                 opposes SB 984, unless the bill is amended to extend the  
                 Program's sunset date, rather than delete the sunset, and  
                 to require DBO to issue an additional report on the  


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                 performance of the Program.  Insikt recommends extending  
                 the sunset to January 1, 2021 and requiring DBO's  
                 additional report to be issued by January 1, 2019.  

               Insikt observes that definitive conclusions are hard to  
                 make using DBO's June 2015 report, because that report  
                 contained information primarily from a single lender.  "A  
                 second report is required by statute on or before January  
                 1, 2017, and that report will include data from more  
                 lenders and finders. We encourage the Legislature to give  
                 DBO adequate time to collect additional data and make  
                 recommendations before it makes the pilot a permanent  
                 part of California law."

               Insikt also believes that broader changes in the small  
                 dollar lending landscape should be considered before the  
                 Legislature makes the Program permanent.  Rules expected  
                 to be released later this year by the federal Consumer  
                 Financial Protection Bureau (CFPB) may require  
                 adjustments to the Program, particularly around its  
                 ability-to-repay provisions.  It is also widely expected  
                 that the CFPB rules, once finalized, will result in a  
                 substantial decline in payday lending, which, in turn,  
                 will lead to an increase in consumer demand for payday  
                 alternatives.  "We believe the Legislature would be wise  
                 to consider the impact of the CFPB rules on California  
                 consumers and on small dollar lending in California  
                 before making the pilot program permanent."   

               In addition, the CFPB is strongly encouraging banks and  
                                        credit unions to offer responsible small-dollar loans to  
                 consumers.  Bank and credit union regulators are taking a  
                 more cautious view about the extent to which depository  
                 institutions should expose themselves to non-prime  
                 consumer credit.  "We believe the Pilot Program's finder  
                 provisions provide an excellent mechanism to achieve both  
                 the CFPB's objectives and safety and soundness  
                 objectives, by allowing banks and credit unions to  
                 partner with Pilot Program lenders to meet the needs of  
                 their communities while managing the bank/credit union's  
                 overall risk.  We believe the Legislature would benefit  
                 from seeing whether the finder provisions provide such a  
                 path forward, and whether it [the Program] can be further  
                 optimized to increase its reach and effectiveness."  


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               Finally, Insikt believes that it would be inappropriate to  
                 lock the Program in its current form into law, while it  
                 is still dominated by one company.  "The founding  
                 objective of the Pilot Program was to create a  
                 marketplace where lenders can compete to benefit the  
                 consumer.  This promise can only be delivered through an  
                 increase in participation in the Pilot Program by growing  
                 the number of lenders and finders."

               Although not the basis for its "oppose unless amended"  
                 position, Insikt also encourages the Legislature to  
                 consider making two changes to the Program.  First, the  
                 Program should be amended to require a single, uniform  
                 rule governing the way in which Program lenders must  
                 measure a borrower's increase in credit score from one  
                 loan to the next.  The lack of guidance on this issue in  
                 the current Program has led to different Program lenders  
                 calculating credit score increases in different ways,  
                 which makes the data very difficult to evaluate.  Second,  
                 Insikt believes that the Program should be amended to  
                 replace the word "finder" with the term "referral  
                 partner," to more accurately reflect the broad range of  
                 activities these entities can perform following passage  
                 of last year's SB 235.   

          7.  Prior and Related Legislation:   

               a.     SB 1146 (Florez), Chapter 640, Statutes of 2010:   
                 Authorized California's original small-dollar loan pilot  
                 program within the CFLL, named the Pilot Program for  
                 Affordable Credit-Building Opportunities.  Allowed  
                 lenders approved to participate in the pilot program to  
                 charge higher interest rates and fees on loans of up to  
                 $2,500 than those authorized under CFLL.  Required pilot  
                 program lenders to rigorously underwrite their loans,  
                 offer credit education at no cost to their borrowers, and  
                 report borrower payment history to at least one major  
                 credit bureau.  Required detailed reporting of loan  
                 outcomes to DBO.  Originally 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.  


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               b.     SB 318 (Hill), Chapter 467, Statutes of 2013:   
                 Replaced the Pilot Program for Affordable,  
                 Credit-Building Opportunities with the Pilot Program for  
                 Increased Access to Responsible Small Dollar Loans.   
                 Retained several aspects of the original pilot, including  
                 the underwriting requirements, offers of free credit  
                 education, reports to at least one major credit bureau,  
                 and detailed reporting of program loan outcomes, but  
                 modified other aspects of the original pilot program.   
                 These modifications increased the maximum interest rates  
                 and fees that pilot lenders could charge, allowed 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.  Scheduled to sunset on January 1,  

               c.     SB 235 (Block), Chapter 505, Statutes of 2015:   
                 Expanded the activities in which Program finders could  
                 engage on behalf of Program lenders. Authorized finders  
                 to disburse loan proceeds to borrowers, receive loan  
                 payments from borrowers, and provide notices and  
                 disclosures to borrowers, as specified, and provided  
                 Program lenders with greater flexibility in the ways in  
                 which they may compensate their finders.  



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          Oportun (sponsor)
          Brightline Defense Project
          Capital Good Fund
          Center For Financial Services Innovation
          Credit Shop
          Fathers & Families of San Joaquin
          Fresno Area Hispanic Foundation
          Greenlining Institute
          Hispanic 100
          Latin Business Association
          National Federation of Filipino American Associations
          Nisei Farmers League
          Pacoima Beautiful
          Pew Charitable Trusts
          Salvadoran American Leadership and Educational Fund
          Silicon Valley Community Foundation
          Silicon Valley Leadership Group
          Western Center on Law & Poverty

          Avanza Inc. (dba Listo!)

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