BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Steven Glazer, Chair
2015 - 2016 Regular
Bill No: SB 984 Hearing Date: April 6,
2016
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|Author: |Hueso |
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|Version: |February 10, 2016 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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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.
DESCRIPTION
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
SB 984 (Hueso) Page 2
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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
lenders.
COMMENTS
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
SB 984 (Hueso) Page 3
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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
http://www.dbo.ca.gov/Licensees/Finance_Lenders/pdf/Pilot%20P
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 | | | | | | |
SB 984 (Hueso) Page 4
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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 | | | | | | |
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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 | | | | |
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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
encouraged."
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
years."
Third, the sunset date discourages current Program
SB 984 (Hueso) Page 7
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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 Program...is
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
SB 984 (Hueso) Page 8
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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,
2018.
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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LIST OF REGISTERED SUPPORT/OPPOSITION
Support
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
Opposition
Insikt
Avanza Inc. (dba Listo!)
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