BILL ANALYSIS                                                                                                                                                                                                    





                             SENATE JUDICIARY COMMITTEE
                         Senator Hannah-Beth Jackson, Chair
                             2015-2016  Regular  Session


          SB 984 (Hueso)
          Version: February 10, 2016
          Hearing Date: April 19, 2016
          Fiscal: Yes
          Urgency: No
          TH   


                                        SUBJECT
                                           
           Pilot Program for Increased Access to Responsible Small Dollar  
                                  Loans: Extension

                                      DESCRIPTION  

          Existing law establishes, until January 1, 2018, the Pilot  
          Program for Increased Access to Responsible Small Dollar Loans  
          for the purpose of allowing greater access to affordable  
          installment loans in principal amounts of at least $300 and less  
          than $2,500.  This Pilot Program, administered by the  
          Commissioner of Business Oversight, requires participating  
          licensees to pay a fee to participate in the program, and  
          imposes specified limits on the interest rates, charges, and  
          fees that a licensee may impose, as well as other program  
          requirements.

          This bill repeals the January 1, 2018, terminal date for the  
          Pilot Program, and extends the Pilot Program indefinitely as the  
          Program for Increased Access to Responsible Small Dollar Loans.

                                      BACKGROUND  

          The Department of Business Oversight administers the California  
          Finance Lenders Law (CFLL) and licenses finance lenders who make  
          secured and unsecured consumer and commercial loans for less  
          than $2,500 under that law.  In 2008, the former Department of  
          Corporations (DOC) produced a report indicating that CFLL  
          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  








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          loans under the California Deferred Deposit Transaction Law.   
          (DOC, "2008 Annual Report on the Operation of Deferred Deposit  
          Originators under the California Deferred Deposit Transaction  
          Law.")

          In response to concerns that the CFLL's restrictions constrained  
          access to small-dollar lending, the Legislature passed SB 1146  
          (Florez, Chapter 640, Statutes of 2010) to create the Pilot  
          Program for Affordable Credit-Building Opportunities.  The Pilot  
          Program was intended to provide an alternative to higher  
          interest payday loans and would, until January 1, 2015, allow  
          participating CFLL licensees statewide to offer a new type of  
          small-dollar consumer loan that met specified requirements.   
          Under the Pilot Program, a lender would be permitted to charge  
          higher interest rates (between 26 and 30 percent), origination  
          fees, and delinquency fees than are permitted under the CFLL.   
          The loans, which could be originated in an amount from $250 to  
          $2,500, would have to be underwritten by the licensee and the  
          licensee would have to report the borrower's payment performance  
          to at least one of the three major credit bureaus.  The Pilot  
          Program sought to increase the availability of credit-building  
          opportunities and to expand financial education for individuals,  
          particularly unbanked or under-banked persons.  SB 1146's  
          four-year pilot project began on January 1, 2011, and was  
          scheduled to end on January 1, 2015.

          SB 318 (Hill and Steinberg, Chapter 467, Statutes of 2013)  
          subsequently modified the Pilot Program, renamed as the Pilot  
          Program for Increased Access to Responsible Small Dollar Loans,  
          and extended it to January 1, 2018.  In response to feedback  
          received from participants in the Pilot Program established  
          under SB 1146, SB 318 was intended to expand the number of  
          lenders offering loans between $300 and $2,500 by, among other  
          things, authorizing an underwriting fee, increasing the  
          origination fee, interest rates, late fees, and the frequency  
          with which underwriting and origination fees could be assessed.   
          This new Pilot Program authorized lenders to offer installment  
          loans at an interest rate of up to 36 percent on principal  
          amounts up to $1,000, and 35 percent on principal amounts  
          between $1,001 and $2,499.  It authorized the collection of  
          origination fees at 7 percent, late fees at $20 per occurrence,  
          and set loan lengths between 90 and 180 days depending on the  
          principal amount lent at origination.

          Under the current Pilot Program, participating lenders are able  







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          to enlist "finders" to work on behalf of the lender to connect  
          potential borrowers with the lender, but the program restricts  
          both the activities and the rates of compensation of finders  
          operating under the pilot.  SB 253 (Block, Chapter 505, Statutes  
          of 2015) sought to improve participation in the Pilot Program by  
          expanding the services that a finder is authorized to perform.   
          This bill authorized finders to offer new services, including  
          disbursing loan proceeds and receiving loan payments from a  
          borrower, and also increased the cap on compensation that could  
          be paid to finders participating in the pilot.

          In order to allow the Legislature to evaluate the effectiveness  
          of these programs, both the original and modified pilot programs  
          required the Commissioner of Business Oversight (formerly the  
          Commissioner of the Department of Corporations) to report on the  
          utilization of the programs and to make recommendations  
          regarding whether the programs ought to be continued after their  
          terminal date.  The last such report due from the Commissioner  
          is to be delivered to the Legislature on or before January 1,  
          2017.

          This bill would remove the January 1, 2018, repeal date for the  
          Pilot Program for Increased Access to Responsible Small Dollar  
          Loans, thereby extending the program indefinitely.  This bill  
          was approved by the Senate Committee on Banking & Financial  
          Institutions on April 6, 2016, by a vote of 6-1.

                                CHANGES TO EXISTING LAW
           
           Existing law  , the California Finance Lenders Law (CFLL),  
          administered by the Department of Business Oversight (DBO),  
          authorizes the licensure of finance lenders, who may make  
          secured and unsecured consumer and commercial loans.  (Fin. Code  
          Sec. 22000 et seq.)

           Existing law  caps interest rates that may be charged by CFLL  
          licensees who make consumer loans under $2,500.  Those caps  
          range from 12 percent to 30 percent per year, depending on the  
          unpaid balance of the loan.  (Fin. Code Secs. 22303, 22304.)  

           Existing law  caps administrative (origination) fees that may be  
          charged for such loans at the lesser of five percent of the  
          principal amount of the loan or $50.  Existing law also caps the  
          amount of delinquency fees that CFLL lenders who make consumer  
          loans under $5,000 may impose.  Those fees are capped at a  







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          maximum of $10 on loans that are more than 10 days delinquent  
          and $15 on loans 15 days or more delinquent.  Existing law  
          requires CFLL lenders to prominently display their schedule of  
          charges to borrowers.  (Fin. Code Secs. 22305, 22320.5, and  
          22325.)

           Existing law  , until January 1, 2018, authorizes the Pilot  
          Program for Increased Access to Responsible Small Dollar Loans  
          within the CFLL.  (Fin. Code Sec. 22365 et seq.)  CFLL licensees  
          that are approved by the Commissioner of Business Oversight  
          (commissioner) to participate 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 35 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.  (Fin.  
          Code. Sec. 22370.)

           Existing law  states that loans under the Pilot Program must have  
          a minimum principal amount of $300 upon origination and a term  
          not less than:  (1) 90 days for loans whose principal balance is  
          less than $500; (2) 120 days for loans whose principal balance  
          is at least $500 but less than $1,500; and (3) 180 days for  
          loans whose principal balance is at least $1,500.  (Fin. Code.  
          Sec. 22370 (a).)

           Existing law  provides that a licensee may charge an  
          administrative fee in an amount not to exceed seven percent of  
          the principal amount, or $90, whichever is less, on a first  
          loan, and six percent of the principal amount, or $75, whichever  
          is less, on a second or subsequent loan.  A licensee may not  
          charge an underwriting fee more than once in any four-month  
          period, and no administrative or underwriting fee may be charged  
          in connection with a loan refinance unless at least eight months  
          have elapsed, as specified.  (Fin. Code. Sec. 22370 (c).)

           Existing law  provides that a licensee may require reimbursement  
          for the actual insufficient fund fees incurred due to actions of  
          the borrower, and, may contract for and receive a delinquency  
          fee that is: (1) for a period of delinquency not less than 7  
          days, $14; (2) for a period not less than 14 days, $20.  No more  
          than one delinquency fee may be imposed per delinquent payment;  
          no more than two delinquency fees may be imposed during any  







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          period of 30 consecutive days.  (Fin. Code. Sec. 22370 (d),  
          (e).)

           Existing law  states that prior to disbursement of loan proceeds,  
          a licensee must either offer a credit education program or  
          seminar, or invite the borrower to a credit education program or  
          seminar offered by an independent third party, as specified.   
          (Fin. Code. Sec. 22370 (g).)

           Existing law  requires a licensee to report each borrower's  
          payment performance to at least one consumer credit reporting  
          agency, upon acceptance as a data furnisher by that consumer  
          reporting agency.  A licensee that is accepted as a data  
          furnisher after admittance into the Pilot Program must report  
          all borrower payment performance since its inception of lending  
          under the Pilot Program, as specified.  (Fin. Code. Sec. 22370  
          (g).)

           Existing law  requires a licensee to underwrite each loan and  
          states that the licensee shall not make the loan if it  
          determines that the borrower's total monthly debt service  
          payments exceed 50 percent of the borrower's gross monthly  
          income, as specified.  (Fin. Code. Sec. 22370 (h).)

           Existing law  authorizes a licensee who participates in the pilot  
          program to use the services of one or more finders, as  
          specified, and defines a "finder" as an entity that, at the  
          finder's physical location for business, brings a licensee and a  
          prospective borrower together for the purpose of negotiating a  
          loan contract.  (Fin. Code. Sec. 22371.)

           Existing law  authorizes a finder to perform one or more of the  
          following services for a licensee at the finder's physical  
          location for business:  (1) distributing written materials; (2)  
          providing written factual information about the loan; (3)  
          notifying a prospective borrower of the information needed to  
          complete an application; (4) entering information from a  
          prospective borrower into a database; (5) assembling credit  
          applications and other materials; (6) contacting the licensee to  
          determine the status of a loan application; (7) communicating a  
          response regarding underwriting; and (8) obtaining the  
          borrower's signature on documents.  (Fin. Code. Sec. 22372.)

           Existing law  states that a finder may be compensated by the  
          licensee pursuant to a written agreement between the licensee  







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          and the finder, and that the total compensation paid by a  
          licensee to a finder may not exceed $65 per loan, plus $2 per  
          payment 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.  (Fin. Code. Sec. 22374.)

           Existing law  provides that a licensee shall develop and  
          implement policies and procedures designed to respond to  
          questions raised by applicants and borrowers regarding their  
          loans, including those involving finders, and to address  
          customer complaints as soon as reasonably practicable.  (Fin.  
          Code. Sec. 22370 (f).)

           Existing law  states that the commissioner may examine the  
          operations of each licensee and each finder to ensure that the  
          activities of the licensee and the finder are in compliance with  
          the requirements of the pilot program, and specifies that in  
          addition to any other penalty, the commissioner may impose an  
          administrative penalty up to $2,500 for violations of the pilot  
          program's requirements committed by a finder.  (Fin. Code. Sec.  
          22377.)

           Existing law  requires the commissioner to examine each licensee  
          that is accepted into the program at least once every 24 months.  
           (Fin. Code. Sec. 22379.)

           Existing law  requires the commissioner to file reports  
          summarizing the utilization of the Pilot Program for Increased  
          Access to Responsible Small Dollar Loans, and specifies  
          information to be contained within the reports. (Fin. Code. Sec.  
          22380.)

           Existing law  provides that the pilot program shall remain in  
          effect only until January 1, 2018, and as of that date is  
          repealed.  (Fin. Code. Sec. 22381.)

           This bill  deletes the January 1, 2018, repeal date for the pilot  
          program, thereby extending the pilot program indefinitely. 

                                        COMMENT
           
           1.Stated need for the bill  

          According to the author:








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            California's historical regulatory approach has dramatically  
            restricted the availability of unsecured installment loans of  
            less than $2500 dollars for low income borrowers from  
            underserved communities [with] low or no credit history. . . .  
            The legislature passed SB 1146 (Florez, 2010), creating a  
            pilot program that allowed marginally higher interest rates  
            and slight increases to certain fees (than were currently  
            allowed in statute) but required the loans made pursuant to  
            this program to contain significant, specified consumer  
            protections and responsible lending features that enabled  
            borrowers to pay back the loans over a reasonable time based  
            on their ability to repay the loan and allowed them to  
            establish or improve their credit.  This forward thinking  
            approach provided borrowers with previously unavailable, much  
            more affordable loan options.  In the five years since the  
            creation of the pilot program, over a half a billion dollars  
            has been provided to thousands of California families.  Many  
            consumers using the product have been able to establish credit  
            for the first time and/or have seen dramatic increases in  
            their credit scores.  

            The pilot program is set to expire at the end of 2017.  The  
            author and the supporters of the bill believe that this would  
            be very detrimental to the consumers who have been helped by  
            this program as well as those who would have been helped had  
            the program not been allowed to sunset.  They believe that it  
            should be made permanent and that California should send an  
            immediate, clear signal that it wants [pilot] lending to  
            continue and remove the sunset.  

            Just as the pilot is beginning to take on some noticeable  
            momentum and strength, the looming sunset date creates  
            uncertainty for the pilot, pilot consumers and for those  
            lenders in the pilot.  The current sunset is also an  
            impediment to any lender that would like to apply to be a  
            pilot lender and lend under the pilot.  The Center for  
            Responsible Lending in a report last year concluded that "[a]  
            sunset would likely end a large portion of the recent growth  
            in the under $2,500 market that has occurred in recent years,  
            and the presence of a sunset could be having an impact on new  
            lenders' decisions to participate in the program."

            The pilot is a product of several bills that were heavily  
            negotiated with all interested parties.  It is a success.   
            With over half a billion dollars loaned in four years of the  







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            pilot program's existence, it provides a very attractive  
            alternative in the market that should be celebrated and  
            encouraged.  The author believes that the pilot can only  
            achieve its full potential and the goals of the Legislature  
            when it created the pilot by removing the sunset now and  
            letting it continue to grow and fulfill its purpose of helping  
            and providing positive loans for underserved borrowers that  
            need small loans and have limited options.  

           2.Consumer protection
           
          The Legislature has long considered consumer protection to be a  
          matter of high importance.  State law is replete with statutes  
          aimed at protecting California consumers from unfair, dishonest,  
          or harmful market practices.  For example, the Consumer Legal  
          Remedies Act was enacted "to protect the statute's beneficiaries  
          from deceptive and unfair business practices," and to provide  
          aggrieved consumers with "strong remedial provisions for  
          violations of the statute."  (Am. Online, Inc. v. Superior Court  
          (2001) 90 Cal.App.4th 1, 11.)  Similarly, for over 70 years,  
          California's Unfair Practices Act (Bus. & Prof. Code Sec. 17000,  
          et seq.) has protected California consumers from "unlawful,  
          unfair or fraudulent business act[s] or practice[s]."  (Bus. &  
          Prof. Code Sec. 17200.)

          Consumer protection in the banking and finance sector is no less  
          a matter of fundamental public policy.  The California Finance  
          Lenders Law (Fin. Code Sec. 22000 et seq.) declares that it  
          "shall be liberally construed and applied to promote its  
          underlying purposes and policies," which is, among other things,  
          "[t]o protect borrowers against unfair practices by some  
          lenders, having due regard for the interests of legitimate and  
          scrupulous lenders."  (Fin. Code Sec. 22001.)  In the past, this  
          Committee has viewed an annualized interest rate cap of 36  
          percent on small dollar installment loan products as an  
          appropriate consumer safeguard.  The benchmark 36 percent rate  
          cap for small dollar lending emerged in the first half of the  
          twentieth century as a mechanism to control the then-extant  
          "black market for illegal usurious small loans[] run by loan  
          sharks."  (Saunders, Why 36 [Percent]?:  The History, Use, and  
          Purpose of the 36 [Percent] Interest Rate Cap (April 2013)  
           (as  
          of April 12, 2016).)  As of 2013, "over 35 jurisdictions - 70  
          [percent] of states - still provide for annual interest rate  
          caps at the 36 [percent] benchmark or less within their  







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          statutory schemes governing small-dollar installment loans by  
          nonbank lenders."  (Id.)  The 36 percent rate cap has endured  
          because it "works on a practical level."  A 36 percent interest  
          rate cap results in payments that "borrowers are more likely to  
          be able to make while actually paying off the loan," and also  
          "forces lenders to offer longer term loans with a more  
          affordable structure and to more carefully consider ability to  
          pay to avoid write offs" prior to lending.  (Id.)

          The Pilot Program for Increased Access to Responsible Small  
          Dollar Loans incorporates elements of the 36 percent interest  
          rate benchmark.  While not inclusive of other allowable fees and  
          costs, the pilot program limits the interest rate participating  
          lenders can charge for a loan to, at most, 36 percent.  Writing  
          neither in support or opposition, the Center for Responsible  
          Lending (CRL) states:

            While we support the general goal of expanding access to  
            credit, it is crucial that such expansions be both affordable  
            and responsible - so that they help, not hurt consumers in  
            need.  In past efforts to enact and then modify the pilot  
            program, the Center has actively worked to strengthen the  
            pilot's consumer protections. . . . The pilot program is not  
            perfect.  The costs for these loans remains higher than we  
            would like to see.  CRL has long endorsed an all-in 36 percent  
            APR [Annual Percentage Rate] cap on small dollar loans -  
            including interest and origination fees.  The pilot allows  
            APRs on the smallest and shortest loans of more than twice  
            that rate.

          Despite an effective interest rate over 36 percent (when all  
          other costs and fees are factored in), CRL has identified the  
          pilot program as one of California's emerging, less expensive  
          small dollar loan products.  In a December 2015 policy brief  
          entitled "Predatory Payday and Larger Installment Loans  
          Overshadow Emerging Market for Smaller, Less Expensive  
          Installment Loans in California," CRL wrote:

            Despite the continued prominence of high-cost debt-trap  
            lending, some new small-dollar loan providers have begun to  
            make loans to borrowers with thin or no credit files.  These  
            loans have APRs that are just a fraction of those levied by  
            payday, car title and high-cost installment lenders.  Much of  
            this lending is happening under California's Small Dollar Loan  
            Pilot Program, which requires some underwriting to establish  







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            that borrowers have the ability to repay their loans, some  
            refinancing limits and requires lenders to report repayment  
            activity to a major credit bureau.

          Opportun, Inc., the sponsor of this bill, has described the  
          difficulty in constructing small dollar loan products with  
          affordable total loan costs, writing:

            At the time the Pilot was being considered, there were  
            relatively few unsecured, small dollar, credit-building  
            installment loans available to low income Californians with  
            little or no credit history.  Small dollar lending is  
            high-cost and challenging; lenders incur many of the same  
            expenses with small dollar loans as they would with larger  
            loans, but with much less opportunity for profit and much more  
            risk.  Despite these daunting challenges, there is an  
            extraordinary and growing demand for such small loans.  This  
            imbalance between supply and demand drives individuals and  
            families, particularly those from low income, minority  
            communities, to rely on expensive, potentially dangerous  
            financial options that can be harmful to their financial  
            well-being. . . . The Pilot was predicated on the belief that  
            the best way to combat predatory and harmful lending is to  
            encourage and allow more socially responsible lending like  
            that enabled by the Pilot Program. . . . To incentivize  
            lenders' participation, it allows Pilot lenders to charge  
                       marginally higher interest rates and fees than those permitted  
            for consumer loans of that size made outside the program under  
            the Consumer Finance Lenders Law.

          Aside from requiring marginally lower interest rates, the pilot  
          program includes several other important consumer protections,  
          including statutory limitations on fees and costs such as  
          origination and late fees, minimum loan lengths, income  
          verification and underwriting requirements, restrictions on  
          refinancing, and mandatory reporting on loan repayment  
          performance to credit bureaus.  While not ideal, the pilot  
          program offers small dollar loans to consumers on far better  
          terms than other small dollar loan products offered in  
          California.

           3.Comparison with payday loans
           
          The Pilot Program for Increased Access to Responsible Small  
          Dollar Loans was created for the purpose of allowing greater  







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          access to affordable installment loans in principal amounts  
          between $300 and $2,500.  Under the program, interest rates are  
          capped at 36 percent for principal balances up to $1,000, and 35  
          percent for principal balances between $1,000 and $2,500.  In  
          contrast, payday loans - a competing small dollar loan product  
          -- can have exorbitant interest rates.  The Department of  
          Corporations' 2008 annual report on the California Deferred  
          Deposit Transaction Law found that the average annual percentage  
          rate (APR) for payday loans was 416 percent.

          Although the comparison with payday loans is appropriate, it is  
          not quite a strict one-to-one comparison for two reasons.   
          First, the pilot program permits licensees to offer a  
          small-dollar loan of $300 to $2,500.  Payday loans, on the other  
          hand, are capped at $300 for the face value of the check (minus  
          a $45 fee, leaving the borrower with $255).  As a result, a  
          borrower who needs a $200 loan cannot access the Pilot Program  
          and may turn to a payday lender for assistance.  On the other  
          hand, if the borrower could take out a more responsible  
          longer-term loan for $900 under the pilot program, he or she is  
          arguably less likely to need to turn to a payday loan.  Second,  
          payday loan borrowers must have bank accounts.  The pilot  
          program does not require that a prospective borrower have a bank  
          account and, in fact, contemplates that a number of borrowers  
          who are able to obtain loans under the program are unbanked,  
          that is, they do not have bank accounts.

          The pilot program has two critical elements that further  
          distinguish its consumer loans from payday loan products.   
          First, pilot program loans require licensees to report borrowers  
          to at least one of the three major credit bureaus, thereby  
          helping borrowers to gain a credit history, unlike payday loans  
          which are not reported.  Second, unlike payday loans, pilot  
          program loans require licensees to underwrite the loan and  
          ensure that the loan is affordable to the borrower.

           4.Experience under the pilot program
           
          Supporters of this bill widely credit the pilot program with  
          providing affordable small dollar loans to underserved  
          populations in California.  The Center for Financial Services  
          Innovation, in support, writes:

            The Pilot Program was designed to increase the number of  
            responsibly-structured, credit-building small dollar loans to  







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            those with limited access to credit.  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 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.

          Similarly, the Pew Charitable Trusts, in support, writes:

            [L]oans offered under [the pilot program] cost far less than  
            others available, offer borrowers substantial time to repay,  
            carry small installment payments, and create a clear pathway  
            out of debt.  In 2014, fewer than 200,000 loans were issued  
            under the pilot, while more than 12 million were issued under  
            the harmful Deferred Deposit statute in California.  Consumers  
            would be far better off and save hundreds of millions of  
            dollars annually if lending under the smallloan pilot replaced  
            the payday loans issued to 1.8 million Californians in the  
            most recent year.

          Lender participants in the program also note its positive  
          benefits.  Credit Shop, Inc., which makes loans through the  
          pilot program, writes:

            Credit Shop was approved to begin lending under the California  
            Pilot Program for Increased Access to Responsible Small Dollar  
            Loans in 4th quarter 2015, and we just started marketing to  
            consumers and making loans in California under this program in  
            February 2016.  Our first marketing campaign yielded favorable  
            results with a 1.42 [percent] gross response rate.  The median  
            income of our CA applicants is $32,500.  42 [percent] of our  
            applicants have income below $30,000 per year and 16 [percent]  
            are under $20,000 per year.  60 [percent] of our borrowers in  
            California make 2 times or less the state minimum wage.   
            Making loans under this pilot program in California is a core  
            part of our company strategy as we believe that there is a  
            great need for more affordable financial products for [low to  
            moderate income] consumers in California.  Based on U.S.  







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            Census bureau data (2010 - 2014), around 16.4 [percent] of  
            California consumers are living at or below the poverty level.  
             That equates to nearly 6.5 million consumers who may have  
            limited income and options for loans when they need them.

          While the Department of Business Oversight (DBO) has yet to  
          release its final report on the utilization of the pilot  
          program, an initial report issued in June 2015 suggests that  
          loan activity under the pilot is experiencing double-digit  
          growth, and that charge-off or default rates for pilot  
          participants at about 8 percent are significantly below that of  
          other installment lenders.  (See DBO, Report of Activity Under  
          Small Dollar Loan Pilot Programs, June 2015  
           [as of Apr. 12,  
          2016].)

           5.Removal of sunset

           Opportun, Inc., the sponsor of this bill, argues that removal of  
          the sunset provision from the pilot program would incentivize  
          additional lenders to become participants in the program and  
          expand the program's reach.  They write:

            The Pilot and the loans made under it are a creation of  
            statute.  If the statute expires, much of the lending  
            currently done under the Pilot 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.   
            Just as the Pilot is beginning to take on some noticeable and  
            encouraging momentum and strength, the looming sunset date  
            creates uncertainty for the Pilot . . . The current sunset is  
            also an impediment to any lender that would like to apply to  
            be a Pilot lender and lend under the Pilot. . . . Businesses,  
            particularly those that are contemplating substantial  
            investment like what is required to successfully make Pilot  
            loans in any meaningful volume need certainty and reassurance  
            that the program will continue.  At this point with the  
            Sunset, the Pilot 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 2 years. . . . Current Pilot  
            lenders, prospective Pilot lenders and the hundreds of  







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            thousands of borrowers that benefit from the Pilot need the  
            Legislature to signal as soon as possible with passage of SB  
            984 that the Sunset will be removed, thus providing the  
            reassurance needed to enable future growth in responsible  
            Pilot lending.

          Insikt, Inc., another small dollar lender participating in the  
          pilot program, argues in contrast that removal of the sunset  
          date is premature, and suggests instead that the pilot program  
          be reauthorized until January 1, 2020.  They write:

            We fully support making the pilot program permanent at an  
            appropriate time.  However, we believe it is premature to do  
            so until more data is available to demonstrate the program has  
            met its original goal - to increase consumers' access to  
            capital by encouraging multiple lenders and finders to develop  
            a robust small dollar loan marketplace in California.

          Insikt, Inc., notes how the Department of Business Oversight  
          (DBO) has only published its first report on the pilot program,  
          and that an updated report is expected at the beginning of 2017.  
           They note how, in that report, the Department states:

            The current version of the small dollar pilot program has been  
            operational for just one year.  The DBO recommends  
            policymakers give the program more time to work before making  
            changes.  Recommendations for improvements, at this time,  
            would be premature.  (DBO, Report of Activity Under Small  
            Dollar Loan Pilot Programs, June 2015  
             [as of Apr. 12,  
            2016].)

          Insikt, Inc., further notes how expected rules on payday loans  
          from the Consumer Financial Protection Bureau may increase  
          consumer demand for alternative small dollar loan products and  
          may require that changes be made to provisions of the pilot  
          program.  Listo, Inc., an additional pilot program lender  
          opposed to this bill, raises similar concerns and argues that  
          more experience and data with the pilot program would allow the  
          Legislature to improve upon it and possibly diversify the range  
          of loan products offered under the program.  While additional  
          data may indeed show the need for changes to the pilot program,  
          removal of the sunset provision would not deprive the  
          Legislature of the ability to make such changes via future  







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          legislation.


           Support  :  African-American Farmers of California; Brightline  
          Defense; California State Council of Laborers; California  
          Teamsters Public Affairs Council; California Urban Partnership;  
          Capital Good Fund; Center for Financial Services Innovation;  
          Credit Shop, Inc.; Fathers and Families of San Joaquin; Fresno  
          Area Hispanic Foundation; Greenlining Institute; Hispanic 100;  
          Latin Business Association; National Federation of Filipino  
          American Associations; National Hmong American Farmers; Nisei  
          Farmers League; Otay Mesa Chamber of Commerce; Pacoima  
          Beautiful; Pew Charitable Trusts; Salvadoran American Leadership  
          and Educational Fund; Silicon Valley Community Foundation;  
          Silicon Valley Leadership Group; Western Center on Law and  
          Poverty

           Opposition  :  Insikt, Inc.; Listo, Inc.

                                        HISTORY
           
           Source  :  Opportun, Inc.

           Related Pending Legislation  :  None Known

           Prior Legislation  :

          SB 253 (Block, Ch. 505, Stats. 2015) See Background.

          SB 318 (Hill and Steinberg, Ch. 467, Stats. 2013) See  
          Background.

          SB 1146 (Florez, Ch. 640, Stats. 2010) See Background.

           Prior Vote  :  Senate Banking and Financial Institutions Committee  
          (Ayes 6, Noes 1)

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