BILL ANALYSIS                                                                                                                                                                                                    






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          |SENATE RULES COMMITTEE            |                        SB 984|
          |Office of Senate Floor Analyses   |                              |
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                                   THIRD READING 


          Bill No:  SB 984
          Author:   Hueso (D), et al.
          Amended:  5/31/16  
          Vote:     21 

           SENATE BANKING & F.I. COMMITTEE:  6-1, 4/6/16
           AYES:  Vidak, Galgiani, Hall, Hueso, Lara, Morrell
           NOES:  Glazer

           SENATE JUDICIARY COMMITTEE:  7-0, 4/19/16
           AYES:  Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning,  
            Wieckowski

           SENATE APPROPRIATIONS COMMITTEE:  7-0, 5/27/16
           AYES:  Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

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


          SOURCE:    Oportun
          
          DIGEST:   This bill extends the January 1, 2018 sunset date on  
          the Pilot Program for Increased Access to Responsible Small  
          Dollar Loans (Program) to January 1, 2023.

          ANALYSIS:  Existing law, until January 1, 2018, authorizes the  
          Program within the California Finance Lenders Law (CFLL),  
          administered by the Department of Business Oversight (DBO;  
          Financial Code Sections 22365 et seq.).  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, and authorizes Program  








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          lenders to use finders, as specified.  The Program requires its  
          lenders to 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.  

          This bill extends the sunset date on the Program by five years,  
          to January 1, 2023.  

          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 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 of DBO to issue periodic  
          reports regarding the Program, to give the Legislature and  
          interested parties information regarding the 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  







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          such report is due by January 1, 2017.  

          The first report, summarized below, 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.

          Comments

          To date, nine lenders have been approved to participate in the  
          Program, relative to a CFLL licensee population of just over  
          2,600.  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.  

          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.

          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.  

          Short-term delinquencies among Program borrowers are relatively  
          common, but long-term delinquencies are relatively rare.  In  







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          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.  

          Recent Amendments  On May 31st, the Senate Appropriations  
          Committee amended this bill to extend the Program's sunset date  
          by five years.  Arguments in favor of and opposed to this bill  
          are based on the "as introduced" version of the bill, which  
          deleted the Program's sunset date.  Because no revised letters  
          reflecting the amended version of this bill were received before  
          this analysis was finalized, supporters' and opponents'  
          arguments are omitted.  

          Prior Legislation

          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.  

          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  







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          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.  

          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.  


          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   Yes

          According to the Senate Appropriations Committee, this bill will  
          result in ongoing annual costs potentially in excess of $150,000  
          (State Corporations Fund) to DBO to continue administrative and  
          enforcement activities over the Program, which will be  
          recoverable through DBO's authority to charge fees. To the  
          extent removal of the sunset date fosters growth and greater  
          participation in the Program, the future costs of the Program  
          could potentially increase.


          SUPPORT:   (Verified5/25/16)


          Oportun (source)
          African-American Farmers of California
          Brightline Defense Project
          California Teamsters
          California Urban Partnership
          Capital Good Fund
          Casa Familiar
          Center For Financial Services Innovation
          Credit Shop
          Fathers & Families of San Joaquin
          Fresno Area Hispanic Foundation
          Greenlining Institute
          Hispanic 100
          Latin Business Association
          National City Chamber of Commerce







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                                                                    Page  6


          National Federation of Filipino American Associations
          National Hmong American Farmers
          Nisei Farmers League
          Northern California Community Loan Fund
          Pacoima Beautiful
          Pew Charitable Trusts
          Salvadoran American Leadership and Educational Fund
          SEIU California
          Silicon Valley Community Foundation
          Silicon Valley Leadership Group
          Western Center on Law & Poverty


          OPPOSITION:   (Verified5/25/16)


          Insikt
          Avanza Inc. (dba Listo!)

          Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
          5/31/16 21:31:45


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