BILL ANALYSIS                                                                                                                                                                                                    






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          Date of Hearing:  June 27, 2016


                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE


                               Matthew Dababneh, Chair


          SB  
          984 (Hueso) - As Amended May 31, 2016


          SENATE VOTE:  39-0


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


          SUMMARY:  Extends the Pilot Program for Increased Access to  
          Responsible Small Dollar Loans (Pilot) until January 1, 2023.


          EXISTING LAW:   


          1)Provides under the California Finance Lenders Law (CFLL), the  
            licensure of finance lenders, who may make secured and  
            unsecured consumer and commercial loans.  (Fin. Code Sec.  
            22000 et seq.)

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














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          3)Caps administrative (origination) fees that may be charged for  
            such loans at the lesser of 5% 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 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.)



          4)Provides that until January 1, 2018, authorizes the Pilot  
            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 are  
            allowed to receive charges for a loan subject to an annual  
            simple interest rate not to exceed:  (1) the lesser of 36 % or  
            the sum of 32.75 % 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 % or the sum of 28.75 %  
            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.)



          5)States that loans under the Pilot 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).)



          6)Provides that a licensee may charge an administrative fee in  
            an amount not to exceed 7% of the principal amount, or $90,  











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            whichever is less, on a first loan, and 6% 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).)



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



          8)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).)





          9)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 must report all borrower payment  
            performance since its inception of lending under the Pilot, as  
            specified.  (Fin. Code. Sec. 22370 (g).)











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          10)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% of  
            the borrower's gross monthly income, as specified.  (Fin.  
            Code. Sec. 22370 (h).)



          11)Authorizes a licensee who participates in the Pilot 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.)



          12)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.)





          13)States that a finder may be compensated by the licensee  
            pursuant to a written agreement between the licensee 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  











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            duration of the loan, when the finder receives borrower loan  
            payments on the licensee's behalf.  (Fin. Code. Sec. 22374.)






          14)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).)

          15)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, 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's requirements committed by a finder.  (Fin. Code. Sec.  
            22377.)



          16)Requires the Commissioner to examine each licensee that is  
            accepted into the Pilot at least once every 24 months.  (Fin.  
            Code. Sec. 22379.)



          17)Requires the Commissioner to file reports summarizing the  
            utilization of the Pilot, and specifies information to be  
            contained within the reports. (Fin. Code. Sec. 22380.)
















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          18)Provides that the Pilot shall remain in effect only until  
            January 1, 2018, and as of that date is repealed.  (Fin. Code.  
            Sec. 22381.)
          FISCAL EFFECT:  According to the Senate Appropriations analysis,  
          annual costs potentially in excess of $150,000 through 2022 to  
          the DBO to continue administrative and enforcement activities  
          over the Pilot, to be recovered through the authority to charge  
          fees. To the extent the removal of the sunset date fosters  
          growth and greater participation in the Pilot, the future costs  
          of the Pilot could potentially increase.


          COMMENTS:  


          This bill extends the sunset date for the Pilot to January 1,  
          2023.


           Need for the bill.


           According to the author,


            Low income communities in California with low or now credit  
            histories often struggle to gain access to traditional forms  
            of credit.  The few options available to them are often at a  
            significant cost. In 2010 the legislature passed SB 1146 to  
            establish a pilot program that would allow for slightly higher  
            interest rates than currently allowed under the CFLL in  
            exchange for consumer protections. That pilot was updated in  
            SB 318 in 2013 and again with SB 235 in 2015.  Last year the  
            Department of Business Oversight released a report on the  
            status of the Pilot that has shown its tremendous success in  
            lending money to communities in need.  Pilot lending increased  
            83 % from 2011 to 2014. Nearly half a million loans were made,  
            and over 60% of them were made to individuals of low to  
            moderate income. Most importantly, the DBO has reported that  











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            60% of customers of the pilot saw their credit scores  
            increase, and on average they have increased 355 points.  This  
            type of lending has been substantially beneficial to consumers  
            and the lenders operating under the pilot should be allowed to  
            continue to offer these loans to consumers.


           




          Background.
           
          A little over 55% of Californians have subprime credit, meaning  
          they have credit scores below 700.<1>  The Consumer Financial  
          Protection Bureau (CFPB) has found that due to no credit files  
          or very thin credit files one in five Americans have no  
          traditional credit score.  Couple these factors together and you  
          have a large group of consumers that may have difficulty in  
          getting a personal loan at a bank or credit union or attaining a  
          low interest credit card.  This is not to say that everyone in  
          these categories will have the same level of difficulty or need.  
           Some consumers will not need to borrow money, or may have  
          access to credit cards though only 27% of consumers that use  
          small-dollar credit have a credit card, compared to 61% of  
          consumers who do not use small dollar credit.<2>  In other  
          surveys, 29% (majority of those surveyed) of payday loan  
          ---------------------------
          <1>


           Corporations for Enterprise Development (CFED), Asset and  
          Opportunity Scorecard,  
           http://scorecard.assetsandopportunity.org/latest/state/ca  

          <2> Rob Levy and Joshua Sledge.  A complex Portrait: An  
          Examination of Small-Dollar Credit Consumers.  Center for  
          Financial Services Innovation.  August 2012











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          borrowers believe, often correctly that they would not qualify  
          for a loan from a bank or a credit card.<3>  Overall American  
          consumers spent $138 billion in fees and in interest across 26  
          financial products in 2014 with overdraft representing the  
          single largest revenue category of $23.4 billion.<4>

          DBO recently released a report, Report of Activity Under Small  
          Dollar Loan Programs, on the performance of the Access to Credit  
          Building Opportunities program and the Pilot covering January 1,  
          2011 to December 31, 2014.  The data presented in the report  
          includes loans arranged without a finder as finder activity was  
          very limited and not reported until 2014.  The following are  
          highlights from the report:


           Loan applications - Borrower applications increased by 58.5%  
            over the period, from 207,092 in 2011 to 328,198 in 2014. The  
            loan approval rate increased from 39% in 2011 to 50% in 2014. 


           Aggregate principal - The annual total principal of loans  
            made increased by 83.8% over the period, from $97.9 million  
            in 2011 to $179.9 million in 2014. 


           Dollar amounts - Loans made in the $300-$499 range fell by  
            42.3% over the period, from 1,518 in 2011 to 876 in 2014.  
            Loans made in the highest range, from $1,500 to $2,499,  
            increased by 106%, from 21,349 to 43,975. 
          ---------------------------
          <3> Consumers and Mobile Finance Services 2014.  Federal Reserve  
          Board, March 2014.  Pg 9

          <4> 2014 Underserved Market Size, Center for Financial Services  
          Innovation, CORE Innovation Capitol, Morgan Stanley.   
           http://www.cfsinnovation.com/CMSPages/GetFile.aspx?guid=ac5235a9- 
          a42a-434c-a26a-66a1b148b712  













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           Interest rates - Of the 6,560 loans made in the $300-$499  
            range over the period, 73.9% carried an APR of 40% to 49.99 %.  
            In the $500-$999 range, 43.4% carried APRs of 40% to 49.99%,  
            while 25.2% had APRs of 35% to 39.99%.  In the $1,500-$2,499  
            range, the APR distribution was more even. In that category,  
            42.8% of the loans had APRs of 35% to 39.99%, while 19.6% had  
            APRs of 30% to 39.99%, 18.2 % had APRs of 40% to 49.99%, and  
            15.6% had APRs of 25% to 29.99%. 


           Delinquencies - Of the 164,300 loans made in 2014, 22.5% were  
            delinquent for seven days to 29 days, 7.3% were delinquent for  
            30 days to 59 days, and 3.9% were delinquent for 60 days or  
            more. 


           Multiple loans - The number of borrowers who took out more  
            than one loan jumped dramatically from 2011 to 2012. Since  
            then, however, the upward trajectory has been less steep.  
            The number went from 2,189 in 2011 to 10,804 in 2012. From  
            2012 through 2014, the number rose by 21.6%, to 13,136. Of  
            the 13,136 multiple-loan borrowers in 2014, 12,999 took out  
            two loans. 


           Credit scores - The share of multiple-loan borrowers who  
            obtained higher credit scores on subsequent loans averaged  
            61% annually over the four-year period. The average size of  
            the increase for those borrowers jumped from 34 points in  
            2011 to 355 points in 2014. 


           Loan term - In 2014, of the 164,300 loans made, 50.9% were for  
            360 days or more. The ratios for other terms: 120 days to 179  
            days, essentially 0% (only two loans); 180 days to 269 days,  
            20.2%; and 270 days to 359 days, 28.8 %. 













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           Borrower income - Of the 486,287 loans from 2011-2014, 18.4%  
            were made in low-income neighborhoods. The ratios for other  
            neighborhood income levels: moderate-income, 45.4%;  
            middle-income, 21.1%; and upper-income, 4.4%. The annual  
            low-income ratio increased from 16.6% in 2011 to 19.5% in  
            2014. 


           Loan purpose - Of the 164,300 loans made in 2014, borrowers  
            took out 45% (74,026) to build or repair credit. Ratios for  
            other purposes: medical or other emergency, 18.4%; pay bills,  
            12.7%; consolidate debt, 5.7%; non-vehicle purchase, 5.3%;  
            vehicle purchase, 2.7%; vehicle repair, 2.6%; other, 6.4%. 
           
          Prior and Related Legislation:   

          1)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.  

          2)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  











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            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.  

          3)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.  

           Suggested amendment.


           Existing law requires DBO to post a report on their website, on  
          or before January 1, 2017 summarizing the utilization of the  
          Pilot and a recommendation on whether the Pilot should continue  
          beyond January 1, 2023.  The January 1, 2017 date was in statute  
          based on the existing sunset date of January 1, 2018 which this  
          bill now proposes to extend.  If it is appropriate to extend the  
          Pilot for five more years beyond 2018 it would also be suitable  
          to be able to collect as much data as possible so that policy  
          makers can make a determination in the future whether to extend  
          or make permanent the pilot beyond 2023.  Therefore, staff  
          recommends that that in addition to the January 1, 2017 report,  
          that an additional report be added for July 1, 2020.  This will  
          give policy makers additional data and provide DBO sufficient  
          time to compile the data for the report.


             1)   Page 10, line 36 after "2017" insert "and again, on or  
               before July 1, 2020."













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          REGISTERED SUPPORT / OPPOSITION:




          Support


          Oportun (Sponsor)


          African-American Farmers of California


          Avanza Inc. (Listo!)


          Brightline Defense Project


          California Teamsters Public Affairs Council


          California Urban Partnership


          Capitol Good Fund


          Casa Familiar


          Center for Financial Services Innovation (CFSI)


          Credit Shop


          Fathers & Families of San Joaquin (FFSJ)











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          Greenlining Institute


          Hispanic 100


          INSIKT


          Latin Business Association (LBA)


          National City Chamber of Commerce


          National Federation of Filipino American Association (NaFFAA)


          National Hmong American Farmers


          Nisei Farmers League (NFL)


          Northern California Community Loan Fund


          Otay Mesa Chamber of Commerce


          Pacoima Beautiful


          Pew Charitable Trusts


          Salvadoran American Leadership and Educational Fund (SALEF)











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          Service Employees International Union (SEIU)


          Silicon Valley Community Foundation (SVCF)


          Silicon Valley Leadership Group


          United Domestic Workers of America/AFSCME Local 3930


          Western Center on Law & Poverty




          Opposition


          None on file.




          Analysis Prepared by:Mark Farouk / B. & F. / (916)  
          319-3081





















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