BILL ANALYSIS Ó
SB 984
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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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