BILL ANALYSIS Ó
SB 984
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SENATE THIRD READING
SB
984 (Hueso)
As Amended August 15, 2016
Majority vote
SENATE VOTE: 39-0
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+-----------------------+-------------------|
|Banking |12-0 |Dababneh, Travis | |
| | |Allen, Achadjian, | |
| | |Bonilla, Brown, Chau, | |
| | |Gatto, Hadley, Kim, | |
| | |Low, Ridley-Thomas, | |
| | |Mark Stone | |
| | | | |
|----------------+-----+-----------------------+-------------------|
|Appropriations |20-0 |Gonzalez, Bigelow, | |
| | |Bloom, Bonilla, Bonta, | |
| | |Calderon, Chang, Daly, | |
| | |Eggman, Gallagher, | |
| | |Eduardo Garcia, | |
| | |Holden, Jones, | |
| | |Obernolte, Quirk, | |
| | |Santiago, Wagner, | |
| | |Weber, Wood, McCarty | |
SB 984
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SUMMARY: Extends the Pilot Program for Increased Access to
Responsible Small Dollar Loans (Pilot) until January 1, 2023.
1)Eliminates a requirement, due to poor response rate, that the
Department of Business Oversight (DBO) conduct a survey of
consumers who utilize the Pilot.
2)Requires DBO to post a on their Internet Web site a report,
annually on or before July 1, 2017 to July 1, 2021, inclusive
summarizing utilization of the Pilot.
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. (Financial Code
Section (FIN) 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 22303, 22304.)
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
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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 22305, 22320.5, and 22325.)
4)Provides that until January 1, 2018, authorizes the Pilot
within the CFLL. (FIN 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 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 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,
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 22370 (c).)
7)Provides that a licensee may require reimbursement for the
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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 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
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 22370 (g).)
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 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 22371.)
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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 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
duration of the loan, when the finder receives borrower loan
payments on the licensee's behalf. (FIN 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 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 22377.)
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16)Requires the Commissioner to examine each licensee that is
accepted into the Pilot at least once every 24 months. (FIN
22379.)
17)Requires the Commissioner to file reports summarizing the
utilization of the Pilot, and specifies information to be
contained within the reports. (FIN 22380.)
18)Provides that the Pilot shall remain in effect only until
January 1, 2018, and as of that date is repealed. (FIN
22381.)
FISCAL EFFECT: According to the Assembly Appropriations
Committee, moderate costs of approximately $150,000 annually
through 2022 for DBO to continue administrative, evaluation and
enforcement activities related to the Pilot Program, to be
recovered through the authority to charge fees. (State
Corporations Fund)
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
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significant cost. In 2010 the legislature passed SB 1146
[(Florez), Chapter 640] 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 [(Hill), Chapter 467] in 2013
and again with SB 235 [(Block), Chapter 505] 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 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.
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:
1)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.
2)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.
3)Dollar amounts - Loans made in the $300-$499 range fell by
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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.
4)Interest rates - Of the 6,560 loans made in the $300-$499
range over the period, 73.9% carried an annual percentage rate
(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%.
5)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.
6)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.
7)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.
8)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%.
9)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.
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10)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%.
Survey & Study
Existing law requires DBO to conduct a random sample survey of
borrowers who have participated in the program to obtain
information regarding the borrowers' experience and licensees'
compliance with this article. According to information received
from DBO, over 60,000 surveys have been sent out to borrowers
under the pilot program with less than a hundred responses
received. This dismal response rate does not provide enough
data to be statistical significant and the mailing, preparation
and review of the limited survey data costs upwards of one
hundred thousand dollars. For these reasons, this bill would
eliminate the survey requirement.
While the survey requirement is proposed for elimination, this
bill would expand the number of summary reports required on the
Pilot program from one more report in 2017 to an annual report
every year from 2017 to 2022.
Analysis Prepared by:
Mark Farouk / B. & F. / (916) 319-3081 FN:
0004019
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