BILL ANALYSIS                                                                                                                                                                                                    



                                                                     SB 984


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          SENATE THIRD READING


          SB  
          984 (Hueso)


          As Amended  August 15, 2016


          Majority vote


          SENATE VOTE:  39-0


           ------------------------------------------------------------------ 
          |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   |                   |








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          |                |     |                       |                   |
          |                |     |                       |                   |
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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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