BILL ANALYSIS Ó SENATE COMMITTEE ON BANKING AND FINANCIAL INSTITUTIONS Senator Steven Glazer, Chair 2015 - 2016 Regular Bill No: SB 1290 Hearing Date: April 6, 2016 ----------------------------------------------------------------- |Author: |Mendoza | |-----------+-----------------------------------------------------| |Version: |March 28, 2016 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Eileen Newhall | | | | ----------------------------------------------------------------- Subject: Commissioner of Business Oversight: California Finance Lenders Law: California Deferred Deposit Transaction Law SUMMARY Requires the Commissioner of Business Oversight (commissioner) to conduct consolidated examinations of licensees under common ownership, as specified. DESCRIPTION 1. Requires the commissioner, when conducting an examination of a finance lender or broker that is under common ownership with one or more other persons licensed under the California Finance Lenders Law (CFLL), to conduct a single consolidated examination that includes all persons licensed under the CFLL, which share the same common ownership. 2. Requires the commissioner, when conducting an investigation of a person licensed under the California Deferred Deposit Transaction Law (CDDTL), which is under common ownership with one or more other persons licensed under the CDDTL, to conduct a single consolidated examination that includes all persons licensed under the CDDTL, which share the same common ownership. 3. Defines common ownership for purposes of the bill as two or more licensees that are wholly owned by the same person. 4. Authorizes CFLL and CDDTL licensees that are examined as SB 1290 (Mendoza) Page 2 of ? part of a consolidated examination to electronically submit all books, accounts, papers, records, and files required by the commissioner. 5. Notwithstanding the aforementioned provisions, expressly retains the commissioner's right to conduct periodic onsite investigations and examinations of CFLL and CDDTL licensees' physical locations for business. EXISTING LAW 6. Provides, under the CFLL, that, for the purpose of discovering violations of the CFLL or securing information required by the commissioner in the administration and enforcement of the CFLL, the commissioner may at any time investigate the loans and business, and examine the books, accounts, records, and files used in the business of every person engaged in the business of a finance lender or broker, whether the person acts or claims to act as principal or agent, or under or without the authority of the CFLL. Further provides that, for purposes of examination, the commissioner and his or her representative have free access to the offices and places of business, books, accounts, papers, records, files, safes, and vaults of all persons being examined (Financial Code Section 22701). 7. Provides, under the CDDTL, that, for the purpose of discovering violations of the CFFTL or securing information required by the commissioner in the administration and enforcement of the CDDTL, the commissioner may at any time, but not less than once every two years, investigate the business of deferred deposits, and examine the books, accounts, records, and files used in the business of deferred deposit transactions, of every person engaged in the business of deferred deposit transactions, whether the person acts or claims to act as a principal or an agent, or without the authority of this division. Further provides that, tor the purpose of examination, the commissioner and his or her representatives have free access to the offices and places of business, books, accounts, papers, records, files, safes, and vaults of all persons being examined (Financial Code Section 23046). SB 1290 (Mendoza) Page 3 of ? 8. Requires each licensee under the CFLL and CDDTL to pay to the commissioner the cost of each examination of that licensee (Financial Code Sections 22707 and 23046). COMMENTS 1. Purpose: This bill is intended to streamline licensee examinations and improve administrative efficiency under both the CFLL and CDDTL, without reducing consumer protection or increasing examination costs. 2. Background and Discussion: According to the author's office, the Department of Business Oversight (DBO; the Department) does not consistently consolidate its supervisory examinations. Thus, even if one licensee under the CFLL is under common ownership with other CFLL licensees, each of the licensed locations is examined independently. The same is reportedly true under the CDDTL. Because CFLL and CDDTL licensees are required to reimburse DBO for DBO's costs to examine licensees, the piecemeal approach to examinations not only results in significant travel time and expense for DBO staff, who must travel to each location being examined, but also results in significant costs to licensees. This bill will streamline examinations of CFLL and CDDTL licensees in two ways. First, it will require DBO to conduct consolidated examinations of licensees under common ownership. Rather than examining each licensed location separately, DBO will be required to examine all licensed locations under common ownership at the same time as part of a consolidated exam. Second, this bill will authorize licensees subject to consolidated examinations to electronically submit all documents required by DBO in connection with that examination. It is unclear how significantly this bill will impact DBO's examination protocols. According to DBO, the Department does not gather information from its CFLL or CDDTL licensees regarding their common ownership; thus, examinations are not conducted on this basis. However, the Department does conduct companywide examinations, during which it examines all of the locations of the same company at the same time. Typically, companywide examinations take place at a SB 1290 (Mendoza) Page 4 of ? licensee's main office, and Department staff visit a select number of branch offices and locations (not all of them). DBO indicates that it commonly conducts companywide examinations under the CDDTL. The Department has not historically conducted companywide examinations under the CFLL, but has recently begun doing so and intends to continue. According to DBO, companywide examinations will soon become as common under the CFLL as they are under the CDDTL. However, in its communications with Committee staff, DBO stressed the importance of the Department continuing to perform physical examinations at licensed locations under certain circumstances. Physical examinations are warranted if complaints are received against a specific licensed location or if that licensed location had multiple violations during its prior examination. Physical examinations can also help eliminate delays in communication between DBO and its licensees, allow DBO examiners to view how a branch's day-to-day business is run, and allow DBO examiners to speak with branch employees. It is also unclear how significantly this bill will impact electronic communications between DBO and its CFLL and CDDTL licensees, because DBO already collects considerable information related to examinations electronically from its licensees. According to DBO, both CFLL and CDDTL licensees are already authorized to electronically submit loan information to DBO in connection with regulatory examinations, as well as responses to examination questions and follow-up emails and letters related to examinations. 3. Unintended Consequences?: As discussed above, this bill is intended to streamline licensee examinations under both the CFLL and CDDTL without reducing consumer protection or increasing examination costs. Logically, examining all branch offices of the same licensee together makes sense, as all of those branches should be operating under the same policies and procedures, and a consolidated examination should allow DBO to review those policies and procedures once, rather than once each time a branch office is examined. Authorizing licensees to electronically submit information required by DBO in lieu of having DBO examiners physically travel throughout the state from branch office to SB 1290 (Mendoza) Page 5 of ? branch office also appears to be a sensible, cost-saving measure. However, it is also possible that the consolidated examinations this bill would require could have unintended consequences for both consumers and licensees. For example, violations that might be apparent to an examiner during a site visit could go undetected if an examiner conducts an examination entirely within the confines of his or her office by reviewing electronically submitted files. Furthermore, depending on the way in which DBO implements consolidated examinations, licensee examination costs could go up, rather than down. Amendments are suggested below to test the concept of consolidated examinations, before locking this examination approach into either the CFLL or the CDDTL permanently. 4. Summary of Arguments in Support: California Financial Service Providers, Check Into Cash, and Check 'n Go support the bill, because of the efficiencies it would allow. They believe that the bill will "substantially cut down on DBO administrative costs, thus allowing the DBO to free up resources for other critical investigatory needs and reduce costs of licensees without compromising compliance." 5. Summary of Arguments in Opposition: None received. 6. Amendments: a. If this Committee wishes to test the use of consolidated examinations under the CFLL and CDDTL, staff suggests doing so on a trial, rather than a permanent basis, and requiring DBO to report back to the Legislature regarding the extent to which consolidated examination protocols are working as intended. Because DBO seeks to examine each CFLL licensee once every four years and is required to examine each CDDTL licensee once every two years, staff suggests sunsetting the bill after four years (on January 1, 2021) and requiring DBO to report to the Legislature by January 1, 2020 regarding the impacts of the consolidated examination procedure on consumers and licensees. SB 1290 (Mendoza) Page 6 of ? LIST OF REGISTERED SUPPORT/OPPOSITION Support California Financial Service Providers Check 'n Go Check Into Cash Opposition None received -- END --