BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 1146 (Florez) Hearing Date: April 7, 2010
As Amended: March 22, 2010
Fiscal: Yes
Urgency: No
SUMMARY Would authorize the creation of a four-year, statewide
pilot program under the California Finance Lenders Law (CFLL),
to increase the availability of affordable, low dollar value
loans. Would authorize licensed finance lenders accepted by the
Commissioner of Corporations for admission into the pilot
program to charge higher rates and fees than currently allowed
under the CFLL and to use the services of one or more finders,
as defined.
DIGEST
Existing law
1. Provides for the California Finance Lenders Law (CFLL),
administered by the Department of Corporations (DOC), which
authorizes the licensure of finance lenders, who may make
secured and unsecured consumer and commercial loans (Financial
Code Sections 22000 et seq.). The following are the key rules
applied to consumer loans made pursuant to the CFLL:
a. CFLL licensees who make consumer loans under $2,500 are
capped at interest rates which range from 12% to 30% per
year, depending on the unpaid balance of the loan (Sections
22303 and 22304). Administrative fees are capped at the
lesser of 5% of the principal amount of the loan or $50
(Section 22305);
b. In addition to the requirements in "a" above, CFLL
licensees who make consumer loans under $5,000 are prohibited
from imposing compound interest or charges (Section 22309);
are limited in the amount of delinquency fees they may impose
(Section 22320.5; delinquency fees are capped at a maximum of
$10 on loans 10 days or more delinquent and $15 on loans 15
days or more delinquent); are required to prominently display
SB 1146 (Florez), Page 2
their schedule of charges to borrowers (Section 22325); are
prohibited from splitting loans with other licensees (Section
22327); are prohibited from requiring real property
collateral (Section 22330), and are limited to a maximum loan
term of 60 months plus 15 days (Section 22334);
c. In addition to the requirements in "a" and "b" above,
CFLL licensees who make consumer loans under $10,000 are
limited in their ability to conduct other business activities
on the premises where they make loans (Section 22154); must
require loan payments to be paid in equal, periodic
installments (Section 22307); and must meet certain standards
before they may sell various types of insurance to the
borrower (Sections 22313 and 22314);
d. Generally speaking, the terms of loans of $10,000 or
above are not restricted under the CFLL;
2. Authorizes the licensure of finance brokers under the CFLL, and
defines a finance broker as any person who is engaged in the
business of negotiating or performing any act as a broker in
connection with loans made by a finance lender (Section 22004);
3. Prohibits a CFLL licensee from using advertising copy after its
use has been disapproved by the Commissioner of Corporations
(Commissioner), and the Commissioner has notified the licensee
in writing of the disapproval;
4. Authorizes the Commissioner to require CFLL licensees to
maintain a file of all advertising copy for a period of 90 days
from the date of its first use and to make that file available
to the Commissioner, upon request.
This bill
1. Would authorize a four-year, statewide pilot program under
the CFLL, under which licensees approved by the Commissioner
for entry into the program could do all of the following:
a. Offer a new type of consumer loan under the CFLL,
with a new (higher) rate schedule, a new (higher) set of
allowable delinquency fees, new (lower) costs to file a
claim against a borrower in small claims court, and a new
series of conditions on the licensee, as follows:
i. The interest rate of each loan would be
SB 1146 (Florez), Page 3
capped at 3% per month, simple interest, on the
unpaid principal balance;
ii. Origination fees would be capped at the
lesser of 5% of the principal amount of the loan or
$75;
iii. Delinquency fees would be capped at an
amount not to exceed one of the following amounts:
$20 for a delinquency of seven days or more, and $25
for a delinquency of fourteen days or more;
iv. The cost for a pilot project participant
to file a small claims action to enforce a pilot
project loan contract would be $25 (rather than a
maximum of $100 per action, depending on the size of
the loan and the number of actions filed during the
prior twelve months);
v. The loan would have to have a term of at
least 90 days, and a principal amount between $250
and $2,499 upon origination;
vi. The licensee would have to disclose the
annual percentage rate of the loan, the periodic
payment amount, and the total finance charge to the
borrower at the time of application;
vii. The licensee would also have to inform
the consumer that he or she could rescind the loan
by returning the loan principal by the end of the
business day following the day on which the loan was
consummated;
viii. Before disbursing the loan proceeds, the
licensee would have to either offer a credit
education program or seminar to the borrower or
invite the borrower to a credit education program or
seminar offered by an independent third party. The
education program or seminar would have to have been
previously approved by the Commissioner. The
borrower would not be required to attend these
education programs or seminars;
ix. The licensee would have to report each
borrower's payment performance to at least one of
SB 1146 (Florez), Page 4
the three major credit bureaus in the U.S.;
x. The licensee would have to underwrite the
loan, and could not make the loan, if it determined
that a borrower's total monthly debt service
payments, across all outstanding forms of credit
known to the licensee, and including the loan,
exceeded 50% of the borrower's gross monthly income
at the time of loan origination;
b. Utilize the services of one or more finders, as
specified;
i. A finder would be defined for purposes of
the bill as a person who brings a licensee and a
prospective borrower together for the purpose of
negotiating a loan contract;
ii. Finders would be authorized to engage in
one or more of a list of eight tasks, which are
enumerated in the bill, and which generally relate
to disseminating loan-related advertising and
informational materials, collecting information from
prospective borrowers, filling out loan applications
for prospective borrowers, arranging for and
facilitating credit checks on prospective borrowers,
and serving as intermediaries between prospective
borrowers and CFLL licensees;
2. Would prohibit finders from doing any of the following:
a. Providing counseling or advice to a borrower or
prospective borrower;
b. Providing loan-related marketing material that had
not been previously approved by a CFLL licensee to a
borrower or prospective borrower;
c. Interpreting or explaining the relevance,
significance, or effect of the marketing materials or
loan documents the finder provides to a borrower or a
prospective borrower;
3. Would provide that a finder meets the definition of a
broker under the CFLL, if it does any of the following:
SB 1146 (Florez), Page 5
a. Negotiates the price, length, or any other loan term
with a prospective borrower;
b. Advises a prospective borrower or licensee regarding
any loan term;
c. Offers information about the same borrower to more
than one licensee, unless the borrower has been formally
rejected in writing by one of the licensees, before the
borrower's information is provided to the other licensee;
4. Would prohibit licensees from passing on any finder's fees
to borrowers;
5. Would require all arrangements between a licensee and a
finder to be set forth in a written agreement between the
parties, and would require each written agreement to contain
a provision establishing that the finder agrees to comply
with all regulations established by the Commissioner
regarding the activities of finders, and agrees to give the
Commissioner access to all of the finder's books and records
that pertain to the finder's operations under its agreement
with the licensee;
6. Would require a licensee that utilizes the services of a
finder to provide specified information about the finder to
the Commissioner within 10 days of entering into a contract
with that finder. Licensees would also have to pay an
annual finder registration fee to the Commissioner and
submit an annual report to the Commissioner, which includes
information pertaining to the finder and the licensee's
relationship and business arrangements with the finder;
7. Would authorize the Commissioner to examine the operations
of each licensee and each finder, attribute the costs of
those examinations to the licensee, and attribute any
violation of the CFLL by a finder or a finder's employee to
the CFLL with whom the finder entered into an agreement;
8. Would require the Commissioner to submit a report to the
Legislature on or before January 1, 2014, in which he
summarizes utilization of the pilot program by CFLL
licensees and makes recommendations regarding whether the
program should be continued;
9. Would increase the length of time that the Commissioner may
SB 1146 (Florez), Page 6
require a CFLL licensee to retain advertising copy from 90
days to two years;
10. Would authorize the Commissioner to direct any CFLL
licensee to submit advertising copy for review prior to its
use.
SB 1146 (Florez), Page 7
COMMENTS
1. Purpose of the bill To help underbanked Californians obtain
affordable loans and build credit, with the aim of helping
them enter the financial mainstream.
2. Background This bill is the brainchild of James Gutierrez,
President and CEO of a Mountain View, California-based
company called Progreso Financiero, or Progress Financial.
Initially hatched by Gutierrez as a research project at
Stanford's Graduate School of Business, Progreso Financiero
was founded by Gutierrez in 2005, with the aim of offering
underbanked Latinos a responsible alternative to payday
loans. Using a CFLL license, Progreso Financiero currently
offers short-term, unsecured loans of $250 to $2,500, to
Latino borrowers who lack credit scores. Loans are made
through 27 retail locations in California, all of which are
inside ethnic supermarkets and ethnic pharmacies. To date,
Progreso has made 40,000 loans totaling $36 million. The
company is currently making slightly over 3,000 loans per
month.
Consistent with its authority under the CFLL, Progreso charges
borrowers average annual percentage rates of 36% (a number
calculated by adding Progreso's 26% annual interest rate to
origination fees allowable under the CFLL). Progreso offers
lower rates to borrowers on subsequent loans. The typical
loan obtained by a Progreso Financiero borrower is a
fully-amortizing installment loan of $900, and a nine month
duration.
One of the key components of Progreso Financiero's business
model is the practice of reporting borrower payments to a
major credit bureau, to help its customers establish a
credit history. In discussions with Committee staff,
Progreso states that a customer who lacks a credit score
before obtaining a Progreso loan can establish a FICO score
of up to 638, after successfully paying off two Progreso
loans without experiencing a delinquency, and up to 660
after successfully paying off three Progreso loans without a
delinquency.
Although its current products are limited to relatively low
dollar value, unsecured installment loans, Progreso has
plans to expand into additional financial markets.
According to information provided by the company, it plans
SB 1146 (Florez), Page 8
to offer FDIC-insured, reloadable debit cards during the
second quarter of 2010, savings options and life insurance
policies by the end of 2010, and, eventually, investment
accounts. These new product rollouts are intended to allow
Progreso to branch out beyond helping build its customers'
credit histories, and into transactional security,
asset-building, and personal security for borrowers.
To date, Progreso has secured its funding from venture capital
firms. It is not yet profitable, but hopes to become
profitable before the end of 2010.
3. What is being proposed, and why? As noted above, Progreso's
loans are currently offered at average annual percentage
rates of 36%. The rate structure proposed in this bill
would allow loans to be made at higher annual percentage
rates, ranging from 39% (for high dollar value loans
amortized over 24 months) to 67% (for low dollar value loans
amortized over three months).
Many of the requirements in SB 1146 are based on Progreso's
business model and its desire to begin using retail
employees of department stores to help it market its loans.
Progreso already underwrites loans, and will not lend to a
borrower if their overall debt to income ratio, including
the Progreso loan, will exceed 50%. The company schedules
loan payments to coincide with borrowers' paychecks,
provides customers with a full payment schedule at loan
origination showing the dates and amounts of all payments,
provides credit education to borrowers at the time of loan
origination, and reports all loan payments made by borrowers
to Experian. Progreso also makes all of its loan agreements
and credit education materials available in Spanish, the
first language of most of its borrowers.
Currently, Progreso uses word-of-mouth and booths inside
supermarkets to attract potential customers, and is testing
direct mail. The company does not advertise via print,
broadcast, or electronic media. To date, DOC has not
allowed Progreso to use unlicensed finders, to help it
acquire customers. However, as envisioned by Mr. Gutierrez,
and as proposed in this bill, Progreso would use finders
that act in much the same way a retail clerk acts at a
department store, when he or she offers a customer the
opportunity to apply for a store-branded credit card.
SB 1146 (Florez), Page 9
Instead of offering a customer the opportunity to apply for a
store-branded credit card, the retail clerk could offer the
customer an opportunity to apply for a Progreso Financiero
loan. If a customer chooses to apply, the clerk would
collect preliminary information from the potential borrower
at the point of sale, and input that information into a
Progreso prequalification program. If Progreso's
prequalification program rejects the potential borrower, the
clerk would inform the customer of their rejection. If
Progreso's prequalification program suggests that the
customer could qualify to become a Progreso borrower, the
clerk would collect additional, more detailed information
from the customer. Customers would then be asked to provide
personal identification, proof of address, and a paycheck
stub, all of which the retail clerk could verify at the time
of loan application, or subsequently, if the borrower had to
gather the information from home before returning.
Mr. Gutierrez sees the use of finders as a way to lower his
costs of customer acquisition. The lower his customer
acquisition costs, the easier time he will have achieving
and sustaining profitability. He cites customer acquisition
as the largest cost of maintaining a low dollar value loan
program.
4. Support Progreso Financiero is seeking the changes in SB
1146, in order to help it grow its own business and to help
attract other, similar businesses into the low dollar loan
market. Mr. Gutierrez sees the loans his company offers as
a responsible alternative to payday loans for individuals
who have not entered the financial mainstream.
In support of his lending model, Mr. Gutierrez notes that
Progreso's current loan terms are consistent with the
Guidelines for Affordable Small-Dollar Loans, issued by the
Federal Deposit Insurance Corporation (FDIC) as part of its
two-year pilot project to encourage small dollar loans by
banks. The company is also a Community Development
Financial Institution, certified by the U.S. Treasury.
Furthermore, in recognition of his efforts to promote access
to affordable credit in minority communities, Mr. Gutierrez
has been asked by FDIC Chair Sheila Bair to participate on
her Small Dollar Loan Advisory Committee, and is frequently
invited to speak at conferences geared toward banking the
unbanked and financially empowering the underbanked.
SB 1146 (Florez), Page 10
5. Opposition The Center for Responsible Lending (CRL),
California Reinvestment Coalition, and Consumers Union are
all opposed to the bill, unless it is amended. Although the
organizations strongly support the goal of having a wider
availability of affordable and responsible small dollar
value loan products in the marketplace, the organizations
are concerned that SB 1146 would authorize substantial
expansions in fees and marketing channels for finance
lenders, without providing enough checks against abuse.
The three consumer advocacy organizations are requesting the
following six amendments, some of which they would like to
apply to all consumer loans made under the CFLL, and some of
which are focused only on the pilot program being proposed
by SB 1146. The amendments these organizations are seeking
include the following:
1) Amend the CFLL to adopt a tiered interest rate structure,
where interest rates decline as the loan balance grows. The
organizations advocate adopting the rate structure used in
North Carolina, which allows for a maximum interest rate of
30% on the first $1,000 borrowed and a maximum interest rate
of 18% on loan amounts above $1,000. By amending the entire
CFLL, rather than just the pilot program proposed in SB
1146, this amendment would impose maximum interest rates on
CFLL loans above $2,500, where interest rate caps do not
currently exist.
2) Limit pilot program origination fees to one full fee per
borrower, per year, per lender, regardless of whether the
lender is originating a new loan or refinancing an existing
loan for the borrower. CRL would propose that a credit
report fee of up to $10 per loan could be charged for each
new pilot project loan for which a credit report is
obtained.
3) Allow pilot program lenders to charge one late fee per loan,
equal to the lesser of 10 percent of the late payment or $20
per payment cycle.
4) Require declining interest rates to be provided under the
pilot project, to repeat borrowers, who pay off their pilot
project loans in a timely fashion.
5) Institute a tiered minimum loan term for all CFLL loans,
with a minimum of 90 days for loans of up to $500, 120 days
SB 1146 (Florez), Page 11
for loans between $500 and $1,500, six months for loans
between $1,500 and $2,500, and one year for loans above
$2,500.
6) Prohibit the use of finders. Continue, instead, to allow
CFLL-licensed brokers to generate leads for CFLL lenders.
In advocating against the use of finders, the consumer groups
express concern that finders could aggressively market their
products to people who may not be shopping for a loan. The
consumer groups are also concerned that DOC will lack the
capacity to monitor, regulate, and enforce infractions
committed by large chain retailers, particularly those with
high staff turnover. In particular, the groups are unclear
how DOC would monitor the prohibition against finders
providing advice or counseling to prospective borrowers, or
against marketing of products from multiple licensees.
Regarding the use of finders, Consumers Union states, "We
believe that good financial products worth having sell
themselves. They don't need to be aggressively marketed to
consumers by paying commissions to those whose primary
interest is in generating a commission by completing another
sale?Over the last decade and a half, we have witnessed the
serious financial consequences experienced by consumers when
commission-based salespersons sell them higher-cost products
that create more debt. Rather than building wealth, they
plunge consumers deeper into a cycle of debt."
CRL is also seeking an amendment to require underwriting of all
loans made under the CFLL.
6. Questions
a. If Progreso is likely to achieve profitability
later this year under its current fee schedule, should
the company be allowed to charge higher interest
rates, origination fees, and delinquency fees than
allowed under current law?
b. Will other companies use the availability of
the proposed pilot project to enter the small dollar
loan market, or will this bill benefit only one
company?
c. California licensed finance lenders made
SB 1146 (Florez), Page 12
approximately 97,000 loans with principal amounts
under $2,500 during 2008 (the most recent year for
which loan level data are available). They made these
loans under the current rate and fee schedule. Will
some of the lenders who made these loans begin
charging higher rates and fees, if this bill becomes
law? Or will the bill attract new lenders, who did
not previously lend under the authority of the CFLL?
d. How much will it cost for DOC to administer
the pilot program? Will the fees that DOC charges
pilot program applicants and participants to offset
its administrative costs be high enough to discourage
companies from applying to participate in the pilot
program?
SB 1146 (Florez), Page 13
7. Suggested Amendments
a. Page 8, line 11, correct an unintentional
drafting error by striking "do not"
POSITIONS
Support
Progreso Financiero (sponsor)
Oppose
California Reinvestment Coalition
Center for Responsible Lending
Consumers Union
Consultant: Eileen Newhall (916) 651-4102