BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 1146 (Florez)
As Amended April 8, 2010
Hearing Date: April 20, 2010
Fiscal: Yes
Urgency: No
SK:jd
SUBJECT
Finance Lenders: Finders: Small Loans
DESCRIPTION
This bill would create the Pilot Program for Affordable
Credit-Building Opportunities (Pilot Program), a four-year,
statewide pilot program under the California Finance Lenders Law
(CFLL) that would allow participants to offer a new type of
small-dollar consumer loan subject to specified requirements.
That loan would permit the licensee to charge higher interest
rates, origination fees, and delinquency fees than permitted
under existing law. The loans, which could be originated in an
amount from $250 to $2,500, must be underwritten by the
licensee, as specified, and the licensee must report a
borrower's payment performance to at least one of the three
major credit bureaus.
Licensees participating in the program would be allowed to use
the services of a "finder" who would bring the licensee and a
prospective borrower together for the purpose of negotiating a
loan contract, and the Department of Corporations (DOC) would be
required to submit a report to the Legislature with specified
information concerning the Pilot Program. The bill would also
provide that the filing fee shall be $25 in any small claims
action filed to enforce a Pilot Program loan.
(This analysis reflects author's amendments to be offered in
Committee.)
BACKGROUND
The Department of Corporations (DOC) administers the CFLL and
(more)
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licenses finance lenders who may make secured and unsecured
consumer and commercial loans under that law. The DOC's "2008
Annual Report on the Operation of Finance Companies Licensed
under the CFLL" indicates that in 2008, licensees made 96,665
consumer loans under $2,500. Of this amount, 81,790 were
unsecured loans. In contrast, during that same time period,
payday lenders made over 11 million payday loans. (DOC, "2008
Annual Report on the Operation of Deferred Deposit Originators
under the California Deferred Deposit Transaction Law.") This
bill is intended to create an alternative to payday loans by
establishing a Pilot Program until January 1, 2015 that would
allow CFLL licensees to offer a new type of small-dollar
consumer loan that meets specified requirements. This bill is
based on the small-dollar loan model of Progreso Financiero
(Progreso), a company based in Mountain View, California which
offers short-term, unsecured loans of $250 to $2,500 directed to
Latino borrowers who lack credit scores. Progreso makes its
loans through 27 retail locations in California, all of which
are located inside ethnic supermarkets and pharmacies. So far,
the company, created in 2005, has made 40,000 loans totaling $36
million with an average loan of $900 and an average term of nine
months.
CHANGES TO EXISTING LAW
1.Existing law , the CFLL, caps interest rates that may be
charged by CFLL licensees who make consumer loans under
$2,500. Those caps range from 12 percent to 30 percent per
year, depending on the unpaid balance of the loan. (Fin. Code
Secs. 22303, 22304.)
Existing law also caps administrative (origination) fees that
may be charged for such loans at the lesser of five percent of
the principal amount of the loan or $50. (Fin. Code Sec.
22305.)
Existing law 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. (Fin. Code Sec. 22320.5.) Existing law requires
CFLL lenders to prominently display their schedule of charges
to borrowers (Fin. Code Sec. 22325.)
This bill would authorize, until January 1, 2015, a four-year,
statewide Pilot Program under the CFLL that would allow
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licensees accepted into the program to offer a new type of
small-dollar consumer loan under the CFLL subject to the
following:
the loan has a minimum principal amount upon origination
of $250 and is not more than $2,500, as specified;
the interest rate of each loan would be capped at 30
percent for the unpaid balance of the loan up to and
including $1,000 and 26 percent for the unpaid balance of
the loan in excess of $1,000;
delinquency fees would be capped at an amount not to
exceed: (1) $15 for a delinquency of seven days or more; or
(2) $20 for a delinquency of 14 days or more;
origination fees would be capped at the lesser of five
percent of the principal amount of the loan or $65. A
licensee would be prohibited from charging the same
borrower more than one origination fee in any six-month
period;
the loan term is: (1) 90 days for loans whose principal
balance upon origination is less than $500; (2) 120 days
for loans whose principal balance upon origination is at
least $500, but is less than $1,500; and (3) 180 days for
loans whose principal balance upon origination is at least
$1,500;
the licensee must report each borrower's payment
performance to at least one of the three major credit
bureaus;
the licensee must underwrite each loan and may not make
a loan if it determines that the borrower's total monthly
debt service payments exceed 50 percent of the borrower's
gross monthly income. In underwriting the loan, the
licensee must assess the borrower's willingness and ability
to repay and must validate a borrower's outstanding debt
obligations, as specified; and
prior to disbursement of the loan funds, the licensee
must either offer to the borrower a credit education
program that has been reviewed and approved by the
commissioner, or invite the borrower to such a program that
has been reviewed and approved by the commissioner.
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This bill would permit any CFLL licensee to participate in the
program provided that the licensee is in good standing with
the commissioner and has no outstanding enforcement actions or
deficiencies at the time of its application.
This bill would permit a licensee participating in the Pilot
Program to be able to use the services of one or more
"finders," defined to mean a person who brings a licensee and
a prospective borrower together for the purpose of negotiating
a loan contract.
This bill would permit finders to perform certain specified
services for a licensee, including, among other things: (1)
distributing or publishing preprinted, preapproved written
materials relating to the licensee's loans; (2) providing
written factual information about loan terms, conditions, or
qualification requirements to a prospective borrower; (3)
entering the borrower's information into a preprinted or
electronic application; (4) assembling credit applications for
submission to the finance lender; and (5) contacting the
licensee to determine the status of the loan application.
This bill would prohibit a finder from doing any of the
following:
providing counseling or advice to a borrower or
prospective borrower;
providing loan-related marketing material that has not
been previously approved by the licensee to the borrower;
and
interpreting or explaining the significance or effect of
any of the marketing materials or loan documents the finder
provides to the borrower.
This bill would place the following limitations on the
compensation that may be paid by a licensee to a finder: (1)
no fee may be paid to a finder in connection with a loan
application, until and unless the loan is consummated; (2) the
fee cannot be based upon the principal amount of the loan; and
(3) the fee cannot exceed $35 per consummated loan.
This bill would require the finder to provide a disclosure to
the prospective borrower stating that a fee may be paid by the
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licensee to the finder and containing the contact information
of DOC if the borrower wishes to make a complaint.
This bill would require a licensee that uses the services of a
finder to provide the commissioner with specified information
regarding those finders.
This bill would require that all arrangements between a
licensee and a finder must be set forth in a written agreement
between the parties which must contain a provision requiring
the finder to comply with all applicable regulations and
provides that the commissioner may examine the operations of
each licensee and finder to ensure compliance with the bill.
This bill would require the DOC to provide specified
legislative committees with a report by January 1, 2014
regarding the Pilot Program and would require that the report
contain specified information.
1.Existing law provides that the commissioner of DOC may require
a CFLL licensee to retain advertising copy for a period of 90
days from the date of its use. (Fin. Code Sec. 22166.)
Existing law prohibits advertising copy from being used after
its use has been disapproved by the commissioner and the
licensee is notified in writing. (Fin. Code Sec. 22165.)
This bill would increase the length of time licensees may be
required to retain advertising copy to two years and would
permit the commissioner to direct any licensee to submit
advertising copy to the commissioner for review prior to its
use.
2.Existing law provides for filing fees in small claims actions
and specifies increased filing fee amounts based on the dollar
amount of the demand and whether the party has filed more than
12 other small claims in the state within the previous 12
months.
This bill would provide that, notwithstanding those increased
amounts, in any action filed to enforce a contract entered
into pursuant to the Pilot Program, the filing fee shall be
$25.
COMMENT
1. Summary of proposed author's amendments
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The author and his sponsor are proposing a number of amendments
to the bill to attempt to address concerns raised by the
opposition and other interested stakeholders although in several
instances the concerns remain. These amendments do the
following:
a.Place the following three limitations on the compensation that
may be paid by a licensee to a finder: (1) no fee may be paid
to a finder in connection with a loan application, until and
unless the loan is consummated; (2) the fee cannot be based
upon the principal amount of the loan; and (3) the fee cannot
exceed $35 per consummated loan. This amendment was intended
to address concerns raised about the bill's provisions
regarding finders. It does not appear that this amendment
addresses the concern raised (See Comment 5 for further
discussion).
b.Require the finder to provide a disclosure to the prospective
borrower stating that a fee may be paid by the licensee to the
finder and containing the contact information of DOC if the
borrower wishes to make a complaint. The disclosure must be
in 10-point type and the finder must ask the prospective
borrower to, in writing, acknowledge receipt of the
disclosure. This amendment was intended to address concerns
raised about the bill's provisions regarding finders. There
may still be outstanding issues concerning the font size.
Additionally, concerns remain regarding the finders
provisions. (See Comment 5 for further discussion.)
c.Require that, in underwriting the loan, the licensee must
assess the borrower's willingness and ability to repay, and
must validate a borrower's outstanding debt obligations using
information from at least one of the three major credit
bureaus in order to assist in the calculation of the
borrower's monthly debt service ratio. This amendment was
intended to address concerns that the underwriting standards
in the bill did not sufficiently ensure that all Pilot Program
participants would be required to maintain strong underwriting
standards. It does not appear that this amendment addresses
the concern raised. (See Comment 7 for further discussion.)
d.Require the commissioner to audit each Pilot Program
participant at least once every 24 months as compared to the
current average of once every 48 to 60 months. This amendment
was intended to strengthen the bill's enforcement provisions.
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(See Comment 5 for further discussion.)
e.Require that the DOC report on the Pilot Program submitted to
the Legislature include additional detail and items of
information, including, among others: (1) the percentage of
borrowers whose credit scores increased between successive
loans and the average size of the increase; (2) the number of
borrowers who reside in a low-to-moderate income census tract;
and (3) the purpose of the loan (e.g., medical, other
emergency, vehicle repair, pay bills). This amendment was
added to address concerns that the report did not provide
sufficient information to allow for a meaningful review of the
program prior to its sunset. Additional items of information
may still be necessary. (See Comment 5 for further
discussion.)
f.Authorize the commissioner to terminate a contract between a
finder and a licensee, upon a determination that the finder
has violated the bill or implementing regulations. If the
commissioner determines that it is in the public interest, the
commissioner may bar the use of that finder by all Pilot
Program participants. This amendment was intended to
strengthen the bill's enforcement provisions.
g.Specify that the delinquency fees are capped at an amount not
to exceed $15 for a delinquency of seven days or more or $20
for a delinquency of 14 days or more. As currently in print,
the bill would cap delinquency fees at $20 for a delinquency
of seven days or more. The author and his sponsor proposed
this amendment to address concerns that the $20 late fee
should only be imposed after 15 days of delinquency or more.
h.Require that participants be in good standing with no
outstanding enforcement actions or deficiencies. This
amendment was added in order to address concerns that the bill
did not contain sufficiently protective admission standards
for the Pilot Program.
i.Specify that the current penalties in the CFLL apply to this
bill. This amendment was made to clarify the author's intent.
Additional issues are noted in Comment 9.
2. Stated need for the bill
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The author writes:
Enacted in the 1950's, based on statutes from the 1920's, the
CFL is archaic and needs reform. For example, its
restrictions on interest rates, fees, and marketing
partnerships for loans in the $250 to $2500 range effectively
discourages lenders from making loans that would otherwise be
a fair alternative to payday loans. As a result, today there
are very few fully amortizing, credit building loans in the
$250-$2500 range and even fewer providers. Instead, the vast
majority [of] CFL licensees only make loans above $2500,
precisely because there is no cap on interest rates for loans
over $2500. Lenders simply do not believe they can make a
profit below $2500, given current CFL law. Thus, if a lender
wants to make small loans, they become a pawn broker or payday
lender (who as an industry makes over 10 million loans to
California residents each year). The result: Californians
have only one option-pay-day loans-and no opportunity to build
or repair their credit. . . .
Californians need access to credit, now more than ever. But,
they also need alternatives that are safe and affordable,
provide credit education and help borrowers build credit. SB
1146 will hopefully allow consumers who need small loans an
alternative to a pay-day loan option, which likely causes more
of a financial burden when payments cannot be made.
3. Comparison with payday loans
The author and sponsor assert that the Pilot Program created by
this bill will provide consumers with an alternative to payday
loans. Under the bill, interest rates will be capped at 30
percent for the unpaid balance of the loan that is under $1,000
and 26 percent for the amount over $1,000. Payday loans, on the
other hand, can have exorbitant interest rates: according to
DOC's 2008 Annual Report, the average Annual Percentage Rate
(APR) was 416 percent.
Although the comparison with payday loans is appropriate, it is
not quite a strict apples-to-apples comparison for two reasons.
First, the Pilot Program would permit a licensee to offer a
small-dollar loan of $250 to $2,500. Payday loans, on the other
hand, are capped at $300 for the face value of the check (minus
the $45 fee, leaving the borrower with $255). As a result, a
borrower who needs a $200 loan cannot access the Pilot Program
and may then turn to a payday lender for assistance. On the
other hand, if the borrower could take out a more responsible
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longer-term loan for $900 under the program, he or she is
arguably less likely to need to turn to a payday loan. Second,
payday loan borrowers must have bank accounts. The Pilot
Program, however, does not require that a prospective borrower
have a bank account and, in fact, contemplates that a number of
borrowers who are able to obtain loans under the program are
unbanked, that is, they do not have bank accounts. Progreso has
indicated that approximately 30 percent of its customers do not
have bank accounts, while 35 percent have bank accounts, but
still use check cashing services and 35 percent are fully
banked.
The author and sponsor point out that this bill would also
contain two critical elements that are not a part of the payday
loan product. First, this bill would require licensees to
report borrowers to at least one of the three major credit
bureaus, thereby helping borrowers to gain a credit history,
unlike payday loans which are not reported. (See Comment 4 for
further discussion.) Second, unlike payday loans, the bill
would require licensees to underwrite the loan and ensure that
the loan is affordable to the borrower. (See Comment 7 for
further discussion.)
4. Reporting to credit bureaus
This bill would require licensee participants to report each
borrower's payment performance to at least one of the three
major credit bureaus. The intent of this provision, based on
the Progreso model, is to help those borrowers who do not have a
credit history to establish one, and to help those borrowers who
do have a credit history to improve their credit scores. The
sponsor asserts that Progreso borrowers have improved their
credit scores and cites its data which shows that, between late
2008 to the present, 87 percent of their 2,400 repeat borrowers
improved their credit scores between the first loan and the
second loan. And, 48 percent saw an improvement in their credit
score from loan two to loan three. For Progreso customers whose
scores improved between loan two and loan three, the average
score increase was 54 points from 546 to 600. In the case of
customers whose scores decreased between loan two and loan
three, the average score decrease was 27 points from 591 to 565.
Progreso notes that 72 percent of these repeat borrowers
started with no credit history. Of the borrowers who had a
credit history when they received their first Progreso loan, 53
percent improved their credit scores between loan one and loan
two. Progreso also asserts that approximately 60 percent of
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their borrowers who did not have a FICO score when they first
obtained a Progreso loan saw an increase in their FICO score to
660.
Creating a credit history, or improving an existing one, can be
critical to accessing mainstream capital and is an important
component of asset-building. The sponsor notes that "[c]redit
is needed to do almost everything in the U.S., from renting an
apartment to buying a cell phone . . ." (The American Banker, "A
Twist on Reaching Out to Unbanked Hispanics," September 21,
2009.)
5. Finders
a. Use of finders
This bill would permit the use of finders, individuals who
would bring a licensee and a prospective borrower together for
the purpose of negotiating a loan contract. The author and
his sponsor envision that Pilot Program participants could use
employees in department stores, for example, to help market
their loans. Currently, many retailers contract with a
national bank to offer a store-branded credit card, and the
store's clerks then offer customers an opportunity to apply
for the card, often at the time of purchase. The national
bank pays the retailer a fee each time that a loan is
successfully consummated. The sponsor intends that this bill
would permit Pilot Program participants to use clerks in a
similar way, except that they would offer the customer the
opportunity to apply for a loan provided by the Pilot Program
participant who contracts with the store. Under the bill, a
fee could be paid by the program participant to the finder,
but could not be passed on to the borrower. The sponsor sees
finders as a way to lower his costs of customer acquisition
which, at least at the start-up phase, can be quite high.
Under the bill, the finder would be permitted to perform
certain services for a licensee, such as distributing
preprinted, preapproved written materials about the
participant's loans, providing written factual information
about loan terms, conditions, or qualification requirements to
a prospective borrower, entering the borrower's information
into a preprinted or electronic application, assembling credit
applications for submission to the licensee, and contacting
the licensee to determine the status of the loan application.
The bill would prohibit a finder from providing counseling or
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advice to a borrower or prospective borrower, providing
loan-related marketing material that has not been previously
approved by the licensee to the borrower, and interpreting or
explaining the significance or effect of any of the marketing
materials or loan documents the finder provides to the
borrower.
Under the author's amendments, the bill would also: (1)
prohibit a fee from being paid by a licensee to a finder until
and unless the loan is consummated; (2) provide that the fee
cannot be based on the principal amount of the loan; and (3)
prohibit the fee from exceeding $35 per consummated loan. In
addition, the author's amendments would require the finder to
provide a disclosure to the prospective borrower stating that
a fee may be paid by the licensee to the finder and containing
DOC's contact information if the borrower wishes to make a
complaint.
b. Consumer group opposition
Consumer groups oppose the finders provision in the bill. The
California Reinvestment Coalition (CRC) writes, ". . . the use
of unlicensed finders is a particularly troubling aspect of SB
1146. This approach will likely lead to aggressive marketing
of the product to consumers who may not even be in the market
for a loan. It would also appear extremely difficult to
regulate. While we support responsible lending alternatives
for consumers in need of small-dollar loans, encouraging the
practice of enticing consumers in greater amounts of spending
and debt does not serve the needs of low-income consumers
looking to build assets and wealth." Consumers Union also
raises concerns about the bill's use of finders and notes that
financial products should not 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."
It is also important to note that there is nothing in the bill
to prohibit other entities, such as payday lenders, from
becoming a finder.
As described above, the author and his sponsor are proposing a
number of amendments in an attempt to address the finders
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issue, including limitations on the amount of the finder's fee
and a prohibition on the payment of the fee until and unless
the loan is consummated. While this is intended to address
the concern that finders will simply generate applications in
order to receive the fee, the proposed amendments do not
sufficiently address the consumer groups' concerns.
However, the Center for Responsible Lending (CRL), CRC, and
Consumers Union have indicated that while they are opposed to
the finders provisions, they would be willing to compromise on
permitting the use of finders provided that "their
compensation is not conditioned in any way on the number of
leads or loans generated." The groups ask that the
compensation for finders be based on a flat monthly fee, per
outlet and that there be a prohibition on "commissions based
on loan applications, either between the licensee and the
finder or between management and line staff in retail
outlets."
The Committee may wish to consider whether to amend the bill
in this way or whether, because discussions appear to be
ongoing and productive, it may simply be more appropriate to
delete the provisions relating to finders and reinsert them
when there is agreement. The following amendment would
achieve this:
Suggested amendment: Beginning on page 9, strike Sections
22352, 22353, 22354, 22355, 22357, 22358, and 22359.
c. Other concerns regarding finders
Should the Committee decide to instead keep the finders
provisions in the bill, modified by the monthly fee language
suggested by CRL, CRC, and Consumers Union, the Committee may
wish to amend the bill to address a few important points
concerning the finders provisions.
i. Meaningful disclosure to the borrower
First, it would be helpful to require that the borrower
receive a copy of the disclosure in the mail after the loan
is successfully consummated, particularly because the
disclosure contains helpful information regarding DOC's
contact information. The following language would
accomplish this:
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Suggested amendment: Add the following to the disclosure
notice (Section 22355):
If the loan is consummated, the licensee shall mail to the
borrower a copy of the disclosure notice within two weeks
of the date of the loan consummation.
ii. Meaningful report to the Legislature
Additionally, should the Committee decide to retain the
finders provisions in the bill, as modified, the Committee
may wish to amend the bill to provide that the report to the
Legislature contain information about the use of finders by
Pilot Program participants. The bill already requires
participants to annually report to the commissioner
information about their use of finders, but there is nothing
in the report provided to the Legislature about that use.
In addition, the report should include a sample survey of
borrowers who have participated in the program to allow a
better understanding of the borrower experience. In order
to provide sufficient information to allow for a meaningful
review of the program prior to its sunset, the Committee may
thus wish to amend the bill as follows:
Suggested amendment:
Include the following in the report to the Legislature:
the number of finders used by Pilot Program participants,
the number of times the commissioner found that a finder
had violated the bill's provisions, the number of times
that the commissioner terminated a written agreement
between a finder and a licensee, and the number of times
that the commissioner barred the use of a finder by Pilot
Program participants. Also require that DOC conduct a
sample survey of borrowers who have participated in the
Pilot Program to better understand the borrower
experience.
iii. Meaningful enforcement powers
The author's proposed amendments would require the
commissioner to examine each licensee at least once every 24
months. The commissioner shall also have the right to
inspect and access all of the finder's books and records and
examine the operations of the finder. If the commissioner
determines that a finder has violated the bill, the
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commissioner can terminate the agreement between the
licensee and the finder and can also bar the use of that
finder by any Pilot Program participant.
Given the importance of oversight regarding this component
of the bill and the significant concern that the finders may
be very difficult to regulate, it may be helpful to better
understand how DOC will use its audit, inspection, and
examination authority to ensure that licensees and finders
are adhering to the Pilot Program requirements.
6. Small claims filing fee
Existing law provides for filing fees in small claims actions
and specifies increased filing fee amounts based on the dollar
amount of the demand and whether the party has filed more than
12 other small claims in the state within the previous 12
months. Specifically, if the party has filed 12 or fewer claims
within the previous 12 months, the fees are, in relevant part,
$30 if the demand is $1,500 or less or $50 if the demand is
between $1,500 and $5,000. If the party has filed more than 12
other small claims actions in the state within the previous 12
months, the filing fee is $100.
This bill would instead provide that, notwithstanding this
graduated filing fee schedule, in any action filed to enforce a
contract entered into pursuant to the Pilot Program, the filing
fee shall be $25. The intent of this provision, according to
the sponsor, is to reduce the costs associated with providing
small-dollar loans under the Pilot Program. The sponsor
explains the rationale for this provision, stating:
At Progreso's average loan amount and term of $900 and 9
months, respectively, the amended version of the bill provides
roughly 4 points of additional APR flexibility in the pricing
(rates and fees included) on small loans. At a $250 loan for
3-months, which mirrors closely the size and short term nature
of payday loans, there is absolutely no change in the APR from
current law at 61% APR. While these changes will certainly
help encourage more responsible small loans and CFL licensees
lending under $2500, where alternatives to payday loans are
most needed, the changes are modest (0 to 4 points) and may
not go far enough. As a result, other changes that help to
lower the cost of offering responsible small loans to
lower-income and credit challenged consumers are greatly
needed to help offset the modest increase in maximum pricing.
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One big example is the small court filing fee. In 2009, for
example, Progreso filed claims for roughly less than 10% of
its new loans, which at $100 per court filing, was equivalent
to a $8 cost per loan, or 1.5-2 points of APR (for a $900 at 9
months). Taken together, the modest increase in pricing plus
the lower cost would allow, at most, 6 additional points of
margin, which is a key part of attracting new participants to
providing safe and affordable small dollar loans.
Since a primary purpose of the bill is to convince more CFLs
and new CFLs to emerge to offer responsible small dollar loans
under $2500 in CA and help address a shortage of available
capital in our hard hit communities, addressing both the
revenue and cost sides of the equation is key [to] the
legislation. Removing the tiered pricing structure on small
claims filings by keeping the cost at $25 per claim,
regardless of quantity is a key part of attracting new and
more responsible lenders to California's hardest hit
communities.
Although it does not have an official position on the bill, the
Judicial Council has expressed concerns about this provision,
noting that "[t]here is no precedent under the Small Claims Act
for creating a reduced filing fee based on a particular case
type. We're not aware of any reason that would justify creating
a reduced filing fee for the type of cases that could be brought
under the bill. In addition to the loss of filing fee revenue,
the bill would create administrative difficulties for the courts
by creating a different fee structure for just this one category
of case, without regard to the amount in controversy. For all
these reasons, we respectfully request that the small claims fee
provisions be deleted from the bill."
The public policy question thus raised by this provision is
whether the desire to keep costs low for Pilot Program
participants outweighs the unprecedented nature of reducing the
small claims filing fee for these particular cases. It is not
clear why small claims actions to enforce Pilot Program loans
should merit different treatment. While the aim of the Pilot
Program is certainly to encourage more CFLL licensees to enter
the small-dollar loan market, the small claims filing fee is
arguably a cost of doing business that should be incorporated
into those costs. Furthermore, this provision opens the door to
arguments by other creditors that a particular case type is
unique and therefore deserving of special treatment. For these
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reasons, the Committee may wish to consider amending the bill to
delete these provisions. The following amendment would
accomplish this:
Suggested amendment:
On page 3, strike lines 1-33, strike page 4, and on page 5,
strike lines 1-16
7. Responsible lending
This bill would require Pilot Program participants to comply
with specified underwriting requirements. The intent of this
provision, according to the author, is to "help to ensure that
[Pilot Program] loans are fair and responsible." Many believe
that lax underwriting led to the subprime mortgage crisis and
borrowers receiving loans that they simply could not afford.
This bill is intended to ensure that the loans offered under the
Pilot Program are both affordable and responsible.
While Progreso Financiero, the sponsor of this measure, appears
committed to affordable and responsible lending, this Pilot
Program will be open to any CFLL licensee. Unfortunately some
of those licensee participants may not share Progreso's
commitment. The author and sponsor's intent, however, is to
codify responsible lending practices so that the commitment to
responsible lending is a part of this small-dollar loan program.
For example, the bill would require that a licensee underwrite
each loan. This is not currently required under existing law,
and is not done by others, such as payday lenders, for
alternative products. Under the Progreso model, codified in
this bill, a licensee would be prohibited from making a loan to
a borrower if it determines that the borrower's total monthly
debt exceeds 50 percent of his or her gross monthly income.
This debt-to-income ratio is intended to include all of the
borrower's debt known to the licensee. The sponsor anticipates
that the 50 percent debt-to-income ratio will ensure that
affordability is incorporated into underwriting decisions.
Because the underwriting decision is such an important part of
the Pilot Program's emphasis on responsible lending, some have
raised concerns about whether the bill would sufficiently ensure
that all participants maintain strong underwriting standards.
In particular, CRL, Consumers Union, and CRC have requested that
the underwriting language be tightened and have suggested
language based on Regulation Z, which implements the federal
SB 1146 (Florez)
Page 17 of ?
Truth in Lending Act. That suggested language provides:
On page 8, beginning on line 31 revise subdivision (f)(3) to
read:
(3) (A) The licensee shall underwrite each loan to determine a
borrower's ability to repay the loan pursuant to the loan
terms, and shall not make a loan, if it determines, through
its underwriting, that the borrower's total monthly debt
service payments, at the time of origination, including the
loan for which the borrower is being considered, and across
all outstanding forms of credit known to the licensee, exceed
50 percent of the borrower's gross monthly income.
(B) For purposes of this section, underwriting shall include
at least the following:
(i) A licensee must verify the income that it relies on to
determine the borrower's debt to income ratio by the
consumer's Internal Revenue Service Form W-2, tax returns,
payroll receipts, or other third-party documents that provide
reasonably reliable evidence of the consumer's income.
(ii) A licensee must seek from an applicant through its loan
application form and process information as to all of the
applicant's existing debt obligations. A licensee must verify
the borrower's current debt service obligations with a credit
report from one of the three major credit bureaus. The
licensee is responsible for considering all debt obligations,
whether or not the debt obligation appears on the borrower's
credit report, but the licensee is not required to
independently verify such obligations.
While the sponsor has expressed concern that every finance
lender performs underwriting in a different way and they use
different calculations to assess creditworthiness, the sponsor
has indicated an openness to accepting the language of (B)(i)
regarding income verification, with possible modifications to be
discussed between the parties.
It is important to note that making the underwriting language
too specific could result in fewer licensees entering the Pilot
Program because they might be required to change their
underwriting calculations. In addition, it is important not to
draft the underwriting requirements in a way that would preclude
a borrower's ability to get a Pilot Program loan because he or
she is unbanked. CRL notes, however, that a CFLL licensee could
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participate in the program and offer loans under the
program-requiring underwriting-and also offer loans outside of
the program, which would not require underwriting. CRL believes
that this would give licensees the flexibility to determine
whether they wanted to use underwriting or not.
8. Rates and fees
This bill would increase the interest rate caps that may be
charged for small-dollar loans offered under the program. Under
existing law, that interest rate may be no more than 30 percent
on the unpaid balance of the loan that is less than $225. The
cap is 24 percent on that portion of the unpaid balance that is
between $225 and $900; 18 percent on that portion between $900
to $1,650; and 12 percent on the portion between $1,650 to
$2,500.
This bill would permit an interest rate of up to 30 percent to
be charged on the unpaid balance of the loan that is less than
$1,000 and up to 26 percent for that portion that is over
$1,000. CRL has argued a preference for the rate structure in
North Carolina which caps the rate at 18 percent annual interest
on the loan balance above $1,000, but, along with Consumers
Union and CRC, has agreed to remove its opposition to the
current rate structure in the bill as well as the fees described
below.
This bill would increase existing law's cap on origination fees
from the lesser of five percent of the principal amount of the
loan or $50 to the lesser of five percent of the principal
amount of the loan or $65, a $15 increase in the fee.
This bill would cap delinquency fees at an amount not to exceed
$15 for a delinquency of seven days or more or $20 for a
delinquency of 14 days or more. Existing law caps these fees at
a maximum of $10 on loans that are more than 10 days delinquent
and $15 on loans 15 days or more delinquent.
9. Additional issues
CRL, CRC, and Consumers Union have also expressed concern that
the bill does not prohibit the sale of credit insurance in pilot
loans, arguing that "[t]he use of credit insurance with small
consumer loans is fraught with problems." The groups also
assert that a CFLL licensee who wishes to offer credit insurance
could do so under the existing CFLL. The sponsor, on the other
hand, does not believe that it is in the best interest of
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borrowers to prohibit Pilot Program participants from offering
credit loss-of-income insurance. While Progreso does not
currently offer this product, it states that others might and
the product can be of use to some borrowers.
CRL, CRC, and Consumers Union also request a clarification that
late fees may only be charged once per month instead of once per
payment cycle. The sponsor has indicated that they are willing
to amend the bill to provide that no more than two late fees may
be charged every 28 days.
Support : None Known
Opposition : California Reinvestment Coalition; Center for
Responsible Lending; Consumers Union
HISTORY
Source : Progreso Financiero
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote : Senate Banking, Finance, and Insurance Committee
(Ayes 9, Noes 0)
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