BILL ANALYSIS
SB 1146
Page 1
Date of Hearing: June 29, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 1146 (Florez) - As Amended: June 23, 2010
As Proposed to be Amended
SENATE VOTE : 36-0
SUBJECT : FINANCE LENDERS: SMALL LOAN PILOT PROGRAM
KEY ISSUE : SHOULD A NEW PROGRAM BE TESTED IN AN EFFORT TO
PROVIDE GREATER CREDIT OPPORTUNITIES TO UNDERSERVED MARKETS WITH
APPROPRIATE SAFEGUARDS AND CONSUMER PROTECTIONS?
FISCAL EFFECT : As currently in print this bill is currently
keyed fiscal.
SYNOPSIS
This bill would create an experimental small-loan program
denominated the Pilot Program for Affordable Credit-Building
Opportunities (Pilot Program), a four-year 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. Supporters believe this program will help build credit
histories and increase participation in the financial services
industry for lower-income borrowers and others who are not well
served by the existing market. As proposed to be amended, it is
believed that previous opposition from consumer advocates has
been addressed.
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SUMMARY : Establishes a temporary program for smaller loans,
denominated the Pilot Program for Affordable Credit Building
Opportunities that would allow licensees under the California
Finance Lender Law (CFLL) to sell unsecured consumer loans less
than $2,500 until January 1, 2015. Specifically, this bill :
1)Provides that any California Finance Lender (CFL) that wishes
to participate in the pilot program shall file an application
with the commissioner of the Department of Corporations (DOC)
and pay a fee calculated by the commissioner of DOC to cover
the costs necessary to administer the pilot.
2)Specifies that a licensee may not make a loan, nor use a
finder without prior approval to participate in the program.
3)Requires that any loan made pursuant to the pilot project must
comply with the following:
a) The loan has a minimum principal amount upon origination
of $250 and is not more than $2,500, as specified;
b) The interest rate of each loan would be capped at 30%
for the unpaid balance of the loan up to and including
$1,000 and 26% for the unpaid balance of the loan in excess
of $1,000;
c) Delinquency fees would not exceed specified maximums
that are greater than existing limits within specified time
periods that are shorter than existing limits;
d) Origination fees would be capped at the lesser of 5% 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;
e) 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;
f) The licensee must be accepted as a data reporter to at
least one of the three major credit bureaus; and
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g) 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% 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.
4)Requires licensees to comply with requirements of any
applicable law, including specific federal regulations.
5)Provides that 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.
6)Prohibits the offering, selling or requiring the borrower to
contract for credit insurance.
7)Allows the use of "finders" defined as a person who brings a
licensee and a prospective borrower together for the purpose
of negotiating a loan contract.
8)Permits finders to perform certain specified services for a
licensee, including, among other things:
a) Distributing or publishing preprinted, pre-approved
written materials relating to the licensee's loans;
b) Providing written factual information about loan terms,
conditions, or qualification requirements to a prospective
borrower;
c) Entering the borrower's information into a preprinted or
electronic application;
d) Assembling credit applications for submission to the
finance lender; and
e) Contacting the licensee to determine the status of the
loan application.
9)Prohibits a finder from doing any of the following:
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a) Providing counseling or advice to a borrower or
prospective borrower;
b) Providing loan-related marketing material that has not
been previously approved by the licensee to the borrower;
or,
c) Interpreting or explaining the significance or effect of
any of the marketing materials or loan documents the finder
provides to the borrower.
10)Prohibits a fee being paid to a finder in connection with a
loan application, until and unless the loan is consummated,
prohibits a fee being paid to a finder based upon the
principal amount of the loan, creates a fee compensation
structure for finders based upon the number of loans issued
per location per month, and prohibits the licensee from
passing on to the borrower any finder fee, or portion thereof.
11)Requires 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.
12)Requires a licensee that uses the services of a finder to
provide the commissioner with specified information regarding
those finders.
13)Requires 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. If the
commissioner determines that a finder has violated the
provision of this bill, the commissioner may terminate the
written agreement between the finder and the licensee, and if
the commissioner deems that action in the public interest, to
bar the use of that finder by all licensees participating in
the pilot program.
14)Requires the DOC to provide specified legislative committees
with a report by January 1, 2014 regarding the Pilot Program
that would contain specified information.
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15)Requires the commissioner to conduct a sample survey of
borrowers who have participated in the pilot program to better
understand the borrower's experience.
16)Increases 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.
EXISTING LAW :
1)Under the CFLL, 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. (Financial Code 22000 et seq. All
further references are to the Financial Code.)
2)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.
3)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.
Existing law requires CFLL lenders to prominently display
their schedule of charges to borrowers.
4)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.
5)Provides that the DOC may require a CFLL licensee to retain
advertising copy for a period of 90 days from the date of its
use. Existing law prohibits advertising copy from being used
after its use has been disapproved by the commissioner and the
licensee is notified in writing.
COMMENTS : In support of the bill the author states:
Consumer Finance Lenders (CFL) Law, enacted in the 1950's
based on statutes from the 1920's, is archaic and needs
reform. For example, its restrictions on interest rates,
fees, and marketing partnerships for loans in the $250 to
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$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 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.
This Bill Would Allow An Experimental Program That Is Designed
To Increase Credit Opportunities For Those Not Served By The
Existing Market, While Ensuring That These Products Are
Underwritten and Sold Responsibly. As supporters note, the
Department of Corporations (DOC) administers the CFLL and
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 a responsible 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.
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Any relaxation of current rules for loan products targeted to
those who may lack or have more risky credit histories naturally
creates concern that there are appropriate safeguards to prevent
any potential for abuse by any of the potential market entrants.
Accordingly, this bill has been crafted in collaboration with
consumer advocates in an effort to anticipate and preclude as
many pitfalls as stakeholders have been able to identify. In
particular, there have been detailed negotiations regarding late
fees, finder's fees, insurance products, and assuring as much
accuracy as possible in determining an applicant's debt for the
purpose of meeting the debt-to-income ratio requirements. The
proposed amendments reflect a consensus reached between the
sponsor and consumer advocates in consultation with the
Committee. It is believed that these amendments address all
outstanding concerns.
Author's Amendments . The author prudently proposes that the
bill be amended as reflected in the attached mock-up to address
concerns by consumer advocates.
REGISTERED SUPPORT / OPPOSITION :
Support
Progreso Financiero (sponsor)
California Hispanic Chamber of Commerce
Experian
Propser Marketplace, Inc.
Jose Cisneros, San Francisco Treasurer and Tax Collector
Opposition (as proposed to be amended)
None on file
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334