BILL ANALYSIS
SB 1146
Page 1
Date of Hearing: August 4, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 1146 (Florez) - As Amended: August 2, 2010
Policy Committee: Banking and
Finance Vote: 12-0
Judiciary 10-0
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill creates the Pilot Program for Affordable
Credit-Building Opportunities, a four-year, statewide pilot
program under the California Finance Lenders Law (CFLL), which
would allow participants to offer consumer loans that, though
more expensive than existing small loans, would be would be a
lower-cost alternative to pay-day loans. Specifically, the
bill:
1)Allows licensees accepted into the program to offer a new type
of small-dollar consumer loan of between $250 and $2,500.
2)Sets the interest rate caps on such loans at 30% for the
unpaid balance of the loan up to $1,000, and 26% for the
unpaid balance of the loan in excess of $1,000. Sets
delinquency fee caps of $12.50 for a delinquency of seven days
or more $17.50 for a delinquency of 14 days or more; restricts
the number of delinquency fees that may be imposed within a
specified period of time; and sets caps on origination fees at
the lesser of 5% of the principal amount of the loan or $65.
3)Establishes loan terms of 90 days for loans whose principal
balance upon origination is less than $500; 120 days for loans
between $500 and $1,500; 180 days for loans over $1,500.
4)Requires the licensee to: report each borrower's payment
performance to at least one of the three major credit bureaus;
underwrite the loan and not make the loan if total monthly
debt service payments exceed 50% of the borrower's gross
monthly income; and offer a Department of Corporations
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approved education program.
5)Permits the licensee to contract with a "finder" to bring
potential borrowers into contact with the lender for purposes
of negotiating a contract. Also places limits on fees paid to
finders, prohibits finders from engaging in certain
activities, and requires that locations of the finders be
approved by the Department of Corporations (DOC).
6)Prohibits lenders from offering or requiring borrowers to
purchase credit insurance.
7)Requires DOC to survey customers, and report to the
Legislature by January 1, 2014 regarding the survey and other
specific information related to the pilot program. Authorizes
DOC to recoup costs of survey from licensees, but limits each
licensee's share of costs to $25,000.
FISCAL EFFECT
DOC would incur one-time costs in the range of $200,000 and
ongoing costs in the range of $75,000 to $150,000. Costs would
be related to the survey of borrowers and preparation of the
report, rulemaking, and expanded examination and approval
responsibilities. Some of these costs could be recouped from
licensees participating in the pilot program, though the extent
of reimbursement would depend on the number of businesses
participating in the program.
COMMENTS
1)Purpose . This bill is intended to help underbanked
Californians obtain affordable loans and enter the financial
mainstream. According to the author, the current California
Finance Lenders' Law is archaic and needs reform. He asserts
that current restrictions on interest rates, fees, and
marketing partnerships for loans in the $250 to $2,500 range
effectively discourages lenders from making small-sized loans.
As a result, borrowers are forced into payday loans, which
are prohibitively expensive.
This bill is sponsored by Progreso Financiero. Initially
conceived as a research project at Stanford's Graduate School
of Business, Progreso Financiero was founded in 2005, with the
aim of offering an alternative to payday loans to those
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lacking access to traditional sources of financing. The
company currently is a CFLL licensed lender, and offers
short-term, unsecured loans of $250 to $2,500 through 27
retail locations in California. The business has been funded
through venture capital and, while it expects to begin showing
profits next year, it believes that current limitations in the
CFLL make it difficult for it to expand and become a viable
option for those seeking access to traditional credit.
2)Background - Finance Lenders Law and Deferred Deposit
Transaction Law . Under the California Finance Lenders Law,
finance lenders licensed by the Department of Corporations are
authorized to make secured and unsecured consumer and
commercial loans, subject to various restrictions. Under this
law, 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. The law also places caps on
administrative fees (the lesser of 5% of the principal amount
of the loan or $50) and delinquency fees ($10 on loans 10 days
or more delinquent and $15 on loans 15 days or more
delinquent).
The California Deferred Deposit Transactions Law authorizes
short-term loans - commonly known as "payday loans", in which
a borrower writes a post-dated, personal check to a lender for
a specified amount, which is capped at $300 by law. The date
on the check is the date on which the parties agree that the
borrower will repay the loan (often when the borrower is
paid), but is capped at 31 days. The lender advances the
borrower the amount on the check, less the fee, which is
capped at 15% of the loan amount. This fee-based model can
result in high effective interest rates, sometimes exceeding a
400% annual rate.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081