BILL ANALYSIS
SB 1146
Page 1
SENATE THIRD READING
SB 1146 (Florez)
As Amended August 16, 2010
Majority vote
SENATE VOTE :36-0
BANKING & FINANCE 12-0 JUDICIARY 10-0
-----------------------------------------------------------------
|Ayes:|Eng, Niello, Evans, Fong, |Ayes:|Feuer, Tran, Brownley, |
| |Fuentes, Gaines, Harkey, | |Evans, Hagman, Huffman, |
| |Mendoza, Nava, Ruskin, | |Jones, Knight, Monning, |
| |Torres, Tran | |Saldana |
| | | | |
-----------------------------------------------------------------
APPROPRIATIONS 17-0
--------------------------------
|Ayes:|Fuentes, Conway, |
| |Bradford, Huffman, Coto, |
| |Davis, De Leon, Gatto, |
| |Hall, Harkey, Miller, |
| |Nielsen, Norby, Skinner, |
| |Solorio, Torlakson, |
| |Torrico |
| | |
--------------------------------
SUMMARY : Establishes the Pilot Program for Affordable Credit
Building Opportunities that would allow licensees under the
California Finance Lender Law (CFLL) to participate in the pilot
program involving 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)Prohibits DOC from approving an application for the pilot
unless the licensee has been accepted as a data furnisher by
at least one the national credit reporting agencies.
SB 1146
Page 2
3)Specifies that a licensee may not make a loan, nor use a
finder without prior approval to participate in the program.
4)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 $500 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) 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;
d) The loan term is: i) 120 days for loans whose principal
balance upon origination is at least $500, but is less than
$1,500; and, ii) 180 days for loans whose principal balance
upon origination is at least $1,500;
e) The licensee must report each borrower's payment
performance to at least one of the three major credit
bureaus; and,
f) 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.
5)Requires licensees to comply with requirements of any
applicable law, including specific federal regulations.
6)Allows a licensee to charge a delinquency fee that is the
lesser of 10% of the amount of the delinquent payment due or
one of the following amounts:
a) For a period of default no less than 7 days, an amount
SB 1146
Page 3
not in excess of $12; or,
b) For a period of default no less than 14 days, an amount
not in excess of $18.
7)Provides that the imposition of delinquency fees would be
subject to the following:
a) No more than one fee may be imposed per delinquent
payment;
b) No more than two delinquency fees may be imposed during
any period of 30 consecutive days;
c) No delinquency fee may be imposed on a borrower who is
180 days or more past due if that fee would result in the
sum of the borrower's remaining unpaid principal balance,
accrued interest, and delinquency fees exceeding 180% of
the original principal amount of the borrower's loan; and,
d) The licensee shall attempt to collect a delinquent
payment for a period of at least 30 days following the
start of the delinquency before selling or assigning that
unpaid debt to an independent party for collection.
8)Requires the licensee to request from the borrower information
regarding outstanding deferred deposit transactions.
9)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.
10)States that a licensee may not require as a condition of
providing the loan that the borrower waive any right, penalty,
remedy, forum or procedure otherwise available under the law.
11)Prohibits the offering, selling or requiring the borrower to
contract for credit insurance.
12)Prohibits a licensee from offering insurance on tangible
personal or real property as specified.
SB 1146
Page 4
13)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.
14)This bill 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.
15)This bill prohibits a finder from doing any of the following:
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.
16)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.
SB 1146
Page 5
17)Establishes a cap on what can be paid to finders based on
number of loans referred.
18)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.
19)Requires a licensee that uses the services of a finder to
provide the commissioner with specified information regarding
those finders.
20)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.
21)Allows DOC to exercise various enforcement powers regarding
finders.
22)Requires the DOC to provide specified legislative committees
with a report by January 1, 2014 regarding the Pilot Program
that would contain specified information.
23)Requires the commissioner to conduct a sample survey of
borrowers who have participated in the pilot program to better
understand the borrower's experience.
24)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 :
SB 1146
Page 6
1)Under the CFLL [Financial Code 22000 et seq], 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. (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.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, DOC would incur one-time costs in the range of
$200,000 and ongoing costs in the range of $75,000 to $150,000
(special funds).
COMMENTS :
Need for bill.
According to the author : 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
SB 1146
Page 7
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.
Background : This bill sponsored by Progreso Financiero seeks to
establish a pilot program under the CFLL to fill the gap in loan
products that exist between payday loans of $255 and CFL loans
of $2,500 or more. Between those two amounts their is little
incentive on the part of potential lenders to offer loans due to
stringent restrictions on fees, marketing and interest rates.
For example, in 2008 98,665 CFL loans under $2,500 were
originated, whereas almost 12 million payday loan transactions
occurred. This bill intends to fill this gap by allowing some
flexibility on the fees and interest rates associated with the
loans in this pilot project, with an enhanced underwriting
process to determine borrower's repayment ability, something
often lacking for non-bank loans, specifically payday loans.
Additionally, the sponsor views the pilot program as a way to
help the unbanked and underbanked build credit files in order to
advance to more traditional lines of credit by the requirement
that loan performance be reported to the credit reporting
agencies. No other lending law requires reporting of payment
performance. The sweet spot of this bill is that it attempts to
make small dollar lending a profitable business so that more
options will become available, while creating lending standards
that will make it a responsible product under certain
conditions.
Unbanked & Underbanked : A driving force behind this bill is
that many people do not have access to mainstream credit options
due to minimal credit history. This history is often due to a
SB 1146
Page 8
lack of relationship with a banking institution through a
checking or savings account. Ironically, a consumer without a
checking account would not be able to get a payday loan as
payday loans are contingent upon the borrower having a checking
account so in some cases an unbanked borrower could not have
very many options at all.
The unbanked, or those without a transaction account with a
financial institution constitute approximately 22 million, or
20% of Americans. This population spends $10.9 billion on more
than 324 million alternative financial service transactions per
year. Bearing Point, a global management and technology
consulting company, estimates that the unbanked population
expands to 28 million when you include those who do not have a
credit score. In addition, Bearing Point, puts the underbanked
population, defined as those with a bank account but a low FICO
score that impedes access to incremental credit, at an
additional 45 million people. Although estimates find that at
least 70% of the population has some type of bank account, these
individuals continue to use non-bank services, ranging from the
purchase of money orders, use of payday lenders, pawn shops or
sending of remittances. The Federal Reserve Board has noted
that 50% of current unbanked households claim to have had an
account in the past.
In California, 28% of adults do not have a checking or savings
account, according to the U.S. Census. In San Francisco, the
Brookings Institution estimated that one in five San Francisco
adults, and half of its African-Americans and Hispanics, do not
have accounts. Recent market research indicates that Fresno and
Los Angeles have the second and third highest percentages of
un-banked residents in the country.
Nationwide, the unbanked are disproportionately represented
among lower-income households, among households headed by
African-Americans and Hispanics, among households headed by
young adults, and among renters. A Harvard Poll of Hurricane
Katrina evacuees in the Superdome found that seven out of ten
did not have a checking or savings account.
The unbanked poor pay more to conduct their financial lives.
Check cashing outlets can charge between 2-3% of the face value
of a check. So, an individual who makes $30,000 a year can pay
$800 a year in fees to cash their payroll checks and pay their
SB 1146
Page 9
bills. The lack of access to mainstream banking costs both
consumers and society, as well as, the financial community that
misses out on this untapped market.
Families without accounts don't have a safe place to keep their
money. They may walk around with wads of cash in their pockets,
or keep it at home in a coffee can. Robberies are more prevalent
around check cashing outlets. A burglary, or a fire, could cost
them their life's savings in a matter of moments. A bank
account helps people take the first step onto the path of
savings and mainstream financial products. Without an account,
it is much more difficult to get well-priced car loans, credit
cards, or mortgages-the exact financial tools needed to climb up
the economic ladder. Stable societies are built on financially
stable families who have access to high-quality, low-cost
financial services.
For a more comprehensive review of the unbanked, please read the
committee's April 16, 2010 analysis of AB 2581 (Bradford).
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0006048