BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 1146|
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UNFINISHED BUSINESS
Bill No: SB 1146
Author: Florez (D)
Amended: 8/20/10
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 9-0, 4/7/10
AYES: Calderon, Cogdill, Correa, Florez, Kehoe, Lowenthal,
Padilla, Price, Runner
NO VOTE RECORDED: Cox, Liu
SENATE JUDICIARY COMMITTEE : 4-0, 4/20/10
AYES: Corbett, Harman, Hancock, Leno
NO VOTE RECORDED: Walters
SENATE APPROPRIATIONS COMMITTEE : 9-0, 5/10/10
AYES: Kehoe, Cox, Alquist, Leno, Price, Walters, Wolk,
Wyland, Yee
NO VOTE RECORDED: Corbett, Denham
SENATE FLOOR : 36-0, 6/2/10
AYES: Aanestad, Alquist, Ashburn, Calderon, Cedillo,
Cogdill, Corbett, Correa, Cox, Denham, DeSaulnier,
Ducheny, Dutton, Florez, Hancock, Harman, Hollingsworth,
Huff, Kehoe, Leno, Liu, Lowenthal, Negrete McLeod,
Padilla, Pavley, Price, Romero, Runner, Simitian,
Steinberg, Strickland, Walters, Wolk, Wright, Wyland, Yee
NO VOTE RECORDED: Oropeza, Wiggins, Vacancy, Vacancy
ASSEMBLY FLOOR : 75-1, 8/25/10 - See last page for vote
SUBJECT : Finance lenders
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SOURCE : Progreso Financiero
DIGEST : This bill establishes the Pilot Program for
Affordable Credit Building Opportunities that would allow
licensees under the California Finance Lender Law to
participate in the pilot program involving unsecured
consumer loans less than $2,500 until January 1, 2015.
Assembly Amendments revise and recast the bill with similar
intent as it left the Senate.
ANALYSIS : Existing law, the California Finance Lenders
Law (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.
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.
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. Existing law requires CFLL lenders to
prominently display their schedule of charges to borrowers.
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.
Existing law provides that the commissioner of the
Department of Corporations (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.
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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 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.
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 $250 and is not more than $2,500, as
specified;
B. 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;
C. Origination fees would be capped at the lesser of 5
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;
D. The loan term is: i) 90 days for loans whose
principal balance upon origination is less than $500,
ii) 120 days for loans whose principal balance upon
origination is at least $500, but is less than $1,500;
and, iii) 180 days for loans whose principal balance
upon origination is at least $1,500;
E. The licensee must report each borrower's payment
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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 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.
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 percent 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 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 percent 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
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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.
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,
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E. Contacting the licensee to determine the status of
the loan application.
15.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.
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
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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.
Background
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 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 percent of Americans. This population spends $10.9
billion on more than 324 million alternative financial
service transactions per year. Bearing Point, a global
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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 percent
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 percent of current unbanked households
claim to have had an account in the past.
In California, 28 percent 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
percent 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 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.
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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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12
2012-13 Fund
Admin expenses approx $50
annuallySpecial*
offset by fee revenue
*Corporations Fund
SUPPORT : (Verified 8/25/10)
Progreso Financiero (source)
California Hispanic Chamber of Commerce
Experion
Greenlining Institute
New America Foundation
Prosper Marketplace, Inc.
ARGUMENTS IN SUPPORT : According to the author's office:
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,
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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.
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Bass, Beall, Bill
Berryhill, Tom Berryhill, Block, Blumenfield, Brownley,
Buchanan, Caballero, Charles Calderon, Carter, Chesbro,
Conway, Cook, Coto, Davis, De La Torre, De Leon, DeVore,
Eng, Evans, Feuer, Fletcher, Fong, Fuller, Furutani,
Gaines, Galgiani, Garrick, Gatto, Gilmore, Hagman, Hall,
Hayashi, Hernandez, Hill, Huber, Huffman, Jeffries,
Jones, Knight, Lieu, Logue, Bonnie Lowenthal, Ma,
Mendoza, Miller, Monning, Nava, Nestande, Niello,
Nielsen, Norby, V. Manuel Perez, Portantino, Ruskin,
Salas, Saldana, Silva, Skinner, Smyth, Solorio, Audra
Strickland, Swanson, Torlakson, Torres, Torrico, Tran,
Villines, Yamada, John A. Perez
NOES: Harkey
NO VOTE RECORDED: Bradford, Fuentes, Vacancy, Vacancy
JA:nl 8/26/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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