BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
SB 896 (Correa) Hearing Date: April 9,
2014
As Amended: February 18, 2014
Fiscal: Yes
Urgency: No
SUMMARY Would authorize a non-profit organization that meets
certain criteria to apply to the Department of Business
Oversight (DBO) for an exemption from the California Finance
Lenders Law (CFLL) and would require a non-profit organization
granted an exemption by DBO to comply with specified
requirements related to the loans it facilitates. Would further
provide that non-profit organizations which partner with exempt
non-profits are not subject to the CFLL, if they meet specified
criteria and comply with specified requirements.
DESCRIPTION
1. Would exempt from the CFLL a nonprofit organization
(hereinafter referred to as an exempt organization) that
facilitates one or more zero-interest installment loans with
principal amounts between $250 and of $2,500, as follows:
a. The organization would have to be exempt from
federal income taxes pursuant to Section 501(c)(3) of the
Internal Revenue Code, and no part of the net earnings of
the organization could inure to the benefit of a private
shareholder or individual.
b. The organization would have to file an application
of exemption with the Commissioner of Business Oversight
(commissioner) and would have to pay a fee to the
commissioner in an amount calculated by the commissioner
to cover costs to administer the bill.
c. Once granted an exemption, an exempt organization
would have to file an annual report with the
commissioner, containing relevant information that the
commissioner reasonably requires regarding lending
facilitated by that organization and its non-profit
SB 896 (Correa), Page 2
partners within the state during the preceding calendar
year.
d. Loans made by the exempt organization would have to
be unsecured, zero-interest loans, which would have to be
of certain minimum duration and be underwritten as
specified (see below). The exempt organization would
have to provide specified disclosures to borrowers in
connection with these loans, report borrower payment
history to at least one consumer reporting agency that
compiles and maintains files on consumers on a nationwide
basis, and would be limited with respect to fees that
could be charged to borrowers in connection with these
loans (see below). Loans could not be refinanced.
Generally speaking, lengths of the loans, underwriting
requirements applied to the loans, disclosures provided
to borrowers, fees that could be charged to borrowers,
and other rules of the program would be identical to the
rules applicable to lenders accepted into the Pilot
Program for Increased Access to Responsible, Small Dollar
Loans, except as shown in the table below.
-----------------------------------------------------------
| | Pilot Program for | |
| | Increased Access | |
| | to Responsible, | |
| |Small Dollar Loans | SB 896 |
| | (SB 318, Chapter | |
| | 467, Statutes of | |
| | 2013) | |
|-------------------+-------------------+-------------------|
|Entities Expected |For-profits with |Non-profits with |
|To Utilize The |socially |socially |
|Bill |responsible |responsible |
| |missions |missions |
|-------------------+-------------------+-------------------|
|Interest Rates |Capped at 36% on | |
|(Percentage) |the first $1,000 | |
| |borrowed and 32% | |
| |on principal | 0% |
| |amounts between | |
| |$1,001 and $2,500. | |
| | The 32% rate can | |
| |rise to a maximum | |
SB 896 (Correa), Page 3
| |of 35% as the | |
| |prime rate rises. | |
|-------------------+-------------------+-------------------|
|Origination Fees |Capped at the | |
| |lesser of 7% or | |
| |$90 on the first | Same as SB 318 |
| |loan to a | |
| |borrower; lesser | |
| |of 6% or $75 on | |
| |the second and | |
| |subsequent loans | |
| |to a borrower | |
|-------------------+-------------------+-------------------|
|Late Fees |Capped at $14 |An insufficient |
| |after 7 days or |funds fee capped |
| |$20 after 14 days; |at $10 may be |
| |actual |charged in lieu of |
| |insufficient funds |any other late fee |
| |fee may also be |or delinquency fee |
| |charged to a | |
| |borrower | |
|-------------------+-------------------+-------------------|
|Loan Amounts |$300 to $2,500 |$250 to $2,500 |
|-------------------+-------------------+-------------------|
|Minimum Loan |90 days for loans | |
|Lengths |<$500; 120 days | |
| |for loans $500 - | Same as SB 318 |
| |$1,499; 180 days | |
| |for loans $1,500 - | |
| |$2,500 | |
|-------------------+-------------------+-------------------|
|Underwriting |Income and debts |Same as SB 318 |
|Requirements |must be |with one |
| |independently |modification: If |
| |verified by the |a borrower's |
| |lender. Monthly |actual income |
| |debt service |cannot be |
| |payments, |independently |
| |including the loan |verified, a signed |
| |for which the |statement from the |
| |borrower is being |borrower regarding |
| |considered, may |their monthly |
| |not exceed 50% of |income may be |
| |the borrower's |used, but the |
| |gross monthly |debt-to-income cap |
| |household income. |drops from 50% to |
SB 896 (Correa), Page 4
| | |25%. |
|-------------------+-------------------+-------------------|
|Credit Education | Yes | Yes |
|Offered at Loan | | |
|Origination? | | |
|-------------------+-------------------+-------------------|
|Borrower Payment | | |
|History Reported | Yes | Yes |
|to Credit Bureau? | | |
|-------------------+-------------------+-------------------|
|Refinancing |Yes, under certain | No |
|Allowed? |circumstances | |
|-------------------+-------------------+-------------------|
|Disclosures |Yes; Must be in |Same as SB 318, |
|Provided at Loan |writing, type size |except for the |
|Origination |no smaller than 12 |statement that |
| |point font: |repaying a loan |
| |amount borrowed, |early will lower |
| |total dollar cost |borrowing costs |
| |of the loan to the |(because SB 896 |
| |consumer if the |loans are |
| |loan is paid back |zero-interest, |
| |on time, APR, |this statement |
| |periodic payment |does not apply). |
| |amount, | |
| |delinquency fee | |
| |schedule, and a | |
| |statement that | |
| |"repaying your | |
| |loan early will | |
| |lower your | |
| |borrowing costs by | |
| |reducing the | |
| |amount of interest | |
| |you will pay. | |
| |This loan has no | |
| |prepayment | |
| |penalty." | |
|-------------------+-------------------+-------------------|
|Payment Reminders |Required 2 days | |
| |prior to each | Same as SB 318 |
| |payment due date; | |
| |borrower may opt | |
| |out if he/she | |
| |wishes | |
|-------------------+-------------------+-------------------|
SB 896 (Correa), Page 5
|Annual Report to | | |
|DBO by Entities | Yes | Yes |
|Accepted into the | | |
|Program | | |
|-------------------+-------------------+-------------------|
|Annual Report by | Yes |Yes |
|DBO on Program | | |
|Performance | | |
-----------------------------------------------------------
The maximum APRs that could be charged under the interest
rate and fee structure allowed by SB 896 are as follows:
-------------------------------------------
| | |Maximum | |
| |Minimum |Originati|Maximum |
|Loan Amount |Loan |on Fee |Possible |
| |Length |Allowable|APR |
| | | | |
|-------------+---------+---------+---------|
|$250 |90 days |$17.50 |42% |
|-------------+---------+---------+---------|
|$500 |120 days |$35 |33% |
|-------------+---------+---------+---------|
|$1,000 |120 days |$70 |33% |
|-------------+---------+---------+---------|
|$1,500 |180 days |$70 |16% |
| | | | |
-------------------------------------------
2. Would provide that the CFLL does not apply to a nonprofit
organization which partners with an exempt organization for
the purpose of facilitating zero-interest loans, provided
that all of the following conditions are met:
a. The partnership between the exempt organization and
each partnering organization would have to be formalized
through a written agreement that specifies the
obligations of each of the parties, and which requires
the partnering organization to comply with all of the
loan-related provisions of the bill and any regulations
the commissioner may promulgate to administer the bill.
b. The partnering organization would have to be a
SB 896 (Correa), Page 6
501(c)(3), and no part of the net earnings of the
partnering organization could inure to the benefit of a
private shareholder or individual.
c. The loans facilitated by the partnering organization
would have to comply with all of the loan requirements
summarized above.
d. Each exempt organization would have to notify the
commissioner within 30 days of entering into a written
agreement with a partnering organization on a form
prescribed by the commissioner. At a minimum, this
notification would have to include the name of the
partnering organization, contact information for a person
responsible for the lending activities facilitated by
that partnering organization, and the address or
addresses at which the organization facilitates lending
activities.
e. Each exempt organization would have to submit
information to the commissioner regarding the loans
facilitated by the each of the nonprofit organizations
with which it partners for the commissioner's inclusion
in the report described in Number 5 below.
3. Would give the commissioner the authority to examine each
exempt organization and each partnering organization for
compliance with the provisions of the bill, require any
organization so examined to make available to the
commissioner or his or her representative all books and
records requested by the commissioner related to the lending
activities facilitated by that organization, and require the
cost of any such examination to be paid by the exempt
organization (thus exempt organizations would pay for their
examinations and for the examinations of non-profits with
which they partner).
4. Would give the commissioner the authority to decline to
grant an exemption, suspend or revoke an exemption,
terminate a written agreement between a partnering
organization and an exempt organization, disqualify a
partnering organization from engaging in certain activities,
bar a partnering organization from facilitating lending at
specific locations, and/or prohibit partnerships between
exempt organizations and other specific organizations, as
specified, and as necessary for the protection of the
SB 896 (Correa), Page 7
public.
5. Would require the commissioner to annually post a report on
the Department's Internet web site summarizing all the
following information: the number of organizations that
applied for exemptions; the number of organizations granted
exemptions; the number of organizations that entered into
partnership with exempt organizations; the reason or reasons
applications for exemption were denied, if applicable; the
number of borrowers who applied for loans through exempt or
partnering organizations; the number of borrowers who
obtained loans facilitated by exempt or partnering
organizations; the total amount loaned; the distribution of
loan lengths upon origination; the number of borrowers who
obtained more than one loan facilitated by an exempt or
partnering organization and the distribution of the number
of loans per borrower; among the borrowers who obtained more
than one loan facilitated by an exempt or partnering
organization, the percentage of those borrowers whose credit
scores increased between successive loans and the average
size of that increase; the income distribution of borrowers
upon loan origination, as specified; the purposes for which
loans facilitated by an exempt or partnering organization
were obtained; the extent to which borrowers self-reported
that they had a bank account at the time of their loan
application and the extent to which these borrowers also
used check-cashing services; the performance of loans, as
specified; the number and types of violations of the
provisions of the bill by exempt and partnering
organizations; the number of times the commissioner
suspended or revoked an exemption granted to an exempt
organization or sanctioned a partnering organization; the
number of complaints received by the commissioner about an
exempt or a partnering organization and the nature of those
complaints; and recommendations, if any, for improving the
program.
EXISTING LAW
6. Provides for the CFLL, administered by DBO, which authorizes
the licensure of finance lenders, who may make secured and
unsecured consumer and commercial loans (Financial Code Sections
22000 et seq.). The following are the key rules applied to
consumer loans made pursuant to the CFLL:
a. CFLL licensees who make consumer loans under $2,500 are
SB 896 (Correa), Page 8
capped at interest rates which range from 12% to 30% per
year, depending on the unpaid balance of the loan (Sections
22303 and 22304). Administrative fees are capped at the
lesser of 5% of the principal amount of the loan or $50
(Section 22305).
b. In addition to the requirements in "a" above, CFLL
licensees who make consumer loans under $5,000 are prohibited
from imposing compound interest or charges (Section 22309);
are limited in the amount of delinquency fees they may impose
(Section 22320.5; delinquency fees are capped at a maximum of
$10 on loans 10 days or more delinquent and $15 on loans 15
days or more delinquent); are required to prominently display
their schedule of charges to borrowers (Section 22325); are
prohibited from splitting loans with other licensees (Section
22327); are prohibited from requiring real property
collateral (Section 22330), and are limited to a maximum loan
term of 60 months plus 15 days (Section 22334).
c. In addition to the requirements in "a" and "b" above,
CFLL licensees who make consumer loans under $10,000 are
limited in their ability to conduct other business activities
on the premises where they make loans (Section 22154); must
require loan payments to be paid in equal, periodic
installments (Section 22307); and must meet certain standards
before they may sell various types of insurance to the
borrower (Sections 22313 and 22314).
d. Generally speaking, the terms of loans of $10,000 or
above are not restricted under the CFLL.
7. Until January 1, 2018, provides for the Pilot Program for
Increased Access to Responsible Small Dollar Loans within
the CFLL (Financial Code Section 22365 et seq.). Significant
elements of that program are summarized in the table above.
COMMENTS
1. Purpose: SB 896 is sponsored by the Mission Asset Fund
(MAF) to help nonprofit organizations that facilitate
affordable, credit-building, small-dollar loans expand their
lending presence throughout California.
2. Background: SB 896 attempts to address two related
problems: 1) the lack of affordable, credit-building,
small-dollar loans in California in amounts under $2,500 and
SB 896 (Correa), Page 9
2) the lack of legal and regulatory certainty provided under
California law to nonprofit organizations that facilitate
affordable, credit-building, small-dollar loans.
The first problem is fairly well characterized. Californians
who lack credit scores or have very thin credit files
currently have very few affordable options when they need to
borrow money; credit cards and low interest rate installment
loans are commonly unavailable to them. Californians with
subprime credit scores also have few options, and typically
access payday lenders when their incomes fail to match their
spending needs.
The lack of choices available to borrowers who cannot qualify
for credit cards, bank, or credit union loans, and who
require credit with which to meet their expenses is borne
out by a comparison of the number of small dollar value
installment loans made each year in California with the
number of payday loans made each year. During 2012 (the
most recent year for which lending data are available for
all CFLL licensees), CFLL licensees made approximately
265,000 unsecured consumer loans with principal amounts
under $2,500. This compares with 12.3 million deferred
deposit transactions (payday loans), which were made by
licensed payday lenders during the same calendar year.
Although the Legislature has taken steps to help close this
gap (most recently through enactment of SB 318, Hill et al.,
Chapter 467, Statutes of 2013), there is consensus among
for-profit businesses, not-for-profit organizations, and the
regulatory community that more should be done to encourage
affordable, credit-building, small dollar lending.
The second problem has not previously received Legislative
attention. One of the not-for-profit organizations that is
attempting to increase access to affordable,
credit-building, small-dollar loans is the Mission Asset
Fund, based in San Francisco. During the past five years,
MAF has facilitated approximately 2,000 affordable,
credit-building loans, totaling over $2.1 million, in
California. MAF's lending volume has increased each year
since inception, reaching $750,000 in the most recent year.
MAF serves borrowers directly, through its presence in the
San Francisco Bay Area, and indirectly, through partnerships
with other nonprofit organizations. It currently works with
nineteen different nonprofit partners across six different
states, including three different groups in Los Angeles.
SB 896 (Correa), Page 10
MAF could facilitate far more loans in far more areas of
California, but is hampered by the lack of legal and
regulatory certainty provided under California law to
nonprofit organizations that facilitate affordable,
credit-building, small-dollar loans. Specifically, because
California law is silent on the manner in which the CFLL
applies to these nonprofits, and is silent on the way in
which the law treats nonprofit partnerships that facilitate
these types of loans, MAF has encountered reluctance among
nonprofits toward partnership agreements. Nonprofits'
reluctance to partner with MAF is due partly to uncertainty
over how the partnerships' lending activities will be viewed
by DBO, and partly to the prospect of having to complete
lengthy and costly CFLL licensing applications that fail to
reflect the types of lending activities which would be
facilitated by the partnerships.
SB 896 is intended to help MAF attract nonprofit partners eager
to enter the small dollar lending space by providing legal
and regulatory certainty to MAF and its nonprofit partners,
without imposing costly licensing burdens. SB 896 is also
designed to help other nonprofits, by eliminating nonprofit
organizations' fear over regulatory backlash toward their
lending activities, and eliminating the need for nonprofits
to waste limited philanthropic resources on lending licenses
are poor fits for the organizations' lending activities.
3. What are lending circles, and how do they work? The lending
circle model around which SB 896 is written was developed by
MAF, based on the time-tested model used worldwide, in
multiple cultures. Lending circles are groups of ten to
twelve people who are connected by a common bond, and who
agree to lend money to one another and pay each other back
in an organized fashion. The lending circle model has been
used for many years in regions throughout the world,
primarily in cultures where money is scarce and individuals
are accustomed to pooling their resources to achieve their
economic goals. Different cultures call these circles by
different names, including tandas or cundinas (in Mexico),
susus (throughout Africa), paluwagan (in the Philippines),
and lun-hui (in China).
Generally speaking, the lending circle model works as follows:
each individual in the circle must agree to pay a certain
amount to the group at a frequency that is agreed upon by
SB 896 (Correa), Page 11
all members of the group (thus, for example, each member of
a ten-person lending circle could agree to pay $100 to the
group, once a month, generating $1,000 per month). A
lottery is used to determine the order in which members of
each lending circle gain access to the payment proceeds. In
the example immediately above, each of the ten members in
the circle would be able to borrow $1,000 each month - one
borrower per month - until all ten members of the lending
circle had paid $1,000, and all had borrowed $1,000.
The key difference between lending circles facilitated by MAF
and the informal lending circles that have been used in
other cultures for decades is the formalized manner in which
MAF facilitates the lending. MAF is not the lender in its
lending circles; that role is played by the members of the
circle. However, MAF plays a vitally important role as
facilitator of the circles. It enters the picture in four
ways. First, it helps individuals who wish to form lending
circles do so, by explaining the rules, underwriting the
members of each circle, and providing the paperwork
necessary to formalize the lending circle loan agreements.
Second, MAF offers free financial education to lending
circle participants. The financial management training
classes offered by MAF are directly linked to credit,
borrowing, and savings topics that lending circle
participants experience in their circles. Third, MAF
guarantees the loans. If any member of a lending circle is
unable to fulfill their loan agreement by fully repaying
their loan amount, MAF steps in to take up those payments,
thus ensuring that the other members of the circle, who have
made their payments, get fully repaid. In the alternative,
MAF helps the circle identify a replacement for the member
of the lending circle that dropped out, to ensure that the
circle is completed and all loans are fully repaid.
Finally, MAF reports borrower payment histories to at least
one of the major credit bureaus. This helps individuals who
participate in lending circles establish, build, and/or
repair their credit scores.
MAF's costs to underwrite loans and run its program are covered
through philanthropic donations. At the present time,
borrowers who participate in MAF lending circles pay zero
fees and zero percent interest on their loans. The maximum
dollar amount of a loan that MAF will facilitate is $2,200.
Approximately one-third of individuals who participate in
SB 896 (Correa), Page 12
lending circles facilitated by MAF lack any type of credit
history when they enter the program. After ten months of
lending circle repayments, these individuals can grow their
credit scores to approximately 600. According to a study of
MAF's lending circles published by the Cesar Chavez
Institute at San Francisco State University, the average
credit score increase among this group is 168 points. Among
the two-thirds of lending circle borrowers who enter the
program with a credit score, the average increase in score
is 19 points per borrower.
Many lending circle borrowers form new lending circles once
their original loan is paid back. MAF caps participation in
the program at three lending circles per borrower (none at
the same time), under the logic that borrowers who
successfully complete three lending circles should be able
to obtain more traditional forms of credit upon their
graduation.
The work of MAF and its Chief Executive Officer has been
recognized by several organizations focused on expanding
access to the financial mainstream. MAF's CEO Jose Quinonez
was awarded a James Irvine Foundation Leadership award in
2013 for his work at MAF. He has also been named Chair of
the federal Consumer Financial Protection Bureau's Consumer
Advisory Board and is a member of the California State
Controller's Financial Literacy Advisory Committee and
Experian's Consumer Advisory Council.
4. Will SB 896 Benefit Only One Non-Profit Organization? As
noted above, SB 896 was drafted around MAF's lending circle
model. However, this bill's author does not intend for the
bill's benefit to extend only to one non-profit organization
and the clientele it serves. The author asserts that by
formally recognizing the important role that non-profit
organizations and non-profit partnerships have to play in
facilitating the growth of responsible, small dollar loans,
SB 896 is intended to lay the statutory groundwork for other
non-profits to enter this space. Several of the bills
requirements - and particularly the bill's fee structure --
are drafted in a manner intended to provide flexibility to
other non-profits with models that differ from MAF's.
5. Summary of Arguments in Support:
a. MAF, sponsor of SB 896, writes that "Now is the time
SB 896 (Correa), Page 13
for the State of California to recognize and enlist the
nonprofit sector to do more in helping underserved
Californians gain access to affordable, responsible
financial products. SB 896 will unleash the potential of
nonprofit organizations to turn underserved households
into visible, active and successful consumers in the
financial marketplace...The bill supports collaborations
among nonprofits that share resources to lower costs of
lending services. SB 896 removes regulatory uncertainty
and ensures an orderly and structured process for
nonprofit organizations helping underserved communities
access affordable financial products and services."
The lending circle model that formed the basis for SB 896
has a proven success record. In 2011, a team of
researchers from San Francisco State University's Cesar
E. Chavez Institute conducted a two-year research study
to determine Lending Circles' impact in helping
low-income people improve their credit and financial
situation, while assessing the model's effectiveness
across diverse populations. According to MAF, "The
results of the study showed that Lending Circle
participants on average improved their credit scores 4
times greater than non-participants: 168 points vs 41
points. Evaluators also observed that participation in
Lending Circles led to reduced debt and increased
savings. Both control and treatment groups started with
an average of $9,300 in debt. Over a period of 10
months, Lending Circles participants reduced their debt
by an average of $1,051 to $8,186. The debt situation
for the control group actually worsened over time; they
increased their debt by another $2,913 to $12,271. Lower
debt is not inconsequential. Lending Circle participants
in the study saved $42,636 in interest and fees from
lowering their debt burdens with zero interest and zero
fee social loans."
b. National Council of La Raza, the Greenlining
Institute, San Francisco Office of Financial Empowerment,
Center for Asset Building Organizations, Opportunity
Fund, EARN, Californians for Shared Prosperity Coalition,
and multiple other consumer advocacy and economic
development organizations support the bill for similar
reasons. "We believe in the impact nonprofit
organizations can have on turning California households
into visible, scoreable consumers. We need more laws
SB 896 (Correa), Page 14
encouraging nonprofits to meet the needs of consumers
living in the fringes of our economy where for-profit
lenders are not affordable options. It's time for the
state to officially recognize these efforts. Together,
we can create more pathways for economic mobility and
financial stability for low-income Californians."
c. Progreso Financiero, a sponsor of the first CFLL
pilot program to encourage responsible small dollar
lending and strong supporter of SB 318, the bill which
revised that program to improve its effectiveness,
supports SB 896. "SB 896 is consistent with the goal set
forth for SB 318 - to increase access to Californians to
responsibly constructed, affordable and credit-building
loans...SB 896 attempts to identify and promote
non-profit lenders who adhere to the same responsible
lending practices defined in SB 318, and to reduce
obstacles that these non-profit lenders face. The
successful passage of SB 896 will create more responsible
and credit building borrowing opportunities for
Californians."
6. Summary of Arguments in Opposition: None received.
7. Prior and Related Legislation:
a. SB 1146 (Florez), Chapter 640, Statutes of 2010:
Authorized the Pilot Program for Affordable
Credit-Building Opportunities to help encourage
socially-responsible, for-profit lenders to offer
installment loans in amounts under $2,500.
b. SB 318 (Hill), Chapter 467, Statutes of 2013:
Modified the provisions of SB 1146 to help attract more
lenders to the pilot program and help increase the number
of loans that existing lenders could afford to make.
Sunsets on January 1, 2018.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Mission Asset Fund (sponsor)
Asian Law Alliance
Calexico Community Action Council, Inc.
SB 896 (Correa), Page 15
Californians for Shared Prosperity Coalition
Center for Asset Building Opportunities
Corporation for Enterprise Development
EARN
Family Independence Initiative
Greenlining Institute
National Council of La Raza
Opportunity Fund
Pilipino Workers Center of Southern California
Progreso Financiero
San Francisco Office of Financial Empowerment/SF Treasurer Jose
Cisneros
San Francisco Supervisor David Campos
Watts/Century Latino Organization
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102