BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
SB 896 (Correa) - Finance Lenders
Amended: February 18, 2014 Policy Vote: BFI 9-0
Urgency: No Mandate: No
Hearing Date: April 28, 2014
Consultant: Maureen Ortiz
This bill does not meet the criteria for referral to the
Suspense file.
Bill Summary: SB 896 authorizes a non-profit organization to
apply for exemption from the California Finance Lenders Law
(CFLL) administered by the Department of Business Oversight
(DBO) in order to facilitate zero-interest installment loans as
specified.
Fiscal Impact:
Preliminary estimates are $95,000 annually, potentially
offset by fee revenue (Special Fund)
Cost estimates result from requirements for amending existing
regulations, licensing new applicants, conducting examinations,
approving credit education programs, and compiling the annual
report. SB 896 provides that fees from applicants will be
established at a level sufficient to cover all administration
costs. Consequently, the actual costs and revenue will be
dependent on the number of participating organizations and could
be higher or lower than the preliminary estimate.
Background: The CFLL, administered by the Department of
Business Oversight, authorizes the licensure of finance lenders
for the purposes of making secured and unsecured consumer and
commercial loans. The CFLL, however, is silent on its
application to nonprofit corporations, and on how it regulates
nonprofit partnerships that facilitate these types of loans. As
a result, there is reluctance in the community for nonprofit
organizations to participate in small-dollar loans. The CFLL
licensing process is currently not structured to promote the
types of lending activities that would be facilitated by
nonprofit organizations.
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The lending circle model around which SB 896 is written was
developed by Mission Asset Fund located in San Francisco and is
based on the time-tested model used worldwide. Lending circles
are generally 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.
SB 1146 (Florez) Chapter 640, Statutes of 2010 (modified by SB
318 Hill, Chapter 467 of 2013), authorized the pilot Program for
Affordable Credit-Building Opportunities to encourage
socially-responsible, for-profit lenders to offer installment
loans in amounts under $2,500.
Proposed Law: SB 896 will authorize nonprofit organizations to
apply to the Department of Business Oversight for an exemption
from the Consumer Finance Lending Law in order to facilitate
zero-interest small dollar loans in amounts from $250 to $2,500
under the following conditions:
1) The organization must be organized as a 501(3)(c)
entity.
2) No part of its earnings can be directed to the benefit
of a private shareholder or individual.
3) The organization may not charge a broker's fee.
4) The entity must file an application for exemption with
the DBO, and pay a fee sufficient to cover all
administration costs.
5) The organization must file a report annually by March 15
containing all relevant information concerning loans that
were facilitated.
6) The organization must report each borrower's payment
performance to at least one consumer reporting agency, as
specified.
7) The borrower's debt to income ratio must not exceed 50%
of his or her gross monthly household income.
8) Borrowers must be notified of the amount and due date of
the next payment at least two days before each payment is
due.
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9) Credit insurance is prohibited from being offered to the
borrower.
10) The borrower must not be forced to waive the right to file
and pursue a civil action or file a complaint with the
commissioner, as specified.
Additionally, all loans made must be unsecured, interest-free,
and any administrative fee will be limited to seven percent of
the principal amount, or $90, whichever is less, on the first
loan made to a borrower; and six percent, or $75, whichever is
less, on the second and subsequent loans made to that same
borrower. SB 896 also prescribes limitations on administrative
fees and delinquency fees, requires an extensive consumer
disclosure to be provided at the time of the loan application,
and outlines the procedures under which an organization may
partner with another nonprofit entity for purposes of these loan
activities.
Prior to the disbursement of the loan proceeds, the organization
must either offer a credit education program that has previously
been approved by the Department of Business Oversight; or invite
the consumer to a credit education program, at no cost to the
borrower, offered by a third party that has been previously
reviewed and approved by the commissioner.
The DBO will be authorized to conduct examinations of each
exempt organization and each partnering organization for
compliance, and the costs of the exams will be paid by the
exempt organization.
The DBO will be required to compile the data received annually
from participating organizations and prepare a summary report by
July 1 each year which will be posted on the department's
Internet Web site. The report shall include the following
information:
a) the number of organizations and partnerships that apply for
exemptions;
b) the number of exemptions granted and the reasons for denial,
if any;
c) the number of borrowers who applied for and were granted
loans;
d) the total amount loaned and their length of terms;
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e) the number of borrowers who applied for multiple loans;
f) the percentage of those borrowers whose credit scores
increased and the average size of the increase;
g) the income distribution of borrowers up loan origination, as
specified;
h) the primary purpose of the loan as indicated by the borrower
at the time of the loan application; and,
i) several other criteria relating to borrowers' bank
accounts, late payments, revocations of exemptions, and
complaints received by the department; as well as any
recommendations for improving the program.
Staff Comments: SB 896 is intended to help nonprofit
organizations that facilitate affordable, credit-building,
small-dollar loans to expand their lending presence throughout
California by addressing two related problems: 1) the lack of
affordable, credit-building, small-dollar loans in California in
amounts under $2,500; and, 2) the lack of legal and regulatory
certainty provided under California law to nonprofit
organizations that facilitate affordable, credit-building,
small-dollar loans.
There are few choices currently available to borrowers who
cannot qualify for credit cards, bank loans, or credit union
loans, and who require credit with which to meet their expenses.
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 reveals that 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, while 12.3
million deferred deposit transactions (payday loans) were made
by licensed payday lenders during the same calendar year.
Advantages of lending circles include zero-interest small dollar
loans, reduced fees, credit education, and credit building
opportunities to individuals who do not otherwise have loan
opportunities.
SB 896 protects participants' proprietary information that is
contained in the reports from being released to the public.
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