BILL ANALYSIS �
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THIRD READING
Bill No: SB 896
Author: Correa (D), et al.
Amended: 5/14/14
Vote: 21
SENATE BANKING & FINANCIAL INST. COMM. : 9-0, 4/9/14
AYES: Evans, Berryhill, Block, Correa, Hill, Hueso, Roth,
Torres, Vidak
SENATE APPROPRIATIONS COMMITTEE : 6-0, 4/28/14
AYES: De Le�n, Gaines, Hill, Lara, Padilla, Steinberg
NO VOTE RECORDED: Walters
SUBJECT : Finance lenders: nonprofit organizations:
zero-interest, low-cost loans: exemptions
SOURCE : Mission Asset Fund
DIGEST : This bill authorizes a nonprofit 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 requires a nonprofit organization granted
an exemption by DBO to comply with specified requirements
related to the loans it facilitates. It further provides that
nonprofit organizations which partner with exempt nonprofits are
not subject to the CFLL, if they meet specified criteria and
comply with specified requirements.
Senate Floor Amendments of 5/14/14 clarify that the
zero-interest loans which are the subject of the bill are
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low-cost (not zero-cost), and correct a provision of the bill
governing the length of time that must pass before a delinquent
loan may be sold or assigned to a third party.
ANALYSIS :
Existing law:
1. Provides for the CFLL, administered by DBO, which authorizes
the licensure of finance lenders, who may make secured and
unsecured consumer and commercial loans. 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 capped at interest rates which range from 12% to 30%
per year, depending on the unpaid balance of the loan.
Administrative fees are capped at the lesser of 5% of the
principal amount of the loan or $50.
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; are
limited in the amount of delinquency fees they may impose
(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; are prohibited
from splitting loans with other licensees; are prohibited
from requiring real property collateral, and are limited
to a maximum loan term of 60 months plus 15 days.
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; must
require loan payments to be paid in equal, periodic
installments; and must meet certain standards before they
may sell various types of insurance to the.
D. The terms of loans of $10,000 or above are not
restricted under the CFLL.
1. Provides, until January 1, 2018, for the Pilot Program for
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Increased Access to Responsible Small Dollar Loans (SB 318,
Hill, Chapter 467, Statutes of 2013) within the CFLL.
This bill:
1. Exempts from the CFLL a nonprofit organization (hereinafter
referred to as an exempt organization) that facilitates one
or more zero-interest, low-cost installment loans with
principal amounts between $250 and of $2,500, as follows:
A. The organization will 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 will have to file an application of
exemption with the Commissioner of Business Oversight
(Commissioner) and pay a fee to the Commissioner in an
amount calculated by the Commissioner to cover costs to
administer this 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 nonprofit partners within the state
during the preceding calendar year.
D. Loans made by the exempt organization will have to be
unsecured, zero-interest, low-cost loans, which will have
to be of certain minimum duration and be underwritten, as
specified. The exempt organization will 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. Loans could not
be refinanced; and delinquent loans may not be sold or
assigned to a third party for collection before at least
90 days following the start of the delinquency.
Generally speaking, lengths of the loans, underwriting
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requirements applied to the loans, disclosures provided to
borrowers, fees that could be charged to borrowers, and
other rules of the program will be identical to the rules
applicable to lenders accepted into the Pilot Program for
Increased Access to Responsible, Small Dollar Loans,
except as specified.
The maximum APRs that could be charged under the interest
rate and fee structure allowed by this bill are as follows:
------------------------------------------------------------
| | | | |
| Loan | Minimum Loan | Maximum | Maximum |
| Amount | Length | Origination Fee |Possible APR |
| | | Allowable | |
| | | | |
|----------+----------------+------------------+-------------|
| $250 | 90 days | $17.50 | 42% |
| | | | |
|----------+----------------+------------------+-------------|
| $500 | 120 days | $35 | 33% |
| | | | |
|----------+----------------+------------------+-------------|
| $1,000 | 120 days | $70 | 33% |
| | | | |
|----------+----------------+------------------+-------------|
| $1,500 | 180 days | $70 |16% |
| | | | |
| | | | |
------------------------------------------------------------
1. Provides that the CFLL does not apply to a nonprofit
organization which partners with an exempt organization for
the purpose of facilitating zero-interest, low-cost loans,
provided that all of the following conditions are met:
A. Requires the partnership between the exempt
organization and each partnering organization 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 this bill and any regulations
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the Commissioner may promulgate to administer this bill.
B. Requires the partnering organization to be a
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. Requires the loans facilitated by the partnering
organization to comply with all of the loan requirements
summarized above.
D. Requires each exempt organization 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 will 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(es) at which the
organization facilitates lending activities.
E. Requires each exempt organization 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 #5 below.
1. Gives the Commissioner the authority to examine each exempt
organization and each partnering organization for compliance
with the provisions of this bill; requires any organization
so examined to make available to the Commissioner or his/her
representative all books and records requested by the
Commissioner related to the lending activities facilitated by
that organization; and requires 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 nonprofits with which they partner).
2. Gives 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,
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and/or prohibit partnerships between exempt organizations and
other specific organizations, as specified, and as necessary
for the protection of the public.
3. Requires the Commissioner to annually post a report on DBO's
Internet Web site summarizing 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;
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 DBO; as well as any recommendations
for improving the program.
Background
The CFLL 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
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process is currently not structured to promote the types of
lending activities that would be facilitated by nonprofit
organizations.
The lending circle model around which this bill 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 10-12 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.
Prior legislation . SB 1146 (Florez, Chapter 640, Statutes of
2010), modified by
SB 318 (Hill, Chapter 467, Statutes 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee, 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. This bill 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.
SUPPORT : (Verified 5/15/14)
Mission Asset Fund (source)
State Controller John Chiang
Asian Law Alliance
Calexico Community Action Council, Inc.
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California Association for Micro Enterprise Opportunity
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
ARGUMENTS IN SUPPORT : The bill's sponsor, Mission Asset Fund,
writes that "Now is the time 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."
Progreso Financiero, a sponsor of the first CFLL pilot program
to encourage responsible small dollar lending, writes "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."
MW:k 5/15/14 Senate Floor Analyses
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SUPPORT/OPPOSITION: SEE ABOVE
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