BILL ANALYSIS �
SB 896
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Date of Hearing: July 2, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
SB 896 (Correa) - As Amended: May 14, 2014
Policy Committee: Banking &
FinanceVote: 12-0
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill exempts certain nonprofit organizations that
facilitate zero-interest, low-cost installment loans with
principal amounts between $250 and $2,500 from the California
Finance Lenders Law (CFLL). Specifically, this bill:
1)Requires the nonprofit organization to be exempt from federal
income taxes pursuant to Section 501(c)(3) of the Internal
Revenue Code, and that no part of the net earnings of the
organization may benefit a private shareholder or individual.
2)Requires the organization to file an application for exemption
with the Commissioner of Business Oversight (Commissioner);
pay a fee in an amount calculated by the Commissioner to cover
the costs of administering the bill; and file an annual report
with the Commissioner on the lending facilitated by the
organization and its nonprofit partners.
3)Specifies that the exempt organization may only issue loans
within the following conditions:
---------------------------------------------------------------
|Principal |$250 - $2,500 |
|amount: | |
|-----------------+---------------------------------------------|
|Interest rate: |0% |
|-----------------+---------------------------------------------|
|Security: |None, loans must be unsecured |
|-----------------+---------------------------------------------|
|Origination |First loan: 7% of the principal amount or |
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|fees: |$90, whichever is less |
| |Subsequent loans: 6% of the principal |
| |amount or $75, whichever is less |
|-----------------+---------------------------------------------|
|Minimum loan |Loans < $500: 90 days |
|duration: |Loans $500 - $1,499: 120 days |
| |Loans $1,500 - $2,500: 180 days |
|-----------------+---------------------------------------------|
|Insufficient |Up to $10 to cover an insufficient funds fee |
|funds fee: |incurred by the lending organization due to |
| |actions of the borrower |
|-----------------+---------------------------------------------|
|Underwriting |Income and debts must be independently |
|requirements: |verified by the lender |
| |Monthly debt service payments, including the |
| |loan, may not exceed 50% of the borrower's |
| |gross monthly household income |
|-----------------+---------------------------------------------|
|Refinancing: |Prohibited |
---------------------------------------------------------------
4)Requires the exempt organization to provide specified
disclosures to the borrower in connection with the issuance of
any loans, provide payment reminders to the borrower at least
two days prior to each payment due date, and report borrower
payment history to at least one consumer reporting agency.
5)Allows non-lending nonprofit organizations to partner with
exempt organizations to facilitate the issuance of the
permitted loans under the following conditions:
a) The partnership is formalized through a written
agreement that requires the partnering organization to
comply with all the loan-related provisions of the bill and
regulations, and any loans facilitated by the partnering
organization comply with all the requirements of the bill
and regulations.
b) The partnering organization is also 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 may benefit a private shareholder or
individual.
c) Each exempt organization notifies the Commissioner
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within 30 days of entering into a written agreement with a
partnering organization, and submits information regarding
the loans facilitated by the partnering organizations.
6)Authorizes the Commissioner to examine the books and records
of any exempt organization or partnering organization for
compliance with the provisions of the bill, and requires the
exempt organization to pay the Commissioner for the cost of
any examination conducted upon it or any of its partnering
organizations.
7)Authorizes the Commissioner to suspend, revoke, or decline to
grant an exemption, as well as disqualify a partnering
organization or terminate or prohibit any agreements with
partnering organizations.
8)Requires the Commissioner to annually post a comprehensive
report on the website of the Department of Business Oversight
(DBO) summarizing information on exempt lending and partnering
organizations and their lending activity, including violations
and complaints.
FISCAL EFFECT
Annual Corporations Fund costs to DBO of approximately $95,000,
largely recoverable through fee revenue.
COMMENTS
1) Purpose. According to the author, this bill attempts to
address the lack of affordable, credit-building, small-dollar
loans in California by addressing the lack of legal and
regulatory certainty for organizations that facilitate those
loans. The author contends that individuals with little or no
credit history or individuals with subprime credit scores
currently have very few affordable options for borrowing
money, and typically resort to payday lenders to cover their
liquidity needs. For example, during 2012, CFLL licensees
made approximately 265,000 unsecured consumer loans with
principal amounts under $2,500, compared with 12.3 million
payday loans made by licensed payday lenders.
2) Lending Circles. Lending circles are typically groups of 10
to 12 people who agree to lend money to one another and repay
that money in an organized fashion. The lending circle model
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has been used for many years in regions of the world where
access to credit is scarce and local societies have a
tradition of informally pooling resources to facilitate
economic activity. Areas where lending circles are
particularly active include Mexico, the Philippines, China,
and throughout Africa.
In a typical lending circle, each individual agrees to fund
the pool with a certain amount at a certain frequency as
agreed among the circle members. For example, a 10-person
lending circle may agree that each member fund the pool at
$100 per month, generating a lending pool of $1,000. The
$1,000 pool is then lent to a single member (the order of
which is often determined via lottery) and repaid at the end
of the period and redistributed to the members. The process
then repeats for the following period until each member has
had the opportunity to borrow from the pool.
3) Mission Asset Fund. Over the past five years, the sponsor of
this bill, the Mission Asset Fund in San Francisco (MAF), has
been facilitating small-dollar loans based on the lending
circle model, with approximately 2,000 loans totaling over
$2.1 million in California. MAF's facilitated lending volume
has increased each year since inception, reaching
approximately $750,000 in the most recent fiscal 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 nonprofit partners in six different states, including
three partners in Los Angeles.
Unlike informal lending circles, MAF serves only as
facilitator and not as a lender. MAF provides a formalized
platform to facilitate the formation of lending circles,
providing several services to members and borrowers including
credit and financial education, underwriting lending circle
members, and providing standard form lending circle and loan
agreements. MAF also serves as guarantor to the loans made by
the lending circles, underwriting the credit risk on behalf of
lending circle members. Finally, MAF reports borrower payment
histories to at least one of the major credit bureaus, helping
borrowers establish or enhance their credit scores.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081
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