Viewpoint: California as a Model for Legislation on Responsible Lending

By Raul Vazquez, Oportun

Regulators and policymakers are eager to find a way to protect consumers from predatory lending practices while also encouraging the kind of innovation that leads to increased access to responsible and affordable credit—especially for those most often left out of the financial mainstream. On Sept. 22, 2016, California Governor Jerry Brown signed SB 984, a bill that extends a state-wide pilot program that has succeeded on both of those fronts. The Pilot Program for Increased Access to Responsible Small Dollar Loans, first implemented in 2011 and now extended until 2023, is a proven model that can inform the efforts of legislators and regulators interested in small-dollar credit.

The California Pilot incentivizes lenders to offer loans from $300 to $2,500 by enabling them to charge higher interest rates and with larger origination and delinquency fees than those permitted for the same size consumer loans made outside the program. In exchange, lenders agree to provide significant consumer protections and benefits, including:

• Required verification of income and debt to be used in underwriting;
• Minimum terms for loans that are measured in months;
• Mandatory reporting of loans to a nationwide credit bureau so consumers can establish credit history;
• Offer of credit education before loan disbursement;
• Conditions on refinancing the loan balance; and,
• A ban on requiring borrowers to waive their rights to sue as a condition of obtaining a loan; among other provisions.

Before the California pilot went into effect, there were very few lenders offering loans between $300 and $2,500. Payday lenders focused on borrowers who needed less than $300 and installment lenders preferred to serve those who needed loans above $2,500, where there was no limit on the rates they could charge. Low-to-moderate income borrowers needed access to loan amounts in between, but there were very few lenders willing to offer loans to individuals with little or no credit history. The Pilot Program for Increased Access to Responsible Small Dollar Loans, which was introduced in 2010, was designed to encourage innovation in lending, increase access to responsible and affordable credit, and ensure that more people have the opportunity to establish credit history.

The California pilot is working. Between 2010 and 2015, the number of loans between $300 and $2,500 more than doubled (from 203,036 in 2010 to 463,603 in 2015) as did the dollars disbursed under the program (from $152 million in 2010 to $329 million in 2015).

What’s more, the California pilot has helped hundreds of thousands of low-to-moderate income Californians gain access to affordable loans while establishing and building the credit history many of them lacked, according to a report published in June 2015 by the California Department of Business Oversight.

During the first four years of the pilot, 2011-2015:

1. Nearly half a million loans were made, totaling more than $550 million.
2. Although the base of licensed lenders is still relatively small through 2015, we’ve also seen the number of lenders under the California pilot triple.
3. Equally important, 61 percent of borrowers saw their credit scores increase. The average borrower saw credit scores increase 198 points, while those who borrowed multiple times saw their scores go up 355 points.

Given the California pilot’s proven results, it’s no wonder nearly 30 nonprofit consumer advocacy, labor and business organizations supported extending the California pilot through 2023. These included such high-profile institutions as the Greenlining Institute, Western Center for Law and Poverty, California State Council of Laborers, Center for Financial Services Innovation, Mission Asset Fund, Pew Charitable Trust and others.

Regulators and policymakers are currently struggling to reconcile two goals that are too often characterized as being mutually exclusive: Protecting vulnerable consumers from predatory practices and increasing access to credit, especially to individuals left out of the financial mainstream due to their lack of credit histories. The California Pilot Program for Increased Access to Responsible Small Dollar Loans proves that, with the right framework that includes provider incentives and consumer protections, these goals need not be at odds.

Raul Vazquez is CEO of Oportun, a company that uses advanced data analytics and technology to provide affordable loans to Latinos and others with little or no credit history so they can establish credit and build a better future. Between its first loan in 2006 and Sept. 30, 2016, Oportun helped more than 800,000 customers by disbursing nearly $3 billion through more than 1.6 million small-dollar loans. Vazquez is the current chair of the Federal Reserve Board’s Community Advisory Council and also serves on the CFPB’s Consumer Advisory Board. 

This article was written by the author in the author’s personal capacity. The views in this article are the author’s own, not those of the Consumer Advisory Board, the Consumer Financial Protection Bureau, or the United States.

In Viewpoints, payments professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.