Assembly Standing Committee on Banking and Finance

With that, it is time to move on to the hearing. And being that we still don't have a quorum, we will start as a Subcommitee. And we will start with item number two, actually, and that is SB 666, file item number two. Senator Min, are you here? Okay, great. The recommendation is do pass, as amended, to the Judiciary Committee. Senator Min, when you're ready, you can begin with your opening statement.

Thank you, Chair Gray and Committee Members, I just want to say I'll be gladly accepting the Committee amendments.

Thank you. To staff amendments SB 666, appropriately numbered, will address junk fees that are bedeviling small businesses by prohibiting or capping specific junk fees placed on small businesses during the commercial financing process. Small businesses were hit hard by the COVID-19 pandemic, and over 40,000 small businesses in California were forced to close. Many others today are still struggling to get back on their feet. These circumstances have pushed many small businesses to take out loans with commercial lending and finance companies just to stay afloat.

Unfortunately, these loans often come with hidden or exorbitant fees. Most of these small businesses have fewer than 10 employees and do not necessarily have the capacity to sift through the fine print of these loans. And of course, the devil is always in the detail when it comes to these contracts. We need safeguards in place to make sure the lending process is straightforward, transparent and does not come with surprises. We've identified five different types of fees that are exorbitant, provide no service, and or are anticompetitive.

One of these identified fees is a charge for providing statement or payoff letters to small businesses trying to refinance their loans. These types of fees put up a barrier to more affordable options and are anticompetitive. Other fees, like platform and due diligence fees, can cost hundreds of dollars each and provide no other corresponding clear service. SB 66 would ensure these fees and others are eliminated or capped at reasonable amounts. Small businesses deserve transparency when evaluating their lending options, and this Bill would do just that.

Here to testify in support of the Bill, I have Bianca Blomquist from Small business Majority and Heidi Pickman from the California Association for Micro Enterprise Opportunity.

Thank you. Witnesses may begin. Thank you. Witnesses may begin.

I said Bianca first.

Thank you, Chairman Grayson, Vice Chairman Chen and Members of the Committee. My name is Bianca Blomquist. I'm policy Director for Small Business Majority. We are a national research, education and advocacy organization that empowers America's entrepreneurs to build a thriving and equitable economy. I'm here to testify on behalf of SB 66 to promote transparency for small business owners when shopping for commercial financing products, access to responsible capital remains a top concern for entrepreneurs.

A poll by small business majority found that actually eight in 10 California small business owners reported they are in favor of regulating online lenders to ensure fees are clearly disclosed to borrowers. Junk fees are anticompetitive and often highly disproportionate to the cost of service provided. They make it difficult for small business owners to shop around based on the actual cost of a product or service. Lenders are charging statement fees, payoff letter fees that place a financial barrier to a borrower seeking to refinance an existing loan.

This practice is anticompetitive and has the effect of coercing a borrower to stay with a loan they cannot afford. Junk fees are not only costly to borrowers, but they stifle competition and entrepreneurship. Commercial lenders often charge large sums to small business owners as duplicate fees or fees that do not provide a clear, corresponding service.

Examples include charging a fee to accept a payment via ACH automatic clearinghouse, or fees that are added on top of an origination fee, such as a risk assessment, due diligence or platform fee, even though risk assessment and due diligence are part of the origination process. By tackling hidden fees, policymakers can ensure small business owners are on a level playing field when accessing the financing they need to start and grow their businesses.

SB 666 protects California's economy and supports responsible innovation and commercial financing in the commercial financing marketplace. We are glad to see policymakers introduce efforts to protect small business owners as they see affordable, transparent financing, which is a critical component to maintaining a business's operations and growth. SB 66 will provide the price transparency that small business owners deserve, and thank you for your leadership on behalf of California small business owners.

Thank you. Thank you. And before we hear the next witness, we'd like to establish a quorum. So, Secretary, if you would, please call roll.

Grayson here. Chen here. Bauer-Kahan here. Cervantes. Dixon here Mike Fong. Gabriel. Petrie-Norris here. Soria. Waldron here. Wicks here. Wilson here.

We do have a quorum now. We have the Bill moved by Ms. Wicks and seconded by Vice Chair Chen. Please go ahead. You do have a motion and a second.

Fantastic. Thank you, Chairman Grayson, Vice Chairman Chen and Members of the Committee. My Name is Heidi Pickman for Cameo, California's statewide network of 400 mission driven entrepreneurial training programs, small business micro lenders, and other stakeholders dedicating to helping small businesses start, grow and thrive. Bianca did a great job listing out the issues. So I'm going to focus my testimony on a story I want to tell you about Kelly.

And actual, I'm going to leave her name out of it, but if you want contracts, I'm happy to send you the contracts. With her information blacked out, she owns a personal fitness business in Long Beach. She took out a 7500 merchant cash advance in a time of desperate need from biddy advance to pay her rent and her instructors. Her origination fee was $595, about 8% of the loan. That's almost three times that of an SBA loan.

On top of that, she was charged a $50 disbursement fee for same day disbursement of the funds, a monthly servicing fee of $49. For a point of comparison, a similar mortgage servicing fee would be about a dollar 60 and an unspecified prepayment fee. SB Six. Six seats. Terrain and high fees and fees that don't come with a corresponding service that make some commercial funding very expensive.

This Bill will support small businesses in their quest for access to responsible, affordable capital so they can grow, succeed and build wealth for them, their families, and in their communities. Which are your communities? We respectfully ask for your aye vote. Thank you very much.

Thank you very much. And we are now turning to witnesses in support in the room. Simply state your name, organization and position.

Good afternoon, Mr. Chairman and Members. Robert Harrell, Executive Director of the Consumer Federation of California. We're a proud co sponsor of this measure. Urge your aye vote. Thank you.

Good afternoon, chair and Members. My name is Andrea Cao with the California Asian Pacific Chamber of Commerce in Support. Thank you.

Thank you. And seeing no other. One more.

My name is Kate Fisher. I'm here with the revenue based Finance Coalition, and we support this Bill. Thank you.

Thank you very much. Seeing no other folks in support, we will now turn to opposition. Lead opposition? None. So do we have any opposition to speak in the room? Seeing none, we will bring it to Committee. Questions or comments from Committee Members? Seeing none, we do have a first and a second or a motion and a second. So we will. Please. Do you want to provide a closing statement?

I respectfully ask your aye vote.

Senator, thank you so much for your brevity. Much appreciated. Secretary, please call the roll.

The motion is do passed as amended and referred to Committee on Judiciary. Grayson, aye. Grayson, aye. Chen, aye. Bauer-Kahan, aye. Cervantes. Dixon, aye. Mike Fong. Gabriel. Petrie-Norris aye. Soria. Waldron, aye. Wicks aye. Wilson aye.

Bill has eight votes. We will keep the roll open for absent Members. Thank you very much. And as the next author prepares to present. So we have a motion on consent Assembly Member Wicks seconded by Bauer-Kahan. Secretary, please call roll.

The motion is due, passed, and referred to Committee on Judiciary. This is SB 446. Grayson, aye. Chen aye. Bauer-Kahan, aye. Cervantes. Dixon aye. Mike Fong. Gabriel. Petrie-Norris, aye. Soria. Waldron aye. Wicks, aye. Wix, aye. Wilson, aye.

Consent has eight votes; it passes. We will leave the roll open for absent Members as they come in. Senator Glazer, you have SB 33, File Item Number One. The recommendation is 'do pass to Judiciary Committee,' and please begin with when you're ready.

Thank you. Thank you, Chair. Thank you, Chair Grayson, if this microphone is working. In 2018, the Legislature passed SB 1235, a law I authored to require financial providers to give small business truth-in-lending disclosures, which included expressing the total cost of financing as an annualized rate, similar to what a consumer loan--on your credit card, you'll see a rate if you're not paying it off in full. That's a consumer protection, so you can see the rate. There's no such requirement for small business lending.

The Department of Financial Protection and innovation was given the authority to decide the exact metric that financial providers would use. They held three informal and six formal comment periods over many, many years. I don't know if there's been such an extensive comment period in our recent history. The Department chose the time tested, APR, annual percentage rate, and released a 48-page guideline document on how financial providers could comply with this disclosure. Noted in the analysis of the Committee, let me thank your staff, Chair Grayson, for the terrific analysis.

A study conducted by the Federal Reserve found consumers like APR because they are familiar with it, and it provides them with crucial information in a digestible manner. APR allows small business borrowers to compare apples to apples. You'll hear in testimony from the opposition that they have their own way of trying to persuade someone to take a loan from them.

They talk about how much money they're going to be providing them, but they don't want to provide it in any kind of annual percentage rate because that's the apples and apples that small business need to be able to compare from one financial offer to another. If you don't have that consistent rate of analysis, you can be easily fooled. SB 33 repeals the sunset that was incorporated into 1235, allowing for the continued disclosure of the total cost of financing to be expressed as an APR.

The bill ensures small business owners who borrow money continue to benefit from the protections the Legislature adopted in 2018. I know that there's going to be some concerns raised, and I wanted just to maybe get in front of it a little bit by talking to you about it. One: I mentioned the time it took to prepare these regulations and I've made that already in my opening statement.

Two is the fact that under the existing regulations, all a lender has to do is provide a good faith estimate. The regulations go into great detail, and I can put it on the record here, if necessary, about how you go about a good faith estimate, and they also speak to the issue of a safe harbor from liability in the regulations, and I can go through that in detail if you wish. To try to.

My intentions originally and certainly today, are not to create a gotcha situation for lenders. It's completely the opposite. We need a robust financing opportunity for small business. That's what we all want for small business to thrive, and I have no interest in authoring legislation or protecting legislation that creates that gotcha circumstance.

So the regulations do go into what a fair estimate is and what a safe harbor is, so that if you make your best estimate and it turns out not to be true, the regulations allow you to change it. Just says you have to have 60 days to change it, disclose it to the borrower, and you're all good, and again, I'm happy to detail that in more detail if you wish. Let me just say this in closing.

From the beginning of time, the manipulation of money has been a historical challenge. We've heard about usury rates. It's in the Old Testament, the New Testament, the Quran. You can look at some biblical writings and you'll get to this issue of the manipulation of money and how easy it is to exploit people.

The intention of the original bill and this extension is to provide a simple and easy to understand metric for what it would cost if you borrowed money from this person or this person or that person.

Today, you're not your banks down the street. It's all on the Internet, and it's easy to be manipulated as a small business person who's not an expert in finance to understand when their pizza oven breaks down or their donut shop has an emergency, whatever it is, that they can at least compare what is being offered so they can make good choices and not be taken advantage of, and with that, I have two people to testify on my behalf on this bill today.

Preston McCaskill, who's with Bluevine--excuse me--and Heidi Pickman, who's with the California Association of Micro Enterprise Opportunity, CAMEO, that represent a lot of the responsible lending firms, and I welcome their testimony at the discussion of the Chair.

Thank you, Senator. And witnesses may begin at your discretion.

Honorable Members of the Committee, my name is Preston McCaskill. I am the Vice President of Strategic Initiatives at Bluevine, a leading provider of end-to-end small business banking solutions. I am based here in California and I'm here to share Bluevine's strong support for preserving California's small business truth-in-lending framework by passing SB 33 as proposed. Since our founding in 2013, Bluevine has served over half a million small businesses, providing over 14 billion dollars in funding and currently exceeds over 700 million dollars in small business checking deposits.

We support SB 33 because we believe small business owners deserve transparency about the prices they may pay for financing. As a financing provider, we want to compete on a level playing field. Under the disclosure rules in place today, we are able to compete on price because providers across all financing types have begun disclosing their prices transparently as APRs.

Different financing companies offer different kinds of financing, but for us and for all financing providers, California's regulations provide clear instructions for how to compute the estimated APR and its other terms. We understand that as we follow these regulations in good faith, we are protected in cases where the effective APR diverges over time from the estimated APR we disclosed. DFPI has stated this in its Final Statements of Reasons at 1.2.22. We urge you to preserve transparent APR disclosures across all types of financing products. Thank you.

Thank you, Chairman Grayson, Vice Chairman Chen, and Members of the Committee. My name is Heidi Pickman, again. We're California's statewide network of mission-driven entrepreneurial programs, micro lenders, and other stakeholders that are mission-driven to serve those small businesses. We constantly hear from our lending members that they're refinancing or sometimes trying to refinance predatory financing that their potential borrowers, your constituents, found online.

The latest targets Spanish speaking business owners who have idle loans and are being told they need to rush and refinance their idle loans or else. The federal Truth in Lending Act protects consumers, but not small businesses. That's why we were strong supporters of SB 1235, the nation's first truth-in-lending bill for small business products, and that's why we're strong supporters of SB 33, a bill that would maintain California's strong disclosure laws, and that is disclosure of the annual percentage rate.

APR allows apples to apples comparisons, as Senator Glazer mentioned, of different financing over a common unit of time. It is very important. Truth is that most small business owners make their financial decisions as a consumer. APR is what most small businesses are familiar with through credit cards, auto loans, and their mortgages. A 2018 Federal Reserve study found small business borrowers syncing financing online. They found APR to be among the most useful terms for understanding the cost of a product.

They also found that when a small business sees a number that looks like an APR, they think it's an APR even when it isn't. So a deceptive financing product can lead a small business to financial ruin or even worse, closure of the business, and I alluded to that product in my last testimony. We want them to access good financing and not financing that will put them out of business. We respectfully ask for your aye vote.

Thank you to the testimony for witnesses. We will turn to additional witnesses in support. Simply step forward. State your name, organization, and position.

Good afternoon. Dani Kando-Kaiser on behalf of the California Low-Income Consumer Coalition in support.

Good afternoon. Janelle Warren-Evans with Access Plus Capital in Fresno serving the Central Valley, and we are here for support.

I am Jaron Thexton with Pacific Community Ventures, a nonprofit lender out of Oakland, California, and we're here in support of SB 33.

Good afternoon. Robert Herrell with the Consumer Federation of California in support of this bill. Thank you.

Thank you very much. Any other witnesses in support? Seeing none, we will now turn to lead witnesses in opposition. If you will step forward to the microphones up here? Yes, please. Yeah, if we can make room for the witnesses--there you go. And witnesses in opposition may start at your discretion.

Good afternoon and thank you for the opportunity to speak with you all today. My name is Chris Nommensen, and I'm here representing a small, private California asset-based lender, Camel Financial, Inc. We are here alongside SFNet to seek an amendment to SB 33 to specifically include specific safe harbor provisions to the statutes. Over the past four years, Camel Financial has been actively sharing our concerns with SFNet and others in responding to the SB 1235 regulations.

The bill explicitly governs four loan products, two of which are term loans and the other two are open credit lines, which Camel Financial is one of the open credit lines. Based on our calculations that are presented in the legislation, open-ended credit lines, unlike term loans, cannot precisely calculate APR or total cost within any reasonable tolerance when comparing estimated versus actual. This is because term loans have fixed payments and revolvers have different types on that side.

While not specific in this bill, the California Financial Code calls for civil and potentially criminal penalties for violations of the code, which include disclosure requirements. If our calculations are off by one-eighth of one percent, we are in violation of the code and subjected to penalties. Camel Financial, Inc. is over 40 years old and is a second generation woman-owned business. We employ a small, diverse staff and the majority of which are also women. Nearly all of our borrowers are California-based businesses and employ hundreds of Californians.

Camel Financial is a direct lender and we do not sell or broker our loans. We maintain the full relationship until the company can transition back into traditional financing. The interest rate is always discussed and negotiated well before the credit line is open and due to the secure nature of our loan, legal review is required by our borrowers prior to signing.

We truly believe that our product helps borrowers and their businesses reach the next stage without giving up equity or ownership so they can create a legacy enterprise. We are job creators and job sustainers as most clientele we serve are unable to get traditional financing like at a bank or an SBA. You are aware that some lenders are no longer working with businesses who need loans under the SBA cap of 500,000 because they do not want to disclose APR. This is likely to be accurate.

At a time when banks are also restricting loans to small business, a safe harbor lending law would allow me to continue doing that. Look, we understand the need for that and Camel Financial is full-fledged for the disclosure, we just need some type of safe harbor thing. It levels the playing field like others have said here, however, this is a different type of financing product.

We are hoping that you would understand that the APR calculation for factors and asset-based lenders, open-ended credit lines, is a near impossible task and without the safe harbor, small private lenders like us could possibly be subjected to these penalties which we do feel are unjust. Further, without some type of protection, we are even considering whether we can cater to these types of loans below 500,000 in fear of making a mistake and incurring fines and fees that would put us out of business.

We encourage Senator Glazer to amend SB 33 just to include the safe harbor provision. He's already mentioned he's open for it. We just are asking for a very specific line item that says that type of stuff. Thank you again for this opportunity to speak, and I'm eager to answer any questions you may have.

Thank you. Next.

So thank you for allowing me the opportunity to speak with you all here today. I'm Rich Gumbrecht. I'm the CEO of the Secured Finance Network, a trade association that's been around for 80 years that represents the interests of small business borrowers because they are the primary recipients of the types of loans that our members provide. This is a secured--the secured finance industry is a five trillion dollar industry that provides collateralized loans to borrowers and has for quite some time.

We fully support disclosure. The relationships we have with our clients typically last many years and without friction, and our concern relative to SB 33 is that the regulations and the statute don't provide sufficient safe harbor for an erroneous calculation of APR.

APR is not a discipline that we've used in this industry because the reality is the way that people borrow with these products, asset-based loans and factoring vary with the daily changes in their business cycles, and so we did some analysis that showed that if you borrowed, if we set that APR number and provided an estimate 12 months later, it's invariably different based on what's actual.

We have a motion. Continue.

Okay. I guess I'll sum it up by saying that we support what the intention of this statute and the regulations are. We find it nearly impossible to comply, and so we're seeking a safe harbor that would allow our members to continue to lend. 40 percent of our lenders polled in California have said that they will not lend with the current regulations and statute in place, and that clearly isn't the intention of what we're trying to do here. We want to invite capital into the market, not take it away.

Thank you for your testimony, and we will now turn to opposition in the room. Is there additional opposition in the room? Please simply step forward. State your name, organization, and position.

Hi. Kate Fisher with the Revenue Based Finance Coalition, and we're opposed to SB 33. Thank you.

Thank you. Seeing no other opposition in the room, we do have a motion. Assembly Member Wicks, and I will bring it back to the Committee for comments and questions. Assembly Member Wilson.

Thank you. Thank you. This is to the author. I have a question for the author and then a question for opposition. So the question to the author: in the original bill that you presented, you had a sunset provision which expires now, and part of the request of this is to remove it, can you talk about why initially you had the five-year sunset and then recognizing that because of how long it took, as you noted in your opening statement, it's only really been in effect six months?

Yeah. Thank you. Through the Chair, thank you for the question. You know, when the bill was enacted with broad bipartisan support, it was new, and so the choice was to allow the Department to promulgate regulations and have everybody be at the table for how that metrics was going to be created, and I think that the reason that it took so long was because of how long they bent over backwards to try to deal with a number of the objections that you've heard today.

Both three informal consultations occurred and six formal, six formal comment periods, an extraordinary number, and I think that it shows how thoughtful the Department was and we all were in trying to be responsive to the concerns that were raised today. So this issue of what's an estimate, a fair estimate, was fully examined and the regulations address it. This issue of a safe harbor was fully examined, and the regulations specifically address safe harbor provisions to not create the traps for lenders.

So it was due to that comprehensive engagement that I think we're all proud of because we have a law now in effect that I think is exactly where it needs to be, and it provided the balances that have been testified to earlier.

So just to follow up, the--

If you can--is your microphone on?

I'll get closer to it. Sorry, I moved like everybody over. Just to follow up, so the intent of the five-year length for the bill was to really allow the regulation to come forth with as much input and exposure as possible versus allowing time for regulations to exist to see if any of those fears could be borne out?

I think that is true because during the legislative process that we went through, we had objections from the similar folks that are here today. They didn't want the regulation. I mean, there's a reason that across the country, small businesses have none of these protections that this bill eventually is providing because of the opposition of people who come in with scare tactics and say, 'you can't do it. You can't do it. You're going to implode the marketplace.'

That's why it's been a hard thing to legislate around, and I think it's why we wanted to give it the time to, as has been done, to be as thoughtful and inclusive in the regulations that we're now operating under.

Okay. Thank you, and then the last question, if I could to the opposition, in regard to looking at the fact that the bill does require not just APR, but does require total dollar cost of financing which allows a consumer or small business in this case to thoroughly review and compare not just APR, which you said has some concerns around and the fact that you can't estimate it or you feel like you have difficulty or challenge in estimating it and you wanting amendments related to safe harbor because you also allow there is the allowance of total cost of financing as they exist together, not one or the other.

You don't feel that that is enough accommodation? I'm concerned or--not concerned, but I don't understand the argument in terms of that the legal basis for the safe harbor, the way it exists now, the basis for it creates like a legal exposure for you.

May I? I can do it. So I'd like to look at you, but I'll talk into the mic.

Please do.

So, it's really having to understand that the payback mechanism is different. So that's where we feel like an estimate--you become too further exposed, and again, I'm talking specifically about asset-based lenders and factors. These are people that take--this is not your donut shop or your pizza shop.

These are businesses that are having to wait on terms for their customers to pay them, and it's the Walmarts, the Amazons, the ones that are demanding 60, 70, 80-day terms for them to actually collect their funds, and so it's up to our borrower to choose how much of that invoice they would like to take as an advance and us attributing a certain percentage towards that.

So the way the bill is written is I have to say, if they give me an invoice for 100,000 dollars, I have to give the client 100,000 dollars and they have to pay on that 100,000 dollars versus the reality, which can be with a lot of advice, and the reason a lot of our clients stay with us is an explanation on what the opportunity costs are and the value of balancing out those types of things are.

Term loans: you can't have that discussion. It's all or nothing. You have fixed rates, you have fixed term, you can have a fixed APR. You're going to be precise and accurate every time because it's all set up. Assuming there's no defaults.

With a revolving line of credit that's based off of assets like a factor or an ABL, there is so much more room for how much they can borrow. The borrower has control over what they can take, and it's very important for us as we're walking through it. As a small business, our portfolio is around ten million dollars, and through the course of a year, we probably put out about 100 million.

They can use this as a tool, and where we can't comply is that we don't know how much they're going to take. We also don't know when the customer is going to pay. Now, they might say, 'hey, it's a net 45-day terms,' but if you just talk to any of your businesses, ask them--I mean, small businesses, not the big guys who can really push their weight around--how quickly and how on time do their customer pays, and I guarantee you it's not going to be very consistent, and that's why we can't have an actual APR for that.

But it is estimate? You use words--

I have no problem disclosing.

And it is estimate based on what they finance, right?

No, it's actually based off of whatever we write a line limit for. That's what the APR has to be based off. The total cost of funds needs to be based off of the total line size and our borrowers--

So going back to your--I'm sorry, through the Chair, if this is okay?

Oh, yeah, I'm sorry.

Go ahead.

I just want to make sure I'm using your example. You said if I got an invoice for 100,000 dollars, it has to be 100,000 dollars. It can't be that it's 60,000 dollars and you provide an estimate based on this person doing for 60,000 dollars? You can't give them that estimate?

Oh, we can, yes.

Okay.

We just--the way the law is currently written, we have to give them the full amount.

The 100,000 dollar invoice, not the 60,000 dollar?

They can choose a portion of it.

Okay. All right. I think I understand. Thank you.

To clarify, it's an estimate, right? Okay.

Did we get a second?

No, not yet.

I'm definitely going to do a second now.

Okay. We have a motion by Assembly Member Wicks and a definite second by Assembly Member Wilson. With that, we do want to definitely hear from Vice Chair Chen.

Thank you, Mr. Chair. I appreciate your time and your indulgence. I understand that you've been talking to Senator Glazer in regards to this bill. I have some questions for Richard from SFNet, clarification, if you will. So, as I understand it, the regulations for the DFPI, currently, they do not have a safe harbor or they do have a safe harbor. Do they have a safe harbor?

We don't believe that they have a safe harbor that addresses our members' concern. There is reference in the regulations to--the term is a small safe harbor, is what it says, specific to being within the one-eighth of one percent tolerance. There is no safe harbor language provided for it being an estimate, and that the actual amount that they borrow, the rate, could be different from the estimate. There's no reference.

And if I may, Mr. Chair, so it sounds like this is your main point of contention, the safe harbor issue. If the safe harbor issue was added to your proposed amendments, would you still be in opposition to this bill? Would you have concerns about it?

No. We feel like if the safe harbor--we'd like to comply with what's been drafted even though we disagree with it in principle, but if we were able to get a safe harbor that would protect our members for the actual turning out to be different than the estimate that was provided, we would be not in opposition.

Thank you for your clarification. Thank you, Chair.

Assembly Member Dixon and then Assembly Member Petrie-Norris.

Thank you. I want just to follow up on my Colleague, Assembly Member Chen's comments. So let's focus on the safe harbor. What is the tolerance, I mean, to give that protection that you need, what would that be, an eighth of a percentage point or what is it?

Well, we presented some examples of where actual California borrowers, if we had calculated using the format of the regulations and to our best efforts we came up with numbers, we went back and did it retrospectively to say, a year ago, 'what would we have provided as an estimate,' and came up with numbers. And then we looked at it prospectively a year later and said, 'what were the actual rates based on what they did borrow?' And it was materially different.

And so it's not an issue for us whether it's an eighth of a percent or it's a one percent difference. I think that the issue is that if we follow the prescribed regulations and the borrower behavior is significantly different, such that the result is very different, we don't want to be subject to civil and potentially criminal liability, and that's what we want to make clear.

Okay. Let me follow up on that. So what would be the protection for the borrower? So you're saying that that rate would change over that period of the term?

Well, in the examples that we gave, it was actually about--it went from 30 percent down to 18 percent in one case and 22 percent in the other. It was actually less.

Okay. May I ask the author? Senator, so could you kind of help us dissect the safe harbor issue, please?

Yeah, you bet, and thank you for the question. So in the regulations, this is Section 901, it specifically talks about a good faith estimate and it defines it, and then on the issue of the threshold, this is in Regulation Section 955, it says this: 'a provider and financier shall have no liability under this subchapter for any inadvertent error in a disclosure to a recipient that does not comply with this subchapter.'

'If within 60 days after discovering the heir,' something's changed, 'after discovering the heir through the provider or the financier's own procedures, and prior to the institution of an action against the provider or financier for such heirs, the financier or its assignees notifies the recipient of the heir.' This is the regulations.

This is the safe harbor that the Department, after six formal reviews, have come up with to be as responsive as they could to the concern that someone may borrow money for 90 days, but only use it for 60 days, and how that time changes the cost of money, but if you borrow it for, you think 90 days and it lasts for 180 days, that interest rate could be double what you thought it was.

So it provides all those opportunities for the lender, if they're being responsible, following the rules, to make a good faith estimate and to have no liability, speaking exactly to the regulation, for changes that they discover in how much that money is actually going to cost. Yes.

You have 60 days to make that--

That change and make the borrower aware of it.

Okay. All right. Thank you very much.

Assembly Member Petrie-Norris.

Thank you. I'm also going to pick up on this thread around safe harbor. So the author shared that his goal is to create apples to apples comparisons which I think we all recognize is really important for whether you're a small business borrower, consumer borrower, everyone.

So I think we're all on board with that, or I'm certainly on board with that objective, and then you also said in your opening comments that your goal is not to create a gotcha situation, and I think what I'm not understanding, and I think some of my colleagues aren't understanding either, is what about this feels like a gotcha situation, and what could be remedied to eliminate that because then it feels like everybody can walk away happy?

That's a great question. Do you want to answer it or shall I?

Go ahead.

Okay. So the issue is all in the inability to predict what the actual borrower behavior is going to be, and so whether it's 30 days later or 60 days later or 80 days or 200 days later, it's not about a miscalculation of what the APR would be. It's that the borrower's actual borrowings translate into a different APR, and as our lenders and counsel interpret the regulations and the statute, there is not adequate protection for that variance in what the actual APR turns out to be.

And again, and not to speak for the author, but it sounded like when you were speaking about your intentions that that falls under the umbrella of a good faith estimate.

And our concern is that there is no explicit safe harbor for a good faith estimate. It calls for us to make a good faith estimate. In fact, the disclosure says this rate could vary, but there's no protection that if it did vary, that we wouldn't be subject to possible tort actions or civil actions or other criminal actions because it's not explicit, and we just simply need it to be explicit.

If we're trying to get to that point where we're trying to do the right thing for the borrowers and for everybody involved and don't want to create any traps, then let's just put a specific safe harbor in, and then everybody's got their needs addressed.

At the risk of wading too much into the judiciary territory, I mean, is that something that you are open to?

Yes. What I said to them was that I am open to providing whatever protection is appropriate to create that safe harbor that they feel is not here in this bill. I do not want to change this bill. It's just to eliminate a sunset that I'd be happy to author a bill next year to try to go with this issue of somehow it's not working.

When I suggested that to the opponent that's here at the table and then followed up with the same question the Vice Chair asked just a moment ago, that were we to resolve the safe harbor issue, would they be supportive of the bill, I got the same answer, which was a non answer, which was the same thing that we heard back five years ago, which is they don't like any regulation in this space and that this is not something that they think is appropriate for the type of lending that they do.

So I found it to be disingenuous to discuss this safe harbor issue despite my willingness to not create traps and not to create a problem for anybody. I want lending in this space, but I think you have to own up to the fact that there is a segment of this community, lending community that does not want any oversight, any regulation, any disclosure, and they're using any reason they can to try to stop this sunset from going away for those reasons.

All that being said, I'm very open to it. In your analysis today, and it was an exceptional analysis, they discussed what the Department has said about this safe harbor issue because they felt, as they went through the comment period over and over again with some of these opponents, that they kept addressing it. They thought they addressed it. They thought they addressed it, and here's what they said at the end of the day.

It's in your analysis on page seven. It says, 'the DFPI declines to adopt this change'--the safe harbor that they were suggesting--'because the regulations already incorporate significant protections for providers. The DFPI can review the effectiveness of these protections against enactment of the regulations and reassess whether some kind of good faith safe harbor standard that they continue to ask for is appropriate.' I completely agree with what the Department is saying here. I'm very open to providing for that if somehow there's weakness in these regulations as they're being implemented.

Thank you.

Assembly Member Bauer-Kahan.

I just want to add my voice to this chorus as it relates to--I heard you say, Senator, that this is just an extension and you would do that next time, and I guess when we go to extend or eliminate a sunset, I think it's an opportunity for us to also change what we did if we got something wrong and so I don't know that we should look at this as just while we're extending the sunset so let's do that in a different bill, I think that it should be our goal in this bill to get it right.

And so I guess I would ask that you be open to not just viewing this in that narrow way and saying, well, we can do that in a separate vehicle if we're allowing the law to continue, we should do it in a way if we've learned in the process to take those learnings and put them into law at this opportunity.

I don't think a safe harbor is necessarily--and that's what I've heard from all of us, I think all of us, including you, Senator, think that a safe harbor is a reasonable thing--I think I still remain a tad bit confused about what would be the appropriate way to do that.

And so I'll be supporting the bill today, but I think it is important that we ensure that where the lenders are making good faith effort to get it right, which I heard you say in the language, so if you feel like that is not the case, which, again, I'm still confused why you don't think it is given the language that we've seen, but that we shouldn't, and I know this is the Senator's view that he doesn't want spurious litigation of any kind, not one of his principles.

I think that we can all get there, and I would urge us to do so, but I think it's important that we continue to move this forward and if there really is a problem, be very clear of what it is and why this safe harbor is insufficient.

Any other questions, comments from Committee Members? Seeing none, Senator Glazer, would you like to make a closing statement?

Well, thank you, Chair, and thank you, Members, for the thoughtful discussion today. These things of financing can make your head spin. Think about that small business person out there who's in crisis, in many cases struggling, trying to figure out what to do about a serious problem and where the capital can come from to help keep their business alive. So I appreciate the complexity that's in this space. I think it speaks to why the Department took so long with these regulations to try to get it right.

I'm open to always finding ways to make sure the work that we do can be improved and made better. I'm open to continuing to work on the safe harbor issue. I think the comments from the Member from Miranda are well taken, that if we can find a way to do it in this legislation, I'm open to doing that.

This was a tough place to legislate for those who were around back then because it's easy to hear the naysayers saying why something can't happen, especially when your goals are so mutually aligned about providing capital for struggling small business people, but I think this conversation today provides and enlightens a little bit of that challenge that we had before. And with that, I respectfully ask for your support today.

Thank you, Senator, and I do want to thank you for bringing this measure forward and for all the work that you have done on behalf of small businesses. I know you truly care about the work of small business. I've held a lot of meetings with stakeholders, and after much deliberation, I've ultimately come to the conclusion that giving small businesses more information will empower them to make informed financial decisions.

I also believe that the APR disclosures come with the appropriate caveats so that anyone that's reading will understand what that number actually represents, apples to apples, as we've said. That said, as we have all seen with today's discussion, that the APR estimate is challenging for some lenders, and while DFPI does grant providers flexibility and room for error, I do wonder if there's more that we can do here to give providers some more legal certainty.

With that, I believe a debate around legal liability is more appropriate for the Judiciary Committee which is where this bill is going next, so I hope you will consider some of the comments as you stated in your closing comments today; you will consider those as you move forward. With that, we do have a motion and a second. Secretary, please call the roll.

SB 33: the motion is 'do pass and refer to Committee on Judiciary.' Grayson? Aye. Grayson, aye. Chen? Not voting. Chen, not voting. Bauer-Kahan? Aye. Bauer-Kahan, aye. Cervantes? Aye. Cervantes, aye. Dixon? Aye. Dixon, aye. Mike Fong? Aye. Mike Fong, aye. Gabriel? Aye. Gabriel, aye. Petrie-Norris? Aye. Petrie-Norris, aye. Soria? Aye. Soria, aye. Waldron? Aye. Waldron, aye. Wicks? Aye. Wicks, aye. Wilson? Aye. Wilson, aye.

Senator, your bill has 11 votes; it's out of Committee.

Thank you very much, everyone. Thank you for your time today.

Thank you very much. Secretary, we will go back to consent calendar and call for roll for Members that were absent.

SB 446: the motion is 'do pass and refer to Committee on Judiciary.' Cervantes? Aye. Cervantes, aye. Mike Fong? Aye. Mike Fong, aye. Gabriel? Aye. Gabriel, aye. Soria? Aye. Soria, aye.

Consent calendar is out with 12 votes. We will now go to File Item Number Two: SB 666. Call for roll.

SB 666: the motion is 'do pass as amended and refer to Committee on Judiciary.' Cervantes? Aye. Cervantes, aye. Mike Fong? Aye. Mike Fong, aye. Gabriel? Aye. Gabriel, aye. Soria? Aye. Soria, aye.

And File Item Number Two: SB 66 has 12 votes; it is out of Committee. We have now--yes, Assembly Member Gabriel. Thank you. We have completed our agenda for today's hearing. We will be leaving the--actually, we've finished our roll, and with that, we will adjourn.