For California borrowers trapped in loans with triple-digit interest rates, a proposed bill to impose a 36% cap might seem like a godsend.
If passed, Assembly Bill 539 would end a decades-long practice of allowing installment loans of $2,500 to $10,000 to carry such high interest rates by limiting that number to 36%.
But in striking a deal on the legislation with loan companies, Assemblywoman Monique Limón, D-Goleta, and consumer advocates decided the bill would apply only to interest on the loan itself.
It now leaves state agencies to continue oversight of other practices critics consider “predatory,” including credit insurance and additional fees that the Pew Charitable Trust says can unnecessarily increase borrowing by more than a third.
“We have found in our research that credit insurance often carries little to no value for consumers except maybe for quite large loans,” said Nick Bourke, director of consumer finance with Pew.
Pew notes that five of the largest national lenders reported $450 million in one year from ancillary product sales. Two major companies backing the proposal, Lendmark and OneMain, sell credit insurance.
Lendmark spent $60,000 on lobbying the Legislature in the first quarter of 2019; OneMain and Oportun, another lender, each spent $30,000. Community Loans of America spent $38,000 and recently contributed to the campaigns of several lawmakers sitting on the Senate Banking and Financial Institutions Committee.
Limón said reaching a compromise that could win passage in the Legislature was “not easy.”
“I worked with lenders and consumer advocates over the past 16 months to search for a place that would be palatable to both sides.” she said. “The starting point for some lenders was no rate cap at all, while consumer groups were calling for a rate cap in the teens. So our work was cut out for us.”
Limón said she and other supporters of the bill discussed credit insurance, but opted not to include it.
“Based on the research and analysis by consumer groups and the Assembly Banking and Finance team, our coalition decided that current law provided protection to ensure lenders could not use predatory sales practices related to credit insurance,” she said.
Under California law, lenders need clearance from the state Department of Business Oversight to sell such ancillary products as credit insurance.
The department monitors when companies add fees to push loans over $2,500, the threshold where interest limits no longer currently apply, and recently reached a $900,000 settlement with a lender that did so.
The state Department of Insurance also regulates credit insurance in California.
But those who advocate more change say ancillary costs are tricky – customers in a financial crunch with less than great credit and, at times, limited English proficiency, might unwittingly sign off on their addition.
Bourke said that nine times out of 10, credit insurance is defaulted into the contract, and the consumer doesn’t think to opt out.
Geneve Villacres, vice president and director of government relations for OneMain disagreed, saying that customers “self-select” these products to protect themselves. Credit insurance is often sold to cover borrowers in case they become disabled, lose their job or die.
“It’s a matter of understanding that these products are safe, they are affordable, they’re totally optional,” Villacres said.
Limón explained that after attempts to cap rates failed in previous years, the “primary motivation” was securing a 36% rate. That number is considered the sweet spot at which lenders can make money off high-risk loans, but borrowers are more likely to afford the payments.
The legislation is backed by Assembly Speaker Anthony Rendon, D-Lakewood, who urged support for the measure during its floor debate on May 23.
Sacramento GOP political consultant Mike Madrid, who has long advocated for more sweeping lending changes, said that the legislation is “shape-shifting” predatory practices, like swapping a “Whopper for a Big Mac.”
“That’s disgusting,” he said. “You’re taking advantage of people. To have the speaker or the author hold this up because it has a lower interest rate is beyond belief. This is not eliminating predatory lending.”
California would be one of the last states to impose a limit, and advocates say the numbers reflect an urgency to act quickly.
Eleven years ago, lenders issued 2,037 loans with at least a 100% interest rate in California. Now those loans are in the hundreds of thousands, according to Safe Affordable Credit, a group promoting the bill that includes Lendmark, OneMain and Oportun, another major lender.
The Safe Affordable Credit coalition calculated that a $10,000 loan with a 100% interest rate amounts to $31,781.29 over 36 months without the legislation. If Limón’s measure passes, that number will be nearly halved.
But getting lawmakers to sign on to reforming an industry with deep pockets is a challenge, said Graciela Aponte-Diaz, the Center for Responsible Lending’s California policy director.
“Nobody wanted to touch this,” she explained. “They pretty much said, ‘You’re throwing a bomb on the committee.’ Half a million was spent this quarter to kill this bill.”