Capitol Alert

More Californians are taking loans with 3-digit interest rates. Will state restrict them?

Assembly Speaker Anthony Rendon: “Stop the practice of preying on people in desperate circumstances”

California Assembly Speaker Anthony Rendon speaks in support of Assembly Bill 539, which would end the practice of selling midsize loans ⁠that carry large interest rates to people in difficult finance circumstances.
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California Assembly Speaker Anthony Rendon speaks in support of Assembly Bill 539, which would end the practice of selling midsize loans ⁠that carry large interest rates to people in difficult finance circumstances.

As California borrowers move away from small payday loans, new data from a state agency show they’ve shifted to larger and more expensive credit with triple-digit interest.

Larger loans increased by 9 percent last year to a total 1.6 million loans, with a third falling between $2,500 and $4,999, according to an August report from the state Department of Business Oversight.

The state does not regulate interest rates on those loans, and 55 percent of the borrowing in that range carried triple-digit rates in 2018.

“There continues to be a lot of predatory lending happening and the targeting of consumers for the lending are those who can least afford it,” said Marisabel Torres, the California policy director for the advocacy group Center for Responsible Lending. “These loans are carrying an average (rate) of 100 percent or more, making them incredibly expensive products. And the people who are buying these products aren’t making a lot of money.”

The new data arrive as state lawmakers consider a bill to cap rates on consumer loans up to $9,999. Assembly Bill 539 would cut the triple-digit interest to a more manageable 36 percent plus the federal funds rate.

The bill stops short of regulating ancillary costs such as credit insurance, which the Pew Charitable Trust found can unnecessarily increase borrowing costs by more than a third.

But consumer advocates, including the Center for Responsible Lending, said the legislation would help curb predatory practices on larger loans that aren’t subject to payday lending regulations.

Lenders opposed to the bill, which faces a Senate Appropriations vote later this week, argue for higher rates as a way to cover consumers who default on their payments. They also say that these borrowers have few financial options and additional regulations will harm the limited business available to them.

The bill’s author, Assemblywoman Monique Limón, D-Santa Barbara, said that failed attempts from years past to cut rates even lower led to a compromise 36 percent cap. At that rate, she said, lenders can make money off high-risk loans, while borrowers are more likely to afford the payments.

“The unregulated interest rate environment in California has led to an explosion of high-cost loans over the past decade,” Limón said during a July hearing. “Far too often, consumers are unable to pay these expensive loans. More than one out of three times these loans leave people worse off than when they started.”

Department of Business Oversight Commissioner Manuel P. Alvarez said the numbers reflect a need for additional industry oversight.

“On the one hand, it’s encouraging to see lenders adapt to their customers’ needs and expectations,” Alvarez said. “But by the same token, it underscores the need to focus on the availability and regulation of small-dollar credit products between $300 and $2,500, and especially credit products over $2,500 where there are largely no current rate caps under the California Financing Law.”

The number of new payday loans fell in California last year by nearly 500,000, to a total 10.2 million. The data show low-income and repeat customers make up a bulk of the consumers.

More than 400,000 people who borrowed in 2018 had taken out at least 10 payday loans. Half of all the borrowers earned $30,000 or less, while another third maxed out their income at $20,000.

A 2016 department report found that more than 60 percent of payday stores congregated in high poverty neighborhoods, and were more likely to be in black and Latino communities.

These borrowers are more vulnerable to late fees and a cycle of borrowing prevalent in the payday industry, Torres said. For example, lenders collected $420.5 million in payday fees last year, with 71 percent coming from customers who took out seven or more loans in 2018.

“That’s just crazy,” Torres said. “That is not a successful business model. You are not helping someone who came for a loan. You are putting them in a year of debt.”

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Hannah Wiley joined The Bee as a legislative reporter in 2019. She produces the morning newsletter for Capitol Alert and previously reported on immigration, education and criminal justice. She’s a Chicago-area native and a graduate of Saint Louis University and Northwestern.