Californians who take out of up to $10,000 no longer have to worry about triple-digit interest after Gov. Gavin Newsom signed a law on Thursday to cap rates at 36 percent.
Assembly Bill 539 ends a decades-long practice of charging borrowers who take out loans between $2,500 and $10,000 with interest that can exceed 200 percent. The rate will now be capped at the nationally recommended 36 percent, what’s considered a “compromise” between lenders and consumer advocates.
“Many Californians living paycheck to paycheck are exploited by predatory lending practices each year,” Newsom said. “Defaulting on high-cost, high-interest rate installment loans push families further into poverty instead of pulling them out. These families deserve better, and this industry must be held to account.”
Assemblywoman Monique Limón, D-Goleta, has called her proposal a “historic bill” that’s been “decades in the making.”
“Predatory lending has been an issue in our state for a very long time,” Limón said this summer during a rally at the Capitol for AB 539. “This piece of legislation is really about tackling one of the hardest issues that this state is trying to tackle. Which is how we help those who are in need who are looking at financial services and products as a way to get out of poverty? One in three individuals who take out this product go into debt and default.”
The new law is no perfect solution, Limón continued.
A borrower taking out a $2,500 loan with 36 percent interest could still face a $4,122.36 total bill on a 36-month repayment plan, according to the Safe Affordable Credit coalition, which is backing the bill. That’s compared, however, to a near $8,0000 total payment with 100 percent interest.
The bill also only applies to the loan product itself, not ancillary costs like credit insurance that are often defaulted into the service. The extra fees can unnecessarily increase borrowing by more than a third, according to the Pew Charitable Trust. Because they’re not regulated by the new law, state agencies are expected to continue oversight of these tacked-on products.
“If policymakers want small installment loans to be available and safe for consumers, they should allow finance charges that are high enough to enable efficient lenders to operate profitably and prohibit ancillary products rather than setting lower rates and then permitting lenders to sell ancillary products to boost their bottom lines,” wrote Nick Bourke, director of consumer finance for Pew.
The new law arrives as borrowers increasingly turn to mid-sized installment loans for when they find themselves in a financial crunch and have few other options. Larger loans increased by 9 percent last year to a total of 1.6 million loans and a third fell between $2,500 and $4,999, according to the Department of Business Oversight. More than half of that borrowing carried triple-digit rates in 2018.
With Newsom’s signature, California became one of the last states to regulate interest rates on these growing loans. The National Consumer Law Center said the number ensures lenders make money off high-risk borrowing, but the rate also offers consumers a “decent chance” at making their payments. Some states cap the interest even lower, while others don’t restrict rates at all.
A handful of Democrats abstained from voting for or against the bill, while some Republicans blasted it as destructive for both consumers and lenders.
“Where are people going to get credit?” said Republican Leader Shannon Grove of Bakersfield. “If you have bad credit, and you haven’t fulfilled your obligations in the past of paying your bills and making sure your credit is good, you can’t just expect a financial institution to take a risk on you when you’re a bad risk in the first place.”
AB 539’s supporters countered that predatory lenders will no longer be able to victimize unwitting borrowers, who are often poorer people of color. Legislators and consumer advocates have shared anecdotes of individuals who took out loans, defaulted and were subsequently left with ruined credit, a repossessed car or a closed bank account.
“Predatory lending is not fulfilling a need. It’s driven by greed,” said Marisabel Torres, the California policy director for the advocacy group Center for Responsible Lending. “That’s not right, that’s not fair and that’s not how California should be positioning itself. Yes, people do need credit, but this is not credit. It’s debt.”