What is a fair price to charge a customer for a personal loan? This question lies at the heart of a contentious debate underway in the California State Legislature that has reached a tipping point after two decades of failed attempts to regulate predatory lenders.
You have probably heard of traditional “payday loans.” These small loans of $300 or less are designed for short-term needs that arise in between paychecks and come with a $45 fee. But more recently, payday lenders have pushed consumers toward much larger loans. Due to a loophole in state law, loans of less than $2,500 are required to charge interest rates of 36 percent or less, but loans above $2,500 do not have these same protections.
According to the National Consumer Law Center, 38 states plus the District of Columbia protect their consumers from sky-high interest rates. But not California.
Many people are surprised to learn that despite its reputation as a pro-consumer state, California law allows lenders to charge whatever interest rate they want, with rates often exceeding 200 percent.
Such high interest rates can quickly turn a family’s tight financial situation into a full-blown catastrophe. To pay back a $2,500 loan with a 200 percent interest rate, a borrower would repay nearly $10,000 over two years, and some borrowers are not even that lucky.
Unfortunately, more than 100,000 Californians each year - or one in three people who take out these loans - cannot afford the payments and end up with their credit ruined, their bank accounts closed and little hope to build a healthy financial future. Given a product that fails consumers at such a high rate, it is our responsibility as policymakers to find a reasonable way to limit the damage.
Since payday lending was authorized by the Legislature in the mid-1990s, there have been many attempts to place protections around payday loans. All of these efforts failed under strong opposition from the industry.
But in the meantime, a group of responsible lenders that serve consumers with damaged credit or no credit history has grown in California. These lenders use financial technology and commonsense underwriting practices that connect consumers with loans that fit within their budgets. Importantly, these lenders have made the decision not to charge consumers more than 36 percent interest on their loans.
Over the past two years that we have served on the Assembly Banking and Finance Committee, we have worked with a group of responsible lenders, consumer advocates and community groups to negotiate a package of strong consumer protections that would maintain a healthy lending market for non-prime borrowers in California. The result of those negotiations is Assembly Bill 539, the Fair Access to Credit Act, which would extend the 36 percent interest rate protections to loans of up to $10,000.
This bill has earned the support of a wide variety of organizations, including AARP, Equal Rights Advocates, the League of United Latin American Citizens, Western Center on Law and Poverty and the California Association of Veteran Services Agencies.
Local governments across the state – from Vallejo and San Francisco to Los Angeles and San Diego – have passed resolutions to support this effort. And a large group of responsible lenders have partnered with community groups, consumer advocates, and religious organizations to pass this bill.
Even with this strong coalition, high-cost lenders are fighting to maintain their ability to charge interest rates of 200 percent or more to financially struggling consumers. If you believe that all Californians deserve a fair chance to build their financial future, contact your legislator and let them know that you support AB 539.