Viewpoints

Limiting interest rates on loans for poor will only create more problems

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.

California is a state with big ambitions – but also big problems.

Despite California’s progressive reputation, the state has struggled mightily with homelessness, poverty and widespread income inequality. Even those with solid middle-class jobs have a hard time managing the high cost of living in the state, and many face additional challenges due to significant income swings from month to month.

For these hard-working men and women, it can be extremely difficult to budget for even expected – let alone unexpected – financial expenses. It’s even harder when you’re among the one in three Californians who don’t have a prime credit score and can’t get a loan from a bank or a credit union.

That’s the reason I must respectfully disagree with the proposal by Assemblymembers Monique Limon and Tim Grayson to cap interest rates for loans between $2,500 and $10,000.

To be clear: I firmly agree that the Legislature must act to protect consumers who use non-prime loans. However, Assembly Bill 539 would do more harm than good, eliminating many accessible, regulated small-dollar loans that thousands of Californians, including many Latinos, rely on to deal with an unexpected crisis.

Opinion

Ideally, every Californian would have plenty money tucked away for a rainy day. But that isn’t reality.

In fact, a report from the Center for the New Middle Class shows only 32 percent of Latinos with prime credit could cover a $1,200 expense with their savings. That number drops to an abysmal 21 percent for those who have non-prime credit. The report also shows that Latinos, regardless of where they sit on the credit spectrum, are more likely to experience changes in their employment situation when compared to the general population, with 56 percent of non-prime Latinos experiencing a job change within the last 12 months.

As it is, those with less-than-perfect credit aren’t able to secure a loan from a traditional banking institution. AB 539 would make it even harder for them to get a loan by eliminating more than half of available regulated loans between $2,500 and $10,000. That could force honest, hard-working families to rely on dangerous options such as overdrafting their account, borrowing from an illegal lender – an actual loan shark – or declaring bankruptcy.

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The evidence shows that states that have enacted rate caps haven’t achieved the desired outcome of protecting and supporting consumers. The State of Georgia, according to a

study done by the Federal Reserve Bank of New York

, saw a 13 percent rise in the amount of bounced checks, and consumers paid an extra $36 million in bounced check fees, after a rate cap was instituted. There was also a sharp rise in complaints about debt collectors.

Furthermore, the claim that certain “responsible lenders” will suddenly begin lending to non-prime Californians just isn’t borne out by the facts.

For example, consumers who have applied for credit from OneMain Financial say they were either asked to put up their cars as collateral or were flat out denied. Others say their loans were loaded up with additional products and fees that they didn’t want or expect. According to state reports, companies like Oportun that lend under a rate cap in the state’s small-dollar lending pilot program rejected about 57 percent of applicants in 2017.

A diverse state like California needs diverse financial options, because life happens and everyone should be able to get a loan when they need one. That’s the reason I urge the Legislature to reject AB 539.

Julian Canete is president of the California Hispanic Chamber of Commerce

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