Legislators had a chance to protect Californians from predatory lenders, but instead sent a special-interest bill to the governor that threatens to expand the damage.
Gov. Jerry Brown should veto Assembly Bill 237 promptly.
AB 237 expands the use of unlicensed and unregulated brokers, called “finders,” who are allowed to operate under the Small Dollar Pilot Program, which is aimed at helping people repair or build credit with loans for small amounts.
The bill expands the program from loans of $2,500 up to $7,500 and allows for using finders for these larger loans. It has been pushed by just one company, INSIKT, whose business model relies on finders.
But finders have not worked out as originally hoped. Legislators originally thought finders would be credit unions or community banks that refer borrowers to the pilot loan program if they do not qualify for a lower cost loan.
In fact, most finders are check cashing stores, grocery stores and even payday lenders. We worry that through these finders, payday lenders can sell borrowers loans that carry triple-digit interest rates. These sorts of loans do not help people build credit. Instead they trap people in a cycle of debt.
The sponsor of this bill could offer lower-cost loans today just by using licensed brokers instead of unlicensed finders, but has chosen not to.
Instead of AB 237, California should catchup with 28 other states and set an interest rate cap for loans above $2,500.
More than 100 civil rights and faith-based organizations across the state rallied behind AB 2500, a bill to limit interest rates at 36 percent for loans from $2,500 to $5,000. The payday lending industry spent more than $1.5 million lobbying against this bill,and it failed to get through the Assembly, essentially kicking this issue down the road for the second time in two years. The predatory lenders won.
For years, Californians most hurt by predatory lending have asked the Legislature to rein in high-cost, abusive loans. And every year the same thing happens: Legislators side with predatory lenders.
If AB 237 becomes law, it will only benefit Wall Street hedge funds making loans under a pilot program that has insufficient protections against abuse. The governor should veto this bad bill, and next year legislators should get to work on real reforms.