Hard-working Californians have long been the target of predatory lenders, which the California Supreme Court recently ruled can no longer offer loans with “unduly oppressive terms” and interest rates so high they are“unconscionable.”
While the decision is laudable, the court did nothing to clarify what defines “unconscionable” and what, if anything, the ruling will mean for working families who are borrowing at triple-digit interest rates and are trapped in an endless cycle of debt.
We believe that “conscientious credit” should be rooted in eight basic principles. First, lenders should verify a borrower’s ability to repay. Second, lenders should disclose the true cost of a loan, with no hidden fees. Third, loans should not have prepayment penalties or compounding interest, and the interest rate should be lower with bigger loans. Fourth, lenders should not make borrowers sign arbitration clauses or sell off debt to collectors before a default. Fifth, all lenders should report to credit bureaus so borrowers can repair their credit scores. Sixth, loans should have minimum payback terms, in months not weeks, so borrowers have time to avoid lump sum payments. Seventh, loan refinancing must be limited to borrowers who have paid off most of their original loan. Lastly, lenders should offer other financial products,especially in low-income communities.
In fact, California already has a lending policy that is helping hundreds of thousands of lower-income consumers and is rooted in these principles. And with Assembly Bill 237, which unanimously passed both the Senate and Assembly and is before Gov. Jerry Brown, the state is primed to create more low-cost access to larger loans for Californians.
The Legislature unanimously established the Pilot Program for Responsible Loans in 2010 for loans between $300 and $2,500 to help provide responsible alternatives to payday loans. The program has been working.
The volume of payday lending in California fell by almost 7 percent from last year, the third consecutive annual decline. Meanwhile, installment loans from the program increased by 18 percent since 2015 through more than 575locations, which are finally starting to rival the state’s 1,731 payday loan stores. And more than 60 percent of repeat borrowers in the program improved their credit score by an average of 309 points.
Since the pilot program was launched, consumers have signaled a need for better loan alternatives for amounts of more than $2,500. In response,AB 237 would expand the program to loan amounts of as much as $7,500. Further,AB 237 extends all of the important consumer protections of the program,including a simple interest rate cap of 35 percent and a minimum rate reduction for successful borrowers who seek more than one loan.
We call on Gov. Brown to sign AB 237 into law now. It’s time to expand access to larger loans that help borrowers succeed at repayment. And in doing so, California can create a national model for “conscientious credit.”
Lorena Gonzalez Fletcher, a San Diego Democrat, represents the 80th Assembly District, is the author of AB 237 and can be contacted at Assemblymember.Gonzalez@assembly.ca.gov. Dean Florez is a former state senator who authored the Pilot Program for Responsible Loans in 2010 and can be contacted at email@example.com. James Gutierrez is founder of program lenders INSIKT and Oportun and can be contacted at firstname.lastname@example.org.