New legislation would cap interest rates on California installment loans

Inside Subprime: June 4, 2018

By Lindsay Frankel

The latest attempt to curb predatory lending practices in California comes as legislation that, if passed, would cap interest rates on installment loans ranging from $2,500 to $10,000. Assembly Bill 2500, was introduced by Assemblyman Ash Kalra and coauthored by Senator Holly Mitchell, and may serve to protect California borrowers from predatory triple-digit interest rates.

No interest rate cap.

Since the Legislature removed rate caps decades ago, predatory lending has flourished. In 2016, Californians borrowed a total of $1.1 billion in larger loans with triple digit annual interest rates. AB 2500 would cap interest rates at 36 percent.

While predatory lenders in California are likely to argue that interest rate caps curtail access to credit for some borrowers, similar caps have worked in other states. Residents in Arizona, Arkansas, New York, and South Dakota are still able to borrow money without becoming vulnerable to triple digit interest rates.

Assemblyman Kalra said the proposed cap strikes the right balance that “allows for profit and allows for access to credit.” And while some studies suggest that the rate cap may reduce the number of loans being issued, the largest lender of this category of installment loans, Oportun, supports the legislation.

The Center for Responsible Lending is also sponsoring the bill. Graciela Aponte-Diaz, the Center’s head of California policy, noted that “These are marketed as quick fixes, quick cash, but the truth is once people take these out, it’s far worse.” She added, “They lead to overdraft fees from banks, wage garnishment and bankruptcy.”

What about payday loans?

While AB 2500 is an important first step in protecting California residents from predatory lending practices, it won’t protect borrowers from high interest rates on payday loans in California. That’s because California’s usury law, which prohibits annual interest rates greater than 10 percent on these short-term loans, doesn’t apply to most lenders. The way the law is written, licensed payday lenders in California are exempt from the usury law.

The California Department of Business Oversight, which regulates payday lenders, allows for payday loans of up to $300 to be issued with fees of up to 15 percent. This adds up to an annual interest rate of up to 460 percent on payday loans in California.

Although these loan products have caused financial harm to many families, political action has moved towards deregulation of payday lenders. Mick Mulvaney, head of the CFPB, placed a hold on the 2017 payday lending rules, which would have required lenders to verify a borrower’s ability to repay a loan, among other protections.

Meanwhile, the bill, introduced by Congressman Jeb Hensarling in 2017, would prohibit “any rule-making, enforcement or other authority with respect to payday loans, vehicle title loans or other similar loans.”

In the absence of consumer protections, it is important that borrowers are aware of the potential financial harm when using payday loans. While AB 2500 may protect borrowers from the high interest rates that have gained popularity among installment lenders, licensed payday lenders in California will still be allowed to charge triple-digit annual interest rates. Borrowers should seek alternatives to payday loans to avoid ending up in ongoing debt.

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