Calif. Senate approves interest rate cap for installment loans

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The California Senate approved a bill Friday that would cap interest rates on a large swath of consumer installment loans at approximately 40%.

The 30-5 vote represents a victory for consumer advocacy groups that have been seeking for years to crack down on lenders that charge triple-digit annual percentage rates.

Suzanne Martindale, senior policy counsel at Consumer Reports, called the legislation a crucial first step toward reining in abusive lenders.

“Predatory lenders have been allowed to take advantage of vulnerable Californians for decades, while blocking any attempts at reform,” she said in a press release.

The bill, which was approved by the state Assembly in May, now goes to Democratic Gov. Gavin Newsom, who has been critical of high-cost lenders.

It would impose a cap of 36% plus the federal funds rate on installment loans of between $2,500 and $9,999. Under California’s complicated rules for small-dollar consumer credit, licensed lenders can currently charge whatever rates they want within that range of loan sizes.

Companies that typically charge interest rates over 40% in California, including Advance America and Elevate, lined up in opposition to the bill.

But it got the support of companies that offer consumer installment loans with lower APRs, including OneMain Financial and Oportun. Those companies are part of the Safe Affordable Credit Coalition, which called the vote Friday an important milestone for consumer protection in the nation’s largest state.

“We commend the Senate, which has joined the Assembly in taking strong, bipartisan action to protect consumers by ensuring access to safe and affordable credit,” the coalition said in a written statement.

If it becomes law, the legislation should reduce the incentive that lenders currently have to encourage consumers to borrow at least $2,500. Annual interest rates on smaller installment loans are capped at 12% to 30% in California.

Last year, lenders licensed under the California Financing Law made roughly 750,000 fixed-rate installment loans of between $2,500 and $9,999. Approximately 55% of those loans had annual percentage rates of 40% or higher, while the rest had lower APRs, according to a report by the California Department of Business Oversight.

Banks and credit unions would not be directly affected by the bill because they are not required to be licensed under the California Financing Law.

The bill would not change the rules for payday loans. In 2018, payday lenders made more than 10 million loans in the state at an average annual percentage rate of 376%.

In his inauguration speech in January, Newsom vowed to stand up to lenders who target the state’s most vulnerable citizens.

“We can’t celebrate until we see his signature on the dotted line,” said Marisabel Torres, California policy director for the Center for Responsible Lending, “but we feel confident in it being sent to him.”

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Small-dollar lending Consumer lending Payday lending Financial regulations Gavin Newsom State of California