California on verge of capping rates on installment loans

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California lawmakers are poised to impose an interest rate cap on consumer installment loans after forging a compromise that has the support of advocacy groups and some lenders.

The legislation passed a key hurdle Wednesday when the state Senate’s banking committee, which had killed another rate-cap measure last year, voted 6-0 to approve it. Several committee members who voted in favor of the bill also expressed misgivings about it.

“This is not the perfect answer. It’s far from it,” said the committee's chairman, Steven Bradford, a Democrat. Nonetheless, he made a recommendation to pass the bill.

The measure, which was approved by the California Assembly in May, would impose a rate 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.

In 2017, the last year for which data was available, some 569,000 installment loans between $2,500 and $9,999 were made by lenders licensed under the California Financing Law. Approximately 56% 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.

The bill that moved forward on Wednesday has the support of companies that make installment loans with APRs below 40% in California, including OneMain Financial and Oportun. Licensed lenders would be allowed to sell ancillary products such as credit insurance without having the costs counted under the APR cap.

Companies that typically charge higher interest rates on installment loans to Californians, including Advance America and Elevate, lined up in opposition.

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 legislation’s sponsor, Democratic Assemblywoman Monique Limón, said during Wednesday’s hearing that her bill is not meant to give a leg up to certain lenders. Instead, she said, it targets more expensive loans because they have high default rates.

“More than one out of three times, these loans leave people worse off than when they started,” Limón said.

If it becomes law, the legislation should reduce the incentive that lenders currently have to encourage borrowers to borrow at least $2,500, since annual interest rates on smaller installment loans in California are capped at 12% to 30%. At the end of 2017, nearly twice as many installment loans of $2,500-$9,999 were outstanding in California as were installment loans under $2,500.

But the question that dominated Wednesday’s hearing was whether the bill will reduce cash-strapped consumers’ access to credit.

Lawmakers heard testimony from two Sacramento-area residents who said they had only been able to get approved for credit that fit their needs by higher-cost lenders.

Also speaking in opposition was Melissa Soper, senior vice president of public affairs at Curo Financial Technologies Corp., which makes loans with triple-digit APRs. “The costs reflect the risk,” she said.

Soper predicted that many customers who do not qualify for loans from the companies that support the legislation will wind up using illegal lenders that are based offshore.

But the bill’s supporters argued that consumers who cannot afford their loans end up in a worse position.

“Are triple-digit loans really giving people access to credit, or are they just giving debt collectors access to people?” asked Democratic Assemblyman Timothy Grayson.

The bill would not change the rules for payday loans in California. In 2017, payday lenders made more than 10 million loans in California, which was about as many loans as were made under the California Finance Law. The payday loans had an average annual percentage rate of 377%.

Limón’s legislation moves next to the Senate Judiciary Committee.

Gov. Gavin Newsom, a Democrat, has not endorsed the bill, but he criticized high-cost lenders as a gubernatorial candidate last year, and those remarks have been interpreted as a sign that he is unlikely to be a roadblock.

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