Three laws signed by California governor will hit lenders
California Gov. Jerry Brown signed three bills Sunday that could have a sizable impact on banks and other lenders in the nation’s most populous state.
The most prominent of the three requires publicly traded companies that are headquartered in California to add more women to their boards. Brown also signed legislation imposing new disclosure requirements for certain small-business loans by nonbanks, as well as a bill expanding a voluntary program that aims to encourage consumer loans that are more borrower-friendly than many of the products available today.
Under the first law, publicly traded firms with six or more directors must have at least three women by the end of 2021. Boards with five directors must include at least two women, and smaller boards must have at least one.
The measure’s supporters have cited a study by Credit Suisse, which found that among companies with a market capitalization of more than $10 billion worldwide, shares of firms with women directors outperformed shares of comparable companies with all-male boards by 26%.
Still, the landmark California law will likely face legal challenges. Business groups have argued that corporations are governed by the laws of the state in which they are incorporated — which is often Delaware — not the laws of the state where they are headquartered.
In a signing statement, Brown said that it is “high time” that corporate boards include women, and he made an apparent reference to the nation's focus on gender equity issues amid the fight over the Supreme Court nomination of Judge Brett Kavanaugh. But he also acknowledged that serious legal concerns have been raised about the bill.
“I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation,” the Democratic governor wrote.
“Nevertheless, recent events in Washington, D.C. — and beyond — make it crystal clear that many are not getting the message.”
The second bill signed by Brown instructs state government officials to develop interest rate disclosure standards for commercial loans of $500,000 or less, making California the first state in the nation to establish consumer-style disclosure rules for small-business loans.
The measure is a response to complaints that high-cost loans by online lenders often carry misleading terms and place an unsustainable strain on the finances of small-business owners. Banks and credit unions, which generally do not offer high-cost business loans, will be exempt from the disclosure rules.
Under the third law, a broader category of loans will qualify for an existing state program that aims to provide more borrower-friendly credit products.
Lenders that choose to participate in the program agree to limits on the ratio between borrowers’ monthly debt service payments and their monthly incomes, for example.
That program previously applied only to unsecured loans of between $300 and $2,500, but will now be expanded to include loans of up to $7,500.
The new law was backed by, and is expected to benefit, Insikt, a San Francisco-based online lender that operates a subsidiary certified as a community development financial institution. The company hailed the measure as a win for borrowers who, it said, deserve better alternatives than they have today.
But some consumer advocates have opposed the measure. The Center for Responsible Lending had urged Brown to veto the bill, arguing that it amounts to a giveaway to a single company and would expand unsound lending practices.
Despite covering more loans, the program is still voluntary. Lenders in California that choose not to participate can still charge unlimited interest rates on consumer loans above $2,500. Loans below that amount are subject to separate interest rate restrictions in the state.
Brown, who will leave office in January following his fourth term as governor, said that he signed the bill reluctantly. He said that the interest rates allowed in the newly expanded program are unacceptably high, but he also noted that loans outside of the program are even pricier.
He invoked the Bible as he exhorted state lawmakers to enact tighter restrictions.
“From the time of Moses, usury has been condemned. Loans that exploit low income borrowers are especially abhorrent,” he wrote.