Walk into a Northgate supermarket and, along with produce and pan dulce, you can walk out with a small loan from the store’s Prospera financial services stand.
Those loans top out at $2,500. Now, a bill working its way through the state Legislature could boost that maximum to $7,500 — enough, the bill’s author said, to pay for an immigration lawyer or a funeral.
The loans are marketed by Northgate but actually made by Insikt, a San Francisco firm that argues the change would help working families and small-time entrepreneurs while disrupting California’s increasingly expensive market for personal loans. Lenders commonly charge interest rates higher than 100%, while Insikt, if the bill passes, would be able to charge no more than 35%, plus fees.
“The large loan market is dominated by a lot of predatory loan structures and pricing that we want to create a better alternative for,” said Insikt founder and Chief Executive James Gutierrez. “There are people who need larger loans. Borrowers can get a loan up to $2,500 from us, but then they have to piecemeal the rest and they’re likely coming in at over 100% APR.”
But consumer advocates and some lenders — including another firm Gutierrez founded and left — say it’s not that simple and call the bill a giveaway to Insikt that would do nothing to encourage more lenders to offer lower interest rates.
“California does not need a bill that would benefit the risky model of a single business,” a coalition of advocacy groups, including the Center for Responsible Lending and the advocacy arm of Consumer Reports, wrote in a letter to lawmakers last month. “Until we make real progress on across-the-board small-dollar credit issues, bad actors will continue to exploit gaps in the law and peddle costly loans in our communities.”
The bill marks the latest Sacramento showdown over how to change the state’s lending code, a hodgepodge of rules that limit fees and interest on some types of loans while leaving others unregulated.
Payday lenders, who make small loans that are due in just a few weeks, can offer no more than $255 and follow strict fee limits. Larger loans of up to $2,499 can carry interest rates of between 20% and 30%. For any loan of $2,500 or more, there’s no limit to what lenders can charge.
Last year, nearly half of all loans of between $2,500 and $10,000 made by state-licensed lenders came with interest rates topping 100%.
Many lenders, not wanting to comply with interest-rate limits, only offer loans of $2,500 and up. The state has attempted to draw more lenders to the market for smaller loans by creating a pilot program that allows them to charge somewhat higher rates and fees on loans up to $2,500.
In exchange for agreeing to report to credit bureaus, more thoroughly underwrite loans and offer financial education, lenders who sign up for the program are allowed to charge interest rates of up to 36%. Unlike ordinary lenders, pilot program lenders are also allowed to offer their loans through finders: businesses like Northgate that advertise loans and help borrowers fill out applications but are not licensed lenders or brokers.
Assembly Bill 237, authored by Assemblywoman Lorena Gonzalez Fletcher (D-San Diego), would change the rules of the program by allowing participating lenders to offer loans of up to $7,500. The main effect of that change is that lenders would be able to offer those larger loans through finders.
And the biggest beneficiary of that change would be Insikt, Gutierrez’s current company and one of the bill’s supporters. Opposing the bill is Oportun, a company Gutierrez founded in 2005 and left in 2012.
Both companies specialize in making loans to customers with little or no credit history, with a particular focus on working-class Latinos. And the two companies are by far the largest lenders in the pilot program, together accounting for 98% of all pilot-program loans made last year, according to a report by the state Department of Business Oversight.
There’s one big difference between the companies, though: Insikt relies entirely on finders and, for now, cannot offer loans larger than $2,500; Oportun does not use finders, so it offers pilot-program loans as well as larger loans of up to $8,000 on its website and at more than 175 California storefronts.
For Insikt, Gonzalez Fletcher’s bill would allow the company to offer larger, potentially more profitable loans through its nearly 400 finder locations, including dozens of Northgate markets and more than 100 DolEx check-cashing and money-transfer shops.
Though 16 lenders participated in the pilot program last year, Insikt was the only company that made loans through finders, according to reports from the Department of Business Oversight.
Gonzalez Fletcher said her bill isn’t about changing the rules to benefit Insikt — “I don’t do specific bills for a company. That’s gross,” she said — but about giving her constituents more borrowing options.
“If you want your immigration paperwork settled, that costs more than $2,500 and a funeral can be about $8,000,” she said. “I don’t want to push those folks to lenders who charge 100%, 140% APR.”
Oportun and other lenders — including Lendmark Financial Services and the trade group California Financial Services Association — oppose the bill on a handful of grounds, saying it isn’t necessary and could ultimately hurt the very borrowers it aims to help.
The pilot program was created, they argue, to encourage lenders to make loans that otherwise weren’t being offered. But there’s no such gap in the market for loans larger than $2,500. Last year, California lenders made nearly 750,000 loans of between $2,500 and $10,000. Though nearly half came with triple-digit APRs, more than 40% charged less than 40% APR, according to a state report.
Lenders and consumer advocates also say that Insikt and its finders could make larger loans without trying to change state law. Instead, they argue the finders should simply apply to become licensed loan brokers.That would put Northgate and other finders on the hook for additional reporting requirements and state oversight.
“We believe any player should come in through the front door,” said Ezra Garrett, a senior vice president at Oportun.
Bill opponents also say they’re worried about some of Insikt’s finders — specifically payday lenders. In a letter to lawmakers, Lendmark Financial said borrowers who apply for an Insikt loan at a payday lender but are denied could find themselves ensnared in a payday loan or other expensive credit.
Gutierrez, in his own letter to lawmakers, said only about 6% of Insikt’s loans over the past year were made through payday lenders. Most, about 86%, were made through grocery stores and money-transfer companies.
Current finders, he said, could apply to become brokers but don’t want to because of concerns about additional regulatory scrutiny or risk. Even if companies were willing to be brokers, though, he believes his customers will be better off dealing with finders — which, unlike brokers, cannot negotiate loan terms with customers and face strict limits on the the type of advertising they can do and the amount of compensation they receive for helping originate loans.
“It really surprises me that advocates prefer that our partners become brokers,” he said.
All those criticisms aside, Gutierrez said the fundamental issue is that he wants to offer loans at lower interest rates and with more consumer protections than many lenders offer. Why not let him?
“I think the opposition loses sight of who we’re trying to help,” he said. “These people need credit now. Why are we not allowing them to do this and instead pushing them to higher-rate options?”