In California lending law, $2,500 is a vital number. Lenders who make loans of less than that amount are limited in the amount of interest they can charge.
Lenders who make loans of $2,500 and up, though, can charge whatever the market will bear. In 2015, more than half of all loans between $2,500 and $5,000 carried interest rates of more than 100%.
Now a state assemblyman wants to rewrite those rules and narrow the gap between loans on either side of that Rubicon.
A bill proposed by freshman Assemblyman Ash Kalra (D-San Jose) would cap interest rates at 24% for consumer loans of more than $2,500.
Kalra said that would prevent Californians from taking out harmful loans. Industry groups, lenders and even one of Kalra's fellow lawmakers worry that the move could cut off access to credit for many would-be borrowers.
"It makes no sense that there are no protections for loans of $2,500 and above," Kalra said, calling loans with triple-digit interest rates "an abusive practice" that leads to long-term indebtedness and consumer harm.
Kalra's bill comes amid concern from consumer advocates over the fate of federal rules aimed at reining in consumer lenders.
The Consumer Financial Protection Bureau last year wrote rules that call for stricter underwriting of loans that carry interest rates topping 36%. But it's not clear whether those rules will ever take effect — or if the CFPB, a target of congressional Republicans and the Trump administration, will continue to exist in its current form.
The proposed state rate cap would apply to any consumer loan between $2,500 and $10,000. Though they often carry sky-high interest rates, loans of that size are not payday loans, which in California can be no larger than $300.
Instead, these are what's known as installment loans. Unlike a payday loan, which is set to be repaid in a matter of days or weeks, an installment loan is typically repaid in equal installments over months or even several years.
Because these loans are larger and longer-term than payday loans, they can wind up costing borrowers many times the amount originally borrowed. The volume of pricey installment loans has ballooned over the last several years.
In 2010, lenders in California made about $102 million in consumer loans carrying triple-digit rates. By 2015, the latest year for which figures are available, that number had shot up to more than $1 billion.
That rapid growth could indicate that there's healthy demand for relatively small loans from borrowers with limited or poor credit history — or that opportunistic lenders are preying on borrowers, who, in the wake of the financial crisis and recession, still have limited financial options.
Groups supporting the bill, including the National Council of La Raza, the Asian Law Alliance and the National Baptist Convention, say these loans are pitched largely to vulnerable consumers and amount to profiteering.
"Over the years we have seen immigrants targeted by predatory loan companies — specifically with their aggressive marketing strategy toward pushing triple-digit loans to these communities," said Joseph Villela, director of policy and advocacy for the Coalition for Humane Immigrant Rights of Los Angeles, another supporter of the bill.
Graciela Aponte-Diaz, California policy director for the Center for Responsible Lending, one of the backers of Kalra's bill, noted that despite the growth of those super-pricey loans, some lenders have shown that they can profitably make loans at much lower rates.
"We've seen lenders cap themselves, so it is being done by some lenders in a way that is lucrative for the business and not predatory," she said.
But both of the lenders she pointed to — Bay Area firms Oportun and Apoyo Financiero — make many loans at rates higher than those called for in Kalra's bill. Raul Vazquez, Oportun's chief executive, said a 24% rate cap would mean that his firm would no longer be able to make loans to some customers.
"The rate cap as currently proposed could result in even less access to credit for thousands of deserving, low-income families — people whose credit options may already be limited because of their lack of credit history or score," Vazquez said in an email.
Especially for smaller loans, a 24% cap could make lending unprofitable, said Danielle Fagre Arlowe, a senior vice president at the American Financial Services Assn., which represents installment lenders. She speculated that if Kalra's bill were to become law, many lenders would simply focus on larger loans.
"It would be the '$2,500 loan elimination act,' " she said. "What you see in states with rate caps is you only have one or two companies competing, and they're not going to make a loan of less than $6,000 or $7,000."
Thomas Miller, a senior scholar at the free-market think tank Mercatus Center at George Mason University, said rate caps in other states have led to fewer loans being made under those state laws — but not necessarily less lending.
He speculated that a rate cap of 24% in California would result in an increase in borrowing from unlicensed lenders.
"People will still have a demand for credit," Miller said. "It will give rise, probably, to illegal lending."
Borrowing at 24% or even 36%, where may states have capped rates, might seem expensive to borrowers with good credit. But lenders and trade groups say it's not easy to profitably make small- and mid-size loans at those rates.
That's particularly the case for borrowers with bad credit or little credit history. If borrowers are considered more likely to default on their loans, lenders charge a higher interest rate to offset potential losses.
San Diego firm Employee Loan Solutions, for instance, arranges loans between $1,000 and $3,000, and borrowers pay 24.9% interest. Doug Farry, one of the company's founders, said the rates are that low only because his company offers loans to workers through their employers, which reduces underwriting, advertising and collection costs.
"I would think it would be difficult for a lender to make a loan of around $3,000 at 24% without leveraging a program like ours," he said. "I think it would be very difficult."
Assemblyman Matthew Dababneh (D-Encino), chairman of the Assembly Banking and Finance Committee, said that he hasn't seen the bill's details yet but that a rate cap could hurt some would-be borrowers.
"What you will see with a bill like this is unintended consequences," he said. "These companies aren't going to offer loans. That will be good for some people but not for others."
For many borrowers, high-interest installment loans can be harmful, Dababneh said, though for others they represent a useful if less-than-perfect way out of a financial pinch.
"I've talked to single moms, to students, to others who say that without these loans, they wouldn't have been able to keep their apartment or fix the car they need for work," he said. "There are people who use them responsibly."
Kalra said access to credit will be part of the conversation as his bill makes its way through Sacramento. He said he and other lawmakers will look at how the rate cap might affect the availability of installment loans and where borrowers might turn without those loans.
"I think that can be part of our homework — to make sure we don't have families losing complete access to credit because of this bill," Kalra said.