When LendMark started offering subprime loans to California residents a few years ago, it noticed something odd: a vast and growing number of big loans offered by rival firms at interest rates of 100% or higher, and relatively few smaller, cheaper loans.
To executives at the suburban Atlanta company, which entered the state by buying loan storefronts from a competitor, it didn’t make sense.
“In most states, smaller dollar loans generally have a little higher APR and larger loans have a little lower APR,” said Chris McKinley, a senior vice president at the company. “In California, it’s like looking in the mirror — it’s the inverse.”
Indeed, California lending law is peculiar in that it strictly limits interest rates, but only on personal loans up to $2,499. In practice, that means smaller loans can carry a maximum interest rate of between 20% and 30%, while loans of $2,500 or more often come with rates of 150% to 200%.
“This is the last state I would have expected to have an unregulated rate environment,” McKinley said.
But that could soon change. After a few failed attempts to get the state Legislature to cap interest rates, consumer advocates say they want to go directly to the voters and will try to put a rate-cap measure on the general election ballot in 2020.
Though discussions are still in the early stages, Graciela Aponte-Diaz of the Center for Responsible Lending said she’d like to see the measure include a cap of 36% for loans of up to $5,000 and a lower cap for larger loans, plus limits on loan origination fees and other add-on charges.
Such a proposal would dramatically reshape the state’s consumer lending market and, Aponte-Diaz hopes, serve as a threat to bring lenders to the table to support compromise legislation that wouldn’t require an expensive initiative campaign.
“We’ll be telling lenders, ‘Look, a ballot measure won’t be this nice,’” she said.
CRL and other advocacy groups have ramped up efforts to change California’s lending code over the past few years, in part because of the rapid growth of the high-cost lending industry. In 2010, Californians borrowed $102 million in personal loans of up to $10,000 with triple-digit APRs; last year, they borrowed $1.2 billion.
The strong demand comes from consumers with typically poor credit and few other borrowing options, who might need to cover expenses such as rent, car repairs or medical bills.
The threat of a ballot measure isn’t the only thing that could push the state’s subprime lending industry to support interest rate caps despite its long-standing argument the market should be allowed to set rates — and that an interest-rate cap would limit loan availability.
They still advocate that position, but a recent California Supreme Court opinion could make them more willing to deal. In August, the court found that while California lending law spells out no rate cap for loans of $2,500 or more, it does allow courts to find that interest rates and other loan terms can be “unconscionable” and therefore illegal.
The opinion was issued in a 10-year-old case involving high-interest-lending pioneer CashCall, which had made loans with interest rates of 90% or more. The company, headquartered in Orange County, argued it was free to charge whatever it wanted. The court said that’s not the case but sent it back to a lower court to make the factual determination of whether or not the loans were illegal.
The opinion did not, however, spell out what an unconscionably high interest rate might be, which is problematic for lenders, said Scott Pearson, a partner at law firm Ballard Spahr who represents lending firms.
“In every single case involving a loan over $2,500, there’s now uncertainty over whether the interest rate is permitted,” he said.
Pearson said that as a result lenders might agree to rate caps, even though they might reduce profits or loan volume. “I think most companies would prefer to know what the rules are ahead of time rather than deal with the uncertainty,” he said.
Indeed, LendMark’s McKinley said that’s one of the reasons his firm is interested in working with the Center for Responsible Lending and other advocacy groups to reach a deal that could make it through the Legislature.
The company operates about 30 stores in California, and McKinley said it would like to open more. But doing so would be risky in the unlikely scenario that its loans — which carry interest rates no higher than 36% — were found to be unconscionable or if a ballot measure called for a lower rate cap.
“Our selfish interest is to bring some certainty to the market we operate in,” he said.
Other lenders, though, remain opposed to any interest-rate regulation, even following the CashCall opinion — and they are counting on lawmakers in Sacramento to help them.
High-interest consumer lenders and their trade groups gave at least $1.3 million to California legislators in advance of the 2016 election, donating to all but seven senators and 18 Assembly members.
Most legislators got at least $5,000 from the industry, campaign finance records show. What’s more, the Center for Responsible Lending estimates, based on state filings, that lenders and their trade groups spent $1.5 million on lobbying against rate-cap bills over the past two years.
Lenders that charge substantially more than LendMark could see their business sharply diminished by new regulations. And one executive from a high-interest lending company, who spoke on condition of anonymity, said it’s not likely the Legislature could pass something palatable to high-cost lenders.
Lenders’ preference, the executive said, would be to either change the law so that rates cannot be deemed unconscionable — essentially returning to what lenders had long believed was the status quo prior to the high court decision — or to adopt an interest-rate cap high enough to allow lenders to continue their current practices.
“I think either option would be great, but I’m a realist and I don’t know that it’s a political reality,” the executive said.
Though the Legislature has rejected rate-cap bills and other legislation that would have reined in high-cost lenders over the past few years, the executive said he doesn’t believe lawmakers could be talked into overriding the state Supreme Court decision. At the same time, a political compromise seems distant given that consumer advocates want a firm 36% interest-rate cap.
“It becomes a situation where you can’t get to a number that is workable,” the executive said.
McKinley of LendMark, though, believes a critical mass of lenders can agree to something in that 36% range and perhaps provide enough industry support to move a bill forward.
He said LendMark was “a hair’s breath away” from supporting Assembly Bill 2500, a bill that would have capped interest rates on loans of up to $5,000 at 36%. It was voted down in the last legislative session in a 27-30 vote on the Assembly floor, with 21 members not voting. Support from LendMark could have brought other lenders on board, McKinley said, and might have pushed the bill over the top.
Assemblywoman Monique Limón, a Santa Barbara Democratic who authored three failed lending regulation bills, said opposition from the industry is an obstacle, but that indifference from legislators is perhaps a bigger one. She suggested that, in the absence of legislation, voters should have a say on how the market is regulated.
“There is not agreement among legislators, not just Democrats, that these loans are a problem,” she said. “I see consumer groups that have introduced legislation and have been unsuccessful. I can’t speak for them, but the time may come where they realize the will of the Legislature may be in question as to whether they want to address this.”
In the meantime, though, the state’s financial regulator may be taking matters into her own hands. Last week, Jan Lynn Owen, commissioner of the state Department of Business Oversight, announced the beginning of what could be a crackdown on high-interest lenders.
Owen’s office demanded information from 20 lenders that specialize in high-interest loan, including CashCall and related firm LoanMe, also based in Orange County.
The demand relates to lenders’ use of firms operating consumer websites that steer customers to lenders. In a statement announcing the inquiry, Owen said her office may take steps to regulate these online loan-referral businesses — something the Legislature didn’t move forward with this year — and perhaps even write new rules requiring lenders to do more underwriting before offering loans.
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