California lawmakers voted to rein in predatory lenders on Friday, sending to the governor a bill to cap interest rates on loans of $2,500 to $9,999 for the first time in more than three decades.
After rejecting similar proposals in prior years, the Legislature approved the bill with the support of influential lawmakers, religious groups, unions, civil rights organizations, local governments and even some lenders.
“It’s been such a hard climb to get here,” Assemblywoman Monique Limón (D-Santa Barbara) said. “It’s not just a win from a policy perspective, but a huge institutional and historic win as well. It’s bigger than just this policy because so many legislators have tried in the past.”
The legislation prohibits lenders from charging more than 36% plus a federal funds rate, now around 2%, on $2,500 to $9,999 loans. Gov. Gavin Newsom’s signature would make California the 38th state in the nation to enact such a policy.
Supporters said the bill is long overdue.
“If you say you’re concerned with high costs in California, you must be doubly concerned with predatory lending practices,” Assembly Speaker Anthony Rendon (D-Lakewood) said. “People who are living paycheck to paycheck, and must borrow for unexpected expenses find those expenses rise faster than every other expense because of indefensible interest rates.”
Lawmakers restricted interest caps to loans under $2,500 in 1985, leaving no limit for rates on loans up to $10,000.
“Basically anyone who is strapped for cash month to month and who doesn’t have access to good credit opportunities, they will turn to these types of products,” said Marisabel Torres, policy director at the Center for Responsible Lending. “Unfortunately in California, not having a loan cap in this range leaves them vulnerable to really predatory practices.”
Some lenders have chosen to charge triple-digit interest rates that exceed 200%, leading more than one-third of borrowers to default on their payments, according to state data.
The California Supreme Court in a decision last year determined that high interest rates on consumer loans over $2,500 can be deemed unconscionable under state law.
During a debate on the Senate floor, Sen. Holly Mitchell (D-Los Angeles) provided an example of a man who took out a $2,700 car title loan that cost him nearly $11,000 to pay back. Mitchell said he spoke only Spanish, but the lender provided documents in English.
“Those are the kinds of scenarios this bill is attempting to address,” Mitchell said. “I, for one, would never want a constituent of mine or a family member to be taken advantage of when they are attempting to deal with ordinary or real life challenges.”
Opponents of the bill have argued that lenders would withdraw from the market or write fewer loans to borrowers who have a bad or limited credit history if the bill becomes law. The result, they say, could be that access to loans dries up for some Californians.
Lenders have lobbied heavily against the bill this year, including spending thousands of dollars on television and radio ads.
“We have to think about, where are people going to get credit?” Sen. Shannon Grove (R-Bakersfield) said. “If you have bad credit and you have not fulfilled your obligations in the past of paying your bills and making sure your credit is good, then you can’t just expect financial institutions to take a risk on you when you’re a bad risk in the first place.”
Limón has said financial institutions in her coalition already offer loans under the 36% cap.
If enacted, lower default rates would serve as a measure of the law’s success. Limón said she will also keep tabs on the amount of money available to consumers and the number of people taking out loans, among other factors.
“I hope that the effect will be that all of the financial institutions are going to rethink what products they offer to consumers and the harm,” she said. “I hope that folks will start to change business practices and models.”
The Senate approved Assembly Bill 539 with a 30-5 vote on Friday. The Assembly followed and voted 59 to 7, sending the bill to Newsom.
The governor has not publicly endorsed the proposal or worked behind the scenes to help secure its passage. But his comments denouncing the payday lending industry, both before and after the 2018 election, give supporters hope that he will sign the bill.
“We respectfully urge Gov. Newsom, who in his inaugural address called out the abusive practices of predatory lenders, to reaffirm his commitment to California consumers and sign this bill into law when it reaches his desk,” said a statement from Lendmark Financial Services, OneMain Financial and Oportun, lenders that support the proposal.
Times staff writer Liam Dillon contributed to this report.