The California Legislature takes a back seat to no one when it comes to regulating business — for the sake of labor, the environment, consumer protection, minority hiring, pay equity, you name it. So you might think state lawmakers would jump on the chance to slam lenders who charge more than 100% interest for a loan. And yet they have been curiously reluctant to do so, beguiled by the claims of high-cost lenders that people with poor credit in desperate need of cash should be able to take on loans that are proven debt traps.
This history is especially galling when you consider that at least 38 other states have imposed specific interest-rate caps on installment loans, the vast majority of which are at or below 36%. Which is not to say that 36% is a reasonable interest rate for a loan designed to be repayable, but it’s a heck of a lot better than 100% or more.
Happily, the Legislature took a long-delayed stand against predatory lending in California Friday, giving final approval to a measure (Assembly Bill 539) to regulate the interest rate and terms of non-mortgage installment loans worth $2,500 to $10,000. If Gov. Gavin Newsom signs the bill, it would close one of the state’s biggest black holes sucking in desperate borrowers.
Similar bills have run aground in several previous sessions, blocked often by Republicans allergic to regulation and Democrats close to the storefront and subprime lenders that had set up shop in their communities. Kudos to the sponsor of AB 539, Assemblywoman Monique Limón (D-Santa Barbara) and her allies for finding a way to surmount those hurdles.
The cap in AB 539 isn’t as low or as tight as some consumer advocates sought. The maximum rate will be 36% plus the federal funds rate, which is a little more than 2% today. And lenders will be allowed to freight loans with such profitable add-ons as credit insurance.
But AB 539 promises more than just a baby step in the right direction. It threatens a business model based on hoovering in borrowers regardless of their ability to repay, then making up for high default rates by charging obscenely high interest. With interest rates capped below 40%, lenders will be pressed to make loans that borrowers can be expected to pay back.
I know some of you are screaming “Nanny state!” at your screens, but this measure is no more overprotective than the ones penalizing manufacturers that churn out inherently dangerous products. Extremely high interest loans extended to borrowers with no clear ability to repay are inherently dangerous, financially if not physically, to the people who take them them out, as well as to the borrowers’ families.
And, yes, reining in ultra-high-interest loans probably means some needy borrowers with poor credit and no savings will be left in the lurch, scrambling for some other way to pay unexpected medical bills or car repairs. But the right answer for those Californians isn’t to trade today’s desperation for months of escalating financial woes.