California lawmakers are set to impose an interest rate cap on consumer installment loans after forging a compromise that has the backing of advocacy groups and some lenders.
The legislation passed a key hurdle on Wednesday when the state Senate Banking Committee, which killed another rate cap measure last year, voted 6-0 to approve it. Several committee members who voted in favor of the bill also expressed doubts about it.
“It’s not the perfect answer. It’s far from it,” said committee chairman Steven Bradford, a Democrat. Nonetheless, he recommended the bill pass.
The measure, which was approved by the California Assembly in May, would impose a rate cap of 36% plus the federal funds rate on installment loans between $2,500 and $9,999. Under California’s complicated low-value consumer credit rules, approved lenders can currently charge whatever rates they want within this range of loan sizes.
In 2017, the last year for which data was available, some 569,000 installment loans between $2,500 and $9,999 were issued by approved lenders under California’s finance law. About 56% of those loans had annual percentage rates of 40% or higher, while the rest had lower APRs, according to a report from the California Department of Business Oversight.
The bill that was introduced on Wednesday has support from companies that provide installment loans with APRs below 40% in California, including OneMain Financial and Oportun. Approved lenders would be allowed to sell ancillary products such as credit insurance without the costs being counted against the APR cap.
Companies that typically charge Californians higher interest rates on installment loans, including Advance America and Elevate, have lined up in opposition.
Banks and credit unions would not be directly affected by the bill because they are not required to be licensed under California finance law.
The bill’s sponsor, Democratic Congresswoman Monique Limón, said at Wednesday’s hearing that her bill was not intended to give some lenders a boost. Instead, she said, he targets more expensive loans because they have high default rates.
“More than one in three times these loans leave people worse off than when they started,” Limón said.
If it becomes law, the legislation would reduce the incentive lenders currently have to encourage borrowers to borrow at least $2,500, since annual interest rates on smaller installment loans in California are capped at 12%. at 30%. At the end of 2017, nearly twice as many installment loans between $2,500 and $9,999 were outstanding in California than installment loans below $2,500.
But the question that dominated Wednesday’s hearing was whether the bill would reduce access to credit for cash-strapped consumers.
Lawmakers heard from two Sacramento-area residents who said they were only able to get credit approved for their needs from higher-cost lenders.
Melissa Soper, senior vice president of public affairs at Curo Financial Technologies Corp., which makes loans with triple-digit APRs, also spoke out in opposition. “The costs reflect the risk,” she said.
Soper predicted that many customers who do not qualify for loans from companies supporting the legislation will end up turning to illegal foreign-based lenders.
But supporters of the bill have argued that consumers who can’t pay their loans end up worse off.
“Do three-figure loans really give people access to credit, or do they just give debt collectors access to people?” asked Democratic MP Timothy Grayson.
The bill would not change the rules for payday loans in California. In 2017, payday lenders made more than 10 million loans in California, about as many loans as those made under the California Finance Law. Payday loans had an average annual percentage rate of 377%.
Limón’s legislation then passes to the Judiciary Committee of the Senate.
Governor Gavin Newsom, a Democrat, did not endorse the bill, but he criticized high-cost lenders as a gubernatorial candidate last year, and the remarks were taken as a sign that unlikely to be a roadblock.