Opinion: California finally defends borrowers, instead of lenders who profit
The California legislature leaves no room for anyone when it comes to regulating business – for the sake of labor, the environment, consumer protection, hiring minorities, pay equity , etc. So you might think state lawmakers will jump at the chance to snap lenders who charge more than 100% interest on a loan. And yet they have been oddly reluctant to do so, seduced by claims from expensive lenders that people with poor credit and in desperate need of cash should be able to take out loans that are proven debt traps.
This story is particularly infuriating when you consider that at least 38 other states have imposed specific interest rate ceilings on installment loans, the vast majority of which are below or equal to 36%. This is not to say that 36% is a reasonable interest rate for a loan designed to be repayable, but it is much better than 100% or more.
Fortunately, the Legislative Assembly took a longstanding fight against predatory loans Friday in California, finally approving a measure (Assembly Bill 539) to regulate the interest rate and terms of non-mortgage installment loans valued at $ 2,500 to $ 10,000. If Gov. Gavin Newsom signs the bill, he would close one of the state’s biggest black holes by sucking in desperate borrowers.
Similar bills have failed in several previous sessions, often blocked by Republicans allergic to regulation and Democrats close to the storefront and risky lenders who had established themselves in their communities. Congratulations to the sponsor of AB 539, MP Monique Limón (D-Santa Barbara) and her allies for finding a way to overcome these obstacles.
The cap on AB 539 is not as low or as tight as some consumer advocates would like. The maximum rate will be 36% plus the federal funds rate, which is just over 2% today. And lenders will be allowed to offer loans with add-ons as profitable as credit insurance.
But AB 539 promises more than just a baby’s step in the right direction. It threatens an economic model based on the aspiration of borrowers regardless of their ability to repay, then compensates for high default rates by charging extremely high interest. With interest rates capped at less than 40%, lenders will be incentivized to make loans that borrowers should repay.
I know some of you are shouting “Nanny State!” on your screens, but this measure is no more overprotective than those that penalize manufacturers who produce inherently dangerous products. Extremely high interest rate loans granted to borrowers without a clear repayment capacity are inherently dangerous, financially if not physically, for the people who underwrite them, as well as for the families of the borrowers.
And, yes, curbing super high interest rate loans probably means that some needy borrowers with poor credit and no savings will be left hanging, scrambling to find another way to pay unexpected medical bills or auto repairs. . But the right answer for these Californians is not to trade today’s desperation for months of growing financial hardship.