Efforts to end triple-digit interest rates on small loans in California remove major hurdle

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Legislation to cap interest rates on high-cost small loans in California lifted a major hurdle Wednesday in the state Senate despite strong opposition from lenders with deep pockets.

The Senate Banking and Financial Institutions Committee approved Assembly Bill 539, which would set an annual interest rate cap of 36% plus a federal funds rate of 2.5% on loans of 2,500 $ to $ 10,000, with a bipartisan vote of 6-0.

After years of unsuccessful attempts to set limits that would prevent triple-digit interest rates on small loans, lawmakers pushed the bill forward and opposed lenders who have invested millions of dollars in recent years in lobbying efforts and campaign contributions – including $ 39,000 to state senators in the last month.

California has fallen behind the rest of the country in its efforts to regulate small loans. In a 2018 report, the National Consumer Law Center said 39 other states have five-year loan limits of $ 10,000.

The state limits interest rates on loans under $ 2,500 to between 12% and 30% per annum. With no monetary limit on loans valued between $ 2,500 and $ 10,000, some lenders have set rates above 200% on high-risk borrowers.

California lags behind in regulating short-term lenders. This bill could finally slow them down >>

More than a third of California borrowers who take out loans with interest rates of 100% or more end up in default, according to the state’s business monitoring department. Lawyers say these loans are designed to fail.

“I can’t think of another product that fails so often without the government intervening,” said MP Monique Limón (D-Santa Barbara), who introduced the bill.

Nearly 20 lenders, which offer auto title loans, personal loans, and other installment loans, have spent about $ 3.5 million lobbying the State Capitol since 2017. More than a dozen have given an additional $ 3.2 million to lawmakers, political parties and campaign committees over the past decade.

Opponents of the bill argue that the rate cap will push many lenders out of the California market, making it more difficult to obtain loans for subprime borrowers with bad or no credit.

“With the passage of this bill, we have the impression that you are taking another option away from us and that is very concerning,” said Maria Bello, a resident of Rancho Cordova who testified against the bill. “We need our options to be open.”

Senator Ben Hueso (D-San Diego) abstained from the vote and said he agreed it would limit Californians’ access to loans.

“Usually, the advocates of these programs are not the people who use these programs,” Hueso said. “Telling people how to manage their finances, I don’t think it’s the government’s job to do that. “

Lenders opposed to the legislation have paid campaign funds to several state senators on the committee in recent weeks, including Hueso and Sens. Steven Bradford (D-Gardena), Anna Caballero (D-Salinas), Ling Ling Chang (R-Diamond Bar) and Brian Dahle (R-Bieber).

Several state senators have questioned the morality of allowing lenders to offer loans at high interest rates.

Senator Maria Elena Durazo (D-Los Angeles) noted that some low-income borrowers are at high risk of default, which is why lenders offer loans at extremely high rates.

“The risk is higher, but imagine the risk when the percentage is so high,” she said.

Senator Anthony Portantino (D-La Cañada Flintridge) said the proposal forces lawmakers to weigh the cost of high interest rates against the possibility of limiting certain borrowers’ access to capital.

“There are people who are victims of predators,” Portantino said. “There are people who need that last minute loan to get through this week. How do you protect someone on both ends of this conversation? “

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