With no law limiting or discouraging triple-digit annual percentage rate lending, the personal loan market has exploded since the Great Recession. Lenders dished out over 300,000 loans to Californians with interest rates above 100 percent in 2016, a stunning jump from just 57 in 2006.
The lending market received a boost late Thursday, as California lawmakers killed yet another attempt to cap interest rates at 36 percent on loans between $2,500 and $5,000. In a bipartisan effort, the Assembly voted down a consumer protection bill 26-29.
The Center for Responsible Lending — which sponsored Assembly Bill 2500 — said lawmakers wilted and succumbed to the financial industry’s heavy lobbying.
“Assembly members just signaled to predatory lenders that it’s OK to target distressed Californians into taking out abusive loans,” the nonprofit’s policy director Graciela Aponte-Diaz said. “People around California and across the country want protections from these loan shark products — they’ve made their voices heard time and time again.”
The deep-pocketed payday lending industry argued that AB 2500 would squash a critical line of credit for borrowers down on their luck. If lawmakers agreed to the proposed 36 percent interest cap, the industry said, it would not be able to continue making short-term loans to high-risk borrowers.
“We understand that the bill is intended to protect consumers from high interest rates,” the California Financial Service Providers Association said in an opposition letter. “However, we believe AB 2500 will have the opposite effect, leading many consumers to unregulated lenders and imposing an indefinite moratorium on access to regulated financial services.”
Before Thursday night’s vote the industry deployed a unit of lobbyists and bombarded Californians with radio, television and social media ads.
The battle between the finance companies and the nonprofit was decided largely because 23 lawmakers didn’t bother to vote. The measure by San Jose Democrat Ash Kalra fell short by 15 votes.
Companies such as LoanMe and Check ‘n Go have boomed since the financial crisis, filling the void left by traditional banks by hawking unsecured loans that often can be completed in less than a business day. Borrowers apply online, accept the sky-high interest rate and are off with the seemingly convenient cash.
But borrowers pay dearly for the lenders’ convenience: a 2-year $2,600 loan at 142 percent interest ends up costing the consumer $7,925, including more than $5,000 in interest and finance fees.
According to the Center for Responsible Lending, the lenders’ customers generally consist of minorities, veterans and seniors.
“Vulnerable communities are being targeted,” Aponte-Diaz said. “We see that through ads on Latino radio stations; the marketing money is really pouring in.”
However, black business leaders opposed capping interest rates, worried that the law would freeze up a critical line of credit.
The California Black Chamber of Commerce said families turn to personal loans to bridge the gap during medical emergencies or even car repairs.
“AB 2500 hurts our community’s ability to access responsible, regulated credit options and it deserves to be rejected by the California State Legislature,” chamber president Aubry Stone wrote in the Los Angeles Sentinel.
Assemblyman Kalra and the nonprofit now have come up empty on several pieces of legislation in the past few years.
The nonprofit says it will continue fighting to curtail the predatory loans, despite being outnumbered.
“In California we’ve made progress on immigration, health care, energy, the environment, but we are terrible when it comes to this financial issue,” said Ricardo Quinto, the nonprofit’s communications director.