California legislature votes to limit interest rates on loans as low as $2,500
California Gov. Gavin Newsom (D) will decide whether to cap interest rates on some small or short-term loans after state lawmakers approved a measure in the last-minute legislative rush to finalize bills before the end of the year.
The measure, Assembly Bill 539, would prohibit lenders from charging interest rates higher than 36 percent, plus the standard federal rate, on loans of between $2,500 and $10,000.
{mosads}The bill would require lenders to offer credit education programs to consumers who take out those loans.
Assemblywoman Monique Limon (D), the bill’s primary sponsor, said some lenders can charge rates of up to 235 percent annually. Her measure is intended to help cut the number of Californians who default on those small loans every year.
“This happens to be the fastest growing product of all of their products,” Limon said of the $2,500–$10,000 loans.
About 20,000 California residents lose their cars because they cannot make loan payments, and about 38 percent who take out those loans end up defaulting.
Opponents say limiting the interest rates that lenders can charge will limit access to capital for people who have bad credit or no credit.
“California has one of the highest costs of living in the nation and it can be extremely difficult to budget and save for financial expenses. I talk with hardworking members of our communities every week, and they need more — not less — options,” Julian Canete, who heads the California Hispanic Chambers of Commerce, said in an email. “Simply mandating arbitrary price controls is not the right answer.”
Some warned the bill would hinder an industry that takes higher risks to lend money to those who have a poor history of paying it back.
“They call it predatory lending, but people that go to these lending organizations are people that are very, very high risk,” said Shannon Grove, the Republican leader of the state Senate, who voted against the bill. “If these organizations cease to exist, where do these people go to establish credit?”
Thirty-eight other states already limit the amount of interest a lender can charge. But not California, where the short-term lending industry is one of the most powerful lobbies in Sacramento.
“This is a space where it’s a billions-of-dollar industry. Their ability to influence the conversation I think has been evidenced. There was one point where these bills wouldn’t even be heard,” Limon said. Versions of her bill have come up, and died, in each of the last 14 legislative sessions.
Assembly Speaker Anthony Rendon (D) said the bill had been 18 months in the making and that Limon had worked to cobble together a broad coalition of interest groups from the business, religious and civil rights communities.
“It’s amazing to me when I hear the predatory lending folks come in here and talk about seeking compromise. She’s been doing that for 18 months,” Rendon said. He called the bill a “moral fight.”
The bill passed with bipartisan support on the final day of the legislative session. Newsom, who has hundreds of bills left to review before his work is done, has not said whether he will sign the bill — but Limon said Sacramento took notice when Newsom mentioned high interest rates in his inaugural address to the state legislature.
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