State Assemblywoman Monique Limon’s loan reform bill was approved by the Senate Banking & Finance Committee Wednesday.
According to a news release from Ms. Limon’s office, the committee voted 6-0 to send AB 539 to the Senate Judiciary Committee. It must pass the Judiciary Committee and Appropriations Committee before it goes to the Senate floor.
“For 14 years, the California State Legislature has attempted to reign in predatory lending. Today, we have advanced a consumer protection bill in the Senate, but our fight is not over,” said Ms. Limón, D-Santa Barbara.
AB 539 caps interest rates at 36 percent plus the Federal funds Rate of 2.4 percent on installment loans in the $2,500 from $10,000 range. She claimed these loans currently average 100 percent to 225 percent interest rates.
“Consumers are often unable to repay these expensive loans, trapping already vulnerable Californians in a cycle of debt,” read the news release.
“For too long predatory lenders have been allowed to profit off the devastation of California families in the name of ‘access to credit…triple digit loans aren’t really giving people access to credit but are instead giving debt collectors access to the most financially vulnerable.'” said the bill’s co-author Tim Grayson, D-Concord.
Critics of the bill allege it doesn’t do enough to address concerns that add-on products, most notably credit insurance, may provide a loophole for circumvent the 36 percent cap. Some experts disagree.
“539 is not a perfect bill in that it doesn’t solve all the problems like payday loans. But as it stands the bill would eliminate the worst loans,” said Nick Bourke, Director of The Pew Charitable Trusts.
“In California, the real problem is the lack of pricing regulation on loans $2500 and over. Credit insurance is a problem but it’s a small one,” said Mr. Bourke who explained that payday installment loans can come with an APR, the annual rate charged for borrowing, over 100 percent. He explained that credit insurance or other loan add-on products like club memberships usually only raise the rate by up to 10 points.
“This is not so big a deal compared to the core problem of base pricing at 100 percent. It’s really an apples and oranges comparison,” said Mr. Bourke.
Lauren Saunders from the National Consumer Law Center added that she suspects the credit insurance issue is being raised by lenders who would lose business if AB 539 passed.
“It’s a distraction. They are trying to kill the bill. Yes this bill is a compromise, would we have liked to get a pure 36 percent rate cap all fees and add-ons included. But the real issue is these 135 percent rates.”