By Liana Molina
People should not be punished financially for the color of their skin or for the neighborhood they live in. And yet, that is exactly what has been happening in our state when it comes to high-cost lenders who disproportionately peddle payday loans in black, brown, and poor communities. While we know that payday loans and the “debt traps” they create are bad, there’s been recent, and troubling growth in even larger and more problematic loans known as installment loans.
It’s hard to believe, but under existing state law, there are no restrictions on the interest rates that lenders can charge for installment loans of over $2,500. Not surprisingly, high-cost lenders are pushing people to take the loans for more than $2,500. According to state data, in 2015, more than half the loans to Californians for $2,500 to $4,999 came with interest rates of over 100%.
[U]nder existing state law, there are no restrictions on the interest rates that lenders can charge for installment loans of over $2,500
This mirrors what borrowers have shared about their experiences when they contact lenders seeking a loan for less than $2,500. Instead of the lenders making that smaller loan (which have restrictions on their interest rates), they’ve pushed borrowers to take a larger loan for over $2,500, which enables the lender to charge whatever interest rates they want. The consequence for the borrower is that they’re trapped into an even bigger loan that will take years to pay off.
If you thought high-cost installment loans were bad, it gets worse. Some of these lenders also offer installment loans that require the borrower’s car as collateral (so-called car title loans). If the borrower is unable to repay the loan then they also lose their main method of transportation when the lender repossesses their car, a dangerous phenomenon that happens to 1 out of 5 people who use a car loan, according to research by the federal Consumer Financial Protection Bureau.
“At least a car thief doesn’t take half your income before they steal your car.”
Recognizing how bad these loans are for Californians, the state agency who regulates these lenders put out a bulletin, warning borrowers that “the interest rate lenders can charge is unlimited,” and that “This should be a loan product of last resort.” Citing the high costs and high default rates on these loans (over 16,000 Californians saw their cars repossessed by car title lenders in 2015), one consumer advocate explained, “At least a car thief doesn’t take half your income before they steal your car.”
The good news is that a new bill, AB 784, by Assemblymember Matt Dababneh, would restrict the interest rates that lenders could charge. If enacted, lenders could continue making loans, but would have to comply with a rate cap of about 24% APR, or, they could participate in a pilot program that would allow them to charge higher interest rates, but that also includes more consumer protections. Currently the bill is sitting with the Appropriations Committee, which is chaired by Assemblymember Gonzalez Fletcher, and consumer advocates are hopeful the committee will send the bill to the floor.
For much of the past decade, lender lobbyists have successfully blocked any reforms to their industry, and California’s working families have suffered financial heartaches as a result. AB 784 represents a clear and balanced piece of legislation that will ensure borrowers have access to safe credit options, and builds on the legislature’s commitment to enact progressive policies in sharp contrast to the proposals we see coming out of Washington DC right now.
If you’re also against predatory lending, … consider joining the conversation online right now about AB 784
Tomorrow, Friday, May 26 is the last day for bills to be released from the suspense file. We are counting on the progressive leadership of the chair, Assemblymember Gonzalez Fletcher to advance this bill out of committee. If you’re also against predatory lending, then please consider joining the conversation online right now about AB 784 to raise awareness of this bill and to encourage the Appropriations Committee to take it out of the suspense file.
Given the recent launch of the new Progressive Caucus in the California legislature, AB 784 represents an important and early opportunity to put our California values into action by stopping predatory lenders from ripping off working families.
Liana Molina is the director of community engagement for the California Reinvestment Coalition, a nonprofit advocating for safe and fair access to credit for all Californians.