The California Senate Banking Committee is scheduled to hold a hearing Wednesday (June 26) on a bill that caps consumer loan rates and threatens to sever a vital credit lifeline for many. Oddly, three commercial lenders who offer the kind of loans subject to this regulation support it.
Assembly Bill 539 would cap the interest rate at 36% plus the federal funds rate on loans of more than $2,500 but less than $10,000. Lawmakers are targeting lenders that make what they believe are “unaffordable” personal loans and are doing so in the name of “consumer protection.”
But the bill will create more harm than it would prevent, should it become law.
Consumers have made it clear they need and value access to personal loans and are unconvinced they need to be protected by legislators. Rather than run from these loans, Californians have voraciously consumed them. Lenders made roughly 63,000 loans in 2009 that were in the $2,500-$4,900 range, according to data from the state Department of Business Oversight. By 2017, they made almost 550,000 of these loans.
That should be no surprise, since, according to a Harris poll, 95% of respondents nationally said it should be up to them, not the government, if they are going to borrow the money.
One lender opposing consumer choice is Lendmark Financial Services. In an op-ed recently published in Capitol Weekly, Lendmark calls AB 539 “the right approach for consumers to have a loan that is affordable and accessible while promoting a sustainable, healthy credit market for lenders.”
Certainly, lenders such as Lendmark have every right to loan money at rates at lower than 36%. No one will stop them.
However, the public deserves to know the loan companies that are behind AB 539 in the name of “consumer protection” are actually trying to gain an unfair advantage in the marketplace. Some make their money by aggressively selling borrowers add-on items, such as useless credit insurance, which raises the overall loan costs to the point they put financial strains on borrowers. As written, AB 539 essentially gives these companies the ability to run an end-around the 36% cap while continuing to profit from questionable sales practices.
For these companies, AB 539, which won’t regulate “loan packing” practices, is not a policy to protect consumers from high interest rates but a law that will handicap the business competitors that don’t sell ancillary products. Roger Salazar, spokesman for Californians for Credit Access, is exactly right when he says the legislation would “create a monopoly for three legislatively favored companies.”
In addition to Lendmark, the other companies that will benefit from AB 539 are One Main Financial and Oportun. All three have not been shy in their efforts to influence the Legislature.
The Sacramento Bee reports Lendmark spent $60,000 in the first quarter this year on lobbying, while OneMain and Oportun each spent $30,000 each.
The bill gives off the distinct feel of cronyism, leading to one former state legislator calling the lawmaking process that produced it “sinister.”
There are other concerns with this bill as well. Should AB 539 become law, millions of California consumers who cannot take out loans from commercial banks because they have poor or no credit history will have limited choices for borrowing at times when they need extra money the most. They will be left with the companies that peddle the extra products that increase the costs of the loans. In some cases, they have been known to demand borrowers put up collateral, a requirement that for some means denial of credit because that’s not an option for them. Given these conditions, consumers may resort to less-savory alternatives such as unscrupulous lenders on the black market.
At Wednesday’s hearing, AB 539 supporters will try to convince lawmakers they are standing up for consumers. For the sake of the millions of Californians who need access to safe credit options, legislators need to see this act for what it really is, a pay-to-play hustle.