The end of California loan sharks? Parliament sets a limit on the interest rate on loans
California lawmakers voted on Friday to limit loan sharks, capping interest rates on loans worth between $2,500 and $9,999 for the first time in more than 30 years.
The California Legislature passed a ratecapping bill this session with the support of prominent lawmakers, religious groups, labor unions, human rights groups, local governments and some lenders, the Los Angeles Times reported, after similar bills stalled in previous years.
“It’s been a hard journey to get here,” said Rep. Monique Limon, a Democrat. “It’s not just a victory for policy, it’s a victory for legislation and history. The new law goes beyond policy because many lawmakers have failed in the past.”
The bill bars borrowers from charging more than 36% plus the federal funds rate (currently about 2%) on loans worth between $2,500 and $9,999. The signing by Gov. Gavin Newsom would make California the 38th state to enact such a law.
Supporters of the bill say they have waited too long.
“If you’re concerned about the high cost of living in California, you’re concerned about predatory lending,” said Anthony Rendon, the House speaker. “When people living on paychecks have to borrow for unexpected expenses, they find that borrowing costs grow faster than all other expenses because of unlimited interest rates.”
California lawmakers in 1985 capped interest rates on loans up to $2,500, but did not set any limits on loans between $2,500 and $10,000.
“People who are basically being chased by their monthly expenses and who don’t have access to good credit are going to turn to these kinds of borrowing products,” said Marisabel Torres, policy director at the Center for Responsible Lending. “Unfortunately in California, there is no interest rate cap on these loans, making them victims of predatory lending.”
According to the state of California, some lenders used to charge triple-digit rates of more than 200 percent, causing more than a third of borrowers to default.
The California Supreme Court ruled last year that charging high interest rates on $2,500 consumer loans could be considered unacceptable practice under state law.
During the Senate debate on the bill, Democratic Senator Holly Mitchell gave an example of people. A man who took out a $2,700 car loan ended up paying nearly $11,000. Mitchel said the man spoke only Spanish, but the borrower provided documents in English.
“That’s the dilemma the bill is trying to solve,” Mitchell said. “I will not allow my constituents or my family to be taken advantage of to deal with the challenges of everyday or real life.”
Opponents of the bill point out that if the law goes into effect, lenders will drop out of the market or offer lower-value loans to borrowers with poor or shaky credit histories. The result could be a contraction in the loan market.
Lenders have spent heavily this year campaigning against the bill, including with television and radio ads.