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California Legislature Fails To Advance Protections Against Predatory Loans

Wednesday, May 31, 2017
Graciela Aponte-Diaz

OAKLAND, Calif. – AB 784, a bill to curb abuses by lenders charging more than 100% interest on loans of more than $2,500, was stalled in the Assembly Appropriations Committee last Friday, effectively preventing the proposal from moving forward to a floor vote.

Earlier last week, Assembly Banking Committee Chair and author of the bill, Matt Dababneh (D-Encino), proposed a set of amendments that would have greatly limited the bill's protections by exempting car-title loans and loans that could be targeting small business. Dababneh's provisions would have allowed lenders to charge borrowers as much in interest each year as the amount borrowed in the first place.

Dababneh’s amendments contradicts his agreement with civil rights, community, and faith-based organizations, and his intentions expressed at the Assembly Banking and Finance Committee last month to make AB 784 the vehicle for capping interest rates on all loans above $2,500. At that hearing, Dababneh spoke openly about the harms caused by these high-cost loans and the need to cap rates. At Dababneh’s urging, the bill passed out of committee on a vote of 7-3.

“Unfortunately consumers suffered two defeats when Assemblymember Dababneh proposed late amendments that would have left the worst financial actors free to prey on consumers, and that another year has passed with the California legislature letting predatory lenders destroy our communities,” said Graciela Aponte-Diaz, California Policy Director for the Center for Responsible Lending. “This is indicative of the kind of power the predatory loan industry has in Sacramento.”

Additional Background on High Cost Loans in California

According to data released by the California Department of Business Oversight (DBO), the majority of loans (54%), of $2,500 to $5,000 made in 2015 had annual percentage rates (APRs) of 100% or higher. (PDF) At these rates, borrowers would pay as much in fees—each year—as the amount borrowed in the first place.

For example, a borrower in Anaheim took out a four-year $2,525 loan with an APR of 139%. This loan agreement required payments of $294 a month—bringing the total payments to $14,102, almost six times the loan’s original principal.

The interest rates on these loans are so high that the lenders benefit even when borrowers default. This is because lenders can typically recoup the entirety of the loan principal, as early as half-way through the loan term. So, even is if a borrower pays every month, and then defaults, the loan is profitable to the lender. For example, if the Anaheim borrower mentioned above had defaulted after two years of payments, the lender would have recouped $7,056 on a $2,525 loan, and then pursued the borrower for collections.

Because rates are so high that they profit even when borrowers default, California’s high-cost installment lenders have no incentive to underwrite their loans to ensure the borrower has the ability to repay the loan without immediately reborrowing or defaulting on other loans.

For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Ricardo Quinto at ricardo.quinto@responsiblelending.org.