California Governor Signs Loan Bill
California Governor Gavin Newsom signed into law last week the Fair Access to Credit Act, or AB-539, which sets an interest rate cap of 36 percent on loans between $2,500 and $10,000. The bill would also prohibit prepayment penalties and would set a minimum loan term of 12 months and a maximum term of five years.
Loans between $2,500 and $10,000 have increased substantially in recent years, and proponents of the bill worry that consumers are falling into debt traps when taking out such loans.
“Many Californians living paycheck to paycheck are exploited by predatory lending practices each year,” said Governor Newsom. “Defaulting on high-cost, high-interest rate installment loans push families further into poverty instead of pulling them out. These families deserve better, and this industry must be held to account.”
Opponents of the bill, on the other hand, worry that low interest rate caps tend to have negative consequences, including reducing access to credit for those who need it the most.
Dan Gwaltney, president emeritus of the California Financial Service Providers (an industry coalition), argues that lenders would not be able to issue short-term loans under a 36 percent rate cap. In addition, “the vast majority of consumers who access credit in this marketplace are using loans responsibly and they’re using them because they have a shortfall in their financial situation, and they use them as bridge loans to get them through that.”
Senior staff at both the California Hispanic Chambers of Commerce and the California-Hawaii State Conference of the National Association for the Advancement of Colored People (NAACP) voiced their opposition as well, arguing that the bill would restrict access to credit for those who need it the most.
The results of a World Bank study appear to confirm these concerns. The authors found that interest rate caps can reduce the cost of credit and limit predatory practices by certain lenders, but they often have adverse and unintended side effects, including “increases in non-interest fees and commissions, reduced price transparency, lower credit supply and loan approval rates for small and risky borrowers, lower number of institutions and reduced branch density, as well as adverse impacts on bank profitability.”
Despite the opposition and criticism, Governor Newsom signed the bill into law, perhaps hoping that this time, interest rate caps will not reduce access to short-term, small-dollar credit.