California adopts new rules that cap personal loan interest at 36%

More … than 23 million people have used at least one payday loan Last year. On Friday, September 13, California passed a law that would make such loans less costly for residents.

The California State Legislature passed the Fair Access to Credit Act, which prevents lenders from charging more than 36% on consumer loans of $ 2,500 to $ 10,000. Previously, there was no interest rate cap on loans over $ 2,500, and the Department of State Enterprise Supervision found that more than half of these loans had annual percentage rates of 100% or more.

Consumer loans, sometimes referred to as installment loans, are similar to payday loans in that they are usually smaller personal loans. You can get them in most states by going to a lender’s store with valid ID, proof of income, and a bank account. A physical warranty may not even be necessary. In recent years, lenders even have them available online.

Personal loans were the fastest growing debt category among all consumers in 2018, larger than auto loans, credit cards, mortgages and student loans. according to the Experian credit agency. But consumer loans can be risky, in large part because of the expense. About 10 million Americans use installment loans each year, according to Pew Charitable Trusts. The fees and interest on these loans amount to $ 10 billion per year.

“The California legislature today took a historic step in the fight against predatory lending,” Marisabel Torres, California policy director at the Center for Responsible Lending, a nonprofit, said on Friday, adding that she hoped that Governor Gavin Newsom would act quickly and enact this bill.

Why lawmakers are taking risky loans

Payday loans and consumer loans are not a new phenomenon, and there are already federal and state laws to help consumers. But payday loans in particular have been a hotly contested issue since the Consumer Financial Protection Bureau (CFPB), the government agency responsible for regulating financial companies, said he plans to review the stipulations of Obama-era payday loans which required lenders to ensure that borrowers could repay their loans before issuing cash advances.

This angered many federal Democratic lawmakers, who argued the agency was not living up to its mandate. So much so, the Democrats of the United States House Committee on Financial Services has also deployed the federal law Project in May, that would cap, among other things, the nationwide APR rate for payday loans at 36%, about double the current APR for credit cards.

“I’m not telling you that all payday lenders are loan sharks, but quite a few are,” Representative Al Green (D-Texas) said at the May conference. committee hearing on legislation. “They found a way to feast on the poor, the underprivileged and the people who are trying to get out of it.”

Representative Alexandria Ocasio-Cortez (DN.Y.) and Senator Bernie Sanders (D-Vt.) Also introduced new legislation in May targeting loans. They jointly published the Law on the Prevention of Usurers, which would cap interest rates on credit cards and other consumer loans, including payday loans, at 15% nationwide.

“It’s an important question,” said Sanders, who is seeking the 2020 Democratic nomination for president. “If you think Wall Street is gross, think about payday lenders.” Ocasio-Cortez, meanwhile, said that under current guidelines, credit card companies and big banks have a “blank check” to charge “extortionate interest rates on the poor.”

Payday loans have long been criticized by consumer advocates as “debt traps” because borrowers often cannot repay the loan immediately and get stuck in a borrowing cycle. In research conducted prior to the development of its rules, the CFPB found that almost one in four payday loans are borrowed nine or more times. Pew Charitable Trusts have found that borrowers take around five months to repay the loans – and costs them an average of $ 520 in finance charges. This is in addition to the original loan amount.

To ensure that borrowers do not find themselves in the “debt traps”, the CFPB finalized a new multi-part payday loan regulation in 2017 which, among other things, required payday lenders to verify that borrowers could afford to pay off their loans on time by verifying information such as income, rent, and even student loan payments.

But the agency’s review of the rule in 2019 found that “ability to pay” requirements would restrict access to credit. The new management of the agency proposed to drop these stipulations.

I’m not telling you that all payday lenders are loan sharks, but many are. They found a way to feast on the poor, the underprivileged and the people who are trying to get out.

Critics fear new rules will make money harder to get

What if more lawmakers manage to cap interest rates on personal loans? It depends who you ask.

Some Republican lawmakers and supporters of law-abiding payday lenders argue that rate caps would make it difficult for storefronts to continue providing these types of unsecured loans. Without these lenders, consumers may not have many options if they need a cash advance.

“Regulations that limit choice and stifle access to credit have no place in our economy,” Representative Blaine Luetkemeyer (R-Mo.) Said earlier this year. “Restricting the availability of short-term credit will not solve the financial problems facing so many American families, but it will push them toward riskier, unregulated products.”

Diego Zuluaga, political analyst at the libertarian think tank Cato Institute, underline at the May congressional hearing, the UK adopted a similar interest rate cap on payday loans. He said search found the number of borrowers fell 53% within 18 months of the introduction of the cap, more than double the 21% forecast by regulators.

“Given that regulators’ forecasts were aimed at the ‘optimal’ amount of payday loans, this poor calibration of the impact of the interest cap has almost certainly made the situation worse for hundreds of thousands of borrowers,” he said. he told the committee.

But consumer advocates say capping payday loan rates won’t have a significant impact on consumers’ ability to get money. Many states are already placing restrictions on interest rates, and consumers have found other ways to address financial deficits, says Diane Standaert, director of state policy at the Center for Responsible Lending.

Restricting the availability of short-term credit won’t be the financial problems that so many American families face, but it will push them toward riskier, unregulated products.

Representative Blaine Luetkemeyer (R-Mo.)

Ohio, which previously had the highest payday interest rates in the country, this year put in place a law capping annual interest on such loans at 28%. The Record-Courier, a newspaper based in Kent, Ohio, reported that nine companies, including three of the largest short-term lenders in the United States, signed up to lend under the new guidelines within days of the new rules.

There is no guarantee that the legislation proposed by Democrats will become national law, but Rep. Gregory Meeks (D-NY) said these were important issues for lawmakers to consider: “Ensure the Access to fair and affordable financial products and protecting consumers from debt traps are, and should be, a priority. “

And meanwhile, states like California are taking over.

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Bernadine J. Perkins