Last week, on the final day of the legislative session, Friday the 13th in fact, the California Senate passed an extensive bill, AB 539, which adds and amends several provisions of the California Financing Law (CFL), including new interest rate caps, new rules governing loan duration, and provisions prohibiting prepayment penalties. The bill, which successfully passed through the California Senate’s Banking Committee on June 26, gained widespread public attention for containing provisions that limit the amount of interest payday lenders may charge borrowers.

Currently, the California Financing Law (CFL) does not set a maximum interest rate on loans of $2,500 or more but does cap the rates on loans of less than $2,500.

AB 539, entitled the Fair Access to Credit Act, caps a finance lender, with respect to a loan of a bona fide principal amount of $2,500 or more but less than $10,000, to charge interest at a rate not exceeding an annual simple interest rate of 36% plus the Federal Funds Rate.

With no CFL regulatory ceilings on the maximum interest rate on loans of $2,500 or more, payday lenders have charged Californians interest rates as high as 200% on loans above $2,500. California law limited interest rates on loans above $2,500 until 1985 when the threshold was lowered by the California Legislature.

Lenders who oppose the bill argue that fewer companies would be able to afford to write loans under the new cap. Opponents of AB 539 also contend that borrowers with subprime, bad, or no credit would lose access to loans.

Data collected from the Senate banking committee suggests a substantial number of lenders would be able to continue operations in California with the new 36% cap. In 2017, more than 150 lenders offered loans of between $2,500 and $9,999 at interest rates below 40%.

Thirty-nine (39) states and the District of Columbia have capped interest rates for five-year, $10,000 loans at a median rate of 25%, based on a 2018 report from the National Consumer Law Center.

In the Banking Committee, AB 539 was amended to include a requirement that finance lenders must report a borrower’s payment performance to at least one nationwide consumer reporting agency. Further, finance lenders must offer borrowers an approved credit education program or seminar at no cost before disbursing loan proceeds.

AB 539 also affects the loan terms that finance lenders may offer and provide customers. The provisions relating to loan terms do not apply to open-end lines of credit or certain student loans.

For covered loans of at least $2,500, but less than $3,000, lenders must offer loan terms of at least 12 months but may not exceed a maximum term of 48 months and 15 days. This maximum term is 60 months and 15 days for covered loans of at least $3,000, but less than $10,000. However, the latter limitation does not apply to real property-secured loans of at least $5,000.

Sen. Brian Dahle, a Republican from Bieber who voted in favor of the bill said “I think if you borrow $2,500 and ended up paying $12,000 back over time, it’s just not right. That tells me there’s something wrong. We need to help these people if there’s a tragedy and they need short-term money to take care of a problem. There should be an opportunity for that, but it shouldn’t be where it puts them further in debt.”

Assembly Bill 539 now heads to Governor Gavin Newsom for his signature and approval.

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