UPDATE BELOW: A bill that could significantly restrict the short-term loan market in California is currently making its way through the state legislature and could have substantial effects on the free market in one region which is rightly known for its excessive regulation and government oversight.
AB539 – Written by Monique Limón (D-Santa Barbara) and Tim Grayson (D-Concord) targets lenders who offer high interest, readily available loans with a short repayment term. The bill will cap the interest rates that a supplier and consumer can freely agree to and prevent suppliers from charging fees for early repayment. In particular, it prohibits lenders from making small loans of $ 2,500 to $ 10,000 for a term of less than 12 months, which effectively kills a large portion of “short-term” loans.
In the state of California, a significant portion of the population lives paycheck to paycheck. According to to recent polls 38% of California families would not have sufficient financial stability to meet their expenses for three months in the event of a sudden loss of income. One in three Californians has subprime credit or no credit at all.
This means that a third of California residents have no institutional support in the financial sector that they could avail themselves of in the event of a financial crisis. In a state that is home to nearly 33 million people, that is a huge number, and a significant portion of that number is represented in minority communities.
Three in five Latin American families live in “liquid asset” poverty. When hard times arise, they don’t have physical assets that they can sell quickly to provide immediate liquidity. Many of these families are not from the United States. While many Californian families may have friends, family and community ties to lean on during a financial crisis, this particular group of Californians are much more vulnerable to isolation and disconnection from traditional forms of support.
This is the population most likely to seek short-term loans as a palliative in the event of a crisis. It’s not just Latin American families who are the target market for short-term loans. African American families are also among the lowest paid in the state.
Alice Huffman – President of the California-Hawaii State Conference of the NAACP – writing that African Americans are more likely to be underemployed, with a whopping 80 percent living from paycheck to paycheck. She cites this arguing that the state should refrain from interfering in the short-term loan market.
“Despite national trends, Center for the New Middle Class study shows African Americans are much more likely to have experienced a drop in wages or hours of work in the past five years compared to their peers . The study also shows that African Americans are 28% less likely to have $ 1,200 for a financial emergency and 80% say they live paycheck to paycheck.
Without widely available low-cost loan options, families will either be unable to meet their financial obligations or will resort to more expensive or less regulated options, such as overdrafting their bank accounts or borrowing from lenders. foreigners and illegals who are not regulated. by the state.”
While the intention may be to prevent struggling families from becoming entangled in a loan deal beyond their ability to pay in a timely manner, Huffman’s article largely explains why such legislation could end. by doing more harm than good.
Credit scoring is based on access
Good credit can be the result of a combination of different circumstances. Those who grew up in middle and upper class families often grow up with some familiarity with credit and ratings and the benefits of cultivating good credit. Access is another important factor. People who live in low-income, high-crime areas may have a hard time finding lenders willing to fund mortgages or business loans. Of course, education continues to be a looming problem when it comes to finances.
There is also the reality of the labor market and its dispersion between different populations. Minority communities are much more likely to have low-end manual jobs and temporary jobs. This makes their weekly income precarious and unreliable from month to month.
All of these factors contribute to circumstances in which it would be very difficult to access market-based sources of finance in a crisis. This is why so many people in low income communities often turn to short term lenders who do not rely on the credit score and compensate for such deficiency with higher interest rates and other terms mutually. agreed.
While some may call AB-539 “protection,” its result will be to drive a significant portion of short term lenders out of the California market altogether, taking a vital resource and also jobs with them.
AB-539 passed the California Assembly with 8 “yes” votes – Rebecca Bauer-Kahan (D-Orinda), Sabrina Cervantes (D-Corona), Jesse Gabriel (D-San Fernando Valley), Tim Grayson (D- Concord), Monique Limón (D-Santa Barbara), Mark Stone (D-Monterey Bay), Shirley Weber (D-San Diego), Buffy Wicks (D-Oakland).
Cervantes, Grayson, Limón, Stone and Weber also voted for the still hotly contested and unpopular gasoline tax which is currently a factor driving California gas prices beyond $ 4 / gallon (which is expected to hit 5 $ / gallon next year).
At the time of publication, AB-539 author Monique Limón (D-Santa Barbara) had not responded to requests for comment.
The “no” votes came from Phillip Chen (R-Diamond Bar), Steven Choi (R-Irvine) and Melissa Melendez (R-Lake Elsinore).
The bill is currently in committee.
MP Limon’s office contacted after the article’s deadline, with her statement.
“AB 539 is important to both consumers and responsible lenders operating in the state. Over 100,000 borrowers – roughly one-third of the people who use this product – default on these very expensive installment loans every year in California, further ruining their credit and can cause significant financial damage including account closures. banking, repossessions and bankruptcy. These defaults are triggered by the high monthly payments on the loans due to interest rates that reach 200% or more.
I can’t think of another product that fails consumers so often without the government stepping in to provide guards and guardrails. The government has an interest in ensuring that these consumers do not fall into financial ruin.
While working on this issue as Chairman of the Assembly Banking Committee, I learned that there is a big misconception about subprime lenders in this $ 2,500 to $ 10,000 space. People seem to believe that all subprime lenders have to charge 100% or more interest to stay in business, but there are large and successful subprime lenders who provide loans of around 36% APR to borrowers with a credit rating of credit is less than 620 or even no credit score. at all. These responsible lenders represent more than half of the subprime mortgage market in California, and these lenders support AB 539 because it will give them regulatory certainty. The California legislature in recent years has considered bills that would have imposed stricter regulations on installment loans in the state than what is proposed in AB 539. We have also witnessed successful efforts in d other states – the red and blue states – which have been made more stringent. regulations through voting initiatives. This legislation does not eliminate the product but requires that the product be offered to consumers at the same rate as it is offered to serving members of our military through the Military Loans Act.