AB 539 Reforms Financing in California But At What Cost?

On Oct. 10, Gov. Gavin Newsom signed Assembly Bill 539. The legislation puts restrictions on predatory lending practices in California he says “creates debt traps for families already struggling financially.”

Assemblywoman Monique Limón previously authored AB 3010 and AB 2953 in 2018. AB 3010 aimed to prevent consumers from taking out more than one payday loan at a time and required lenders to record the transactions. AB 2953 attempted to prevent title loan companies from charging interest rates above 36%. Both failed to win enough votes, but with AB 539’s passing, the mission to crack down on predatory lending is just beginning. During his inauguration speech earlier this year, Governor Gavin Newsome vowed to stand up to various issues including “payday lenders who target our most vulnerable.” 

Cost of Victory

As advocates for the bill celebrated the victory, questions arise over the bill’s efficacy and impact on struggling borrowers who need financing. AB 539 was created to reduce “predatory lending”, a phrase used to refer to short-term lenders such as payday loan companies, car title loan companies, and cash advance companies. Short-term lenders have a high interest rate to compensate for a borrower’s poor credit.  The loans are riskier for the borrower—should a borrower default on their loan, they can get stuck in a cycle of debt or have their assets repossessed. 

Controversies have always surrounded these types of lenders because of the concern over targeting struggling borrowers. However, AB 539 has brought up questions over whether or not the bill will help borrowers it is meant to protect. Many borrowers who end up taking these high-interest installment loans are unable to obtain loans from banks because of poor credit. As a last resort, these borrowers use short-term loans to meet their financial needs. Now that AB 539 has passed, these lenders will be pushed out of the market and may find themselves going out of business. The question remains: will struggling borrowers be able to access easy financing with an enforced interest rate cap? It is likely that AB 539 will create more hurdles for desperate borrowers in search for a loan.

AB 539 will have grueling consequences for both lenders and borrowers alike. Although the bill won’t affect banks, companies offering high-interest loans will undoubtedly struggle as they lower their profit margins because of the interest cap. It will be no surprise when many of these companies shut down or take their business outside of California. In a state with more payday lenders than McDonad’s restaurants, closures across the state will have a dire effect on company employees, many of whom will inevitably lose their jobs. Although lenders will face the most impact from the bill, borrowers will also feel the long-term effects of these company closures and changes in interest rates.

 After the interest rate is enforced, borrowers who would normally qualify for a loan under previous circumstances will be turned down by lenders affected by the policy change. As a result, many of the people AB 539 aims to help will be left without a means to get financing since these lenders were their last resort. Starting 2020, borrowers will need to search for alternative lenders, who may not always provide ideal solutions.

Loopholes in the law

Payday loan companies offering loans amounts under $500 will not be impacted by Assembly Bill 539 since the bill applies to loan amounts of $2,500 to $10,000. Therefore,  payday loan companies will still offer borrowers with poor credit an alternative means to get small-dollar financing.

Lenders on tribal land are another group untouched by AB 539. Tribal lenders, or Native American lenders, are operated by the Native American community and are not subjected to strict regulations because of tribal sovereignty. Tribal lenders, such as Golden Valley Lending, are able to give loans to non-tribal borrowers and are therefore an alternative lender for those who need finances. Unfortunately, since these lenders are not regulated, the loan offers have extremely high interest rates, sometimes going up to 800% since there is no interest rate cap. Borrowers also need to be aware that tribal lenders cannot be sued because of tribal sovereignty. 

Most large lenders in California were also left untouched.  Even before the measure passed, three large lenders said they had a possible escape hatch.

The three firms are Elevate Credit, Inc., Enova International, Inc. and CURO Group Holdings Corp. The lending businesses they operate in California are called, respectively, Rise Credit, CashNet USA, and Speedy Cash.

In 2018, those lenders made a combined 24.7% of the triple-digit APR loans in the dollar range affected by AB 539.

In late-July earnings calls with investors, the three companies made AB 539 seem like a pesky fly easily flicked away. All they have to do, the firms’ executives said, is form partnerships with out-of-state banks in lender-friendly confines and, presto, AB 539’s rate caps vanish.

Section 1831(d)(a) of the Federal Deposit Insurance Act allowed banks to export the interest rates of their home state.  So if a bank is based in a state with no interest rate caps they can charge borrowers in any states whatever they want.

All in all, AB 539 will bring no added consumer protections to consumers in California; rather there will be far less options for consumers to choose from when shopping for a loan.  Tribal lenders, payday lenders, and large personal loan lenders will continue on with their day-to-day business while small to mid size companies will cease operations.