Assembly Bill 539 has made strides through California legislature with ease, unlike its predecessors last year. The bill has already passed the state Assembly as well as the state Senate Committee on Banking and Finance Institutions.
It marks a victory for the bill’s sponsors, Assembly Members Monique Limón (D-Santa Barbara) and Tim Grayson (D-Concord). AB 539, or the Fair Access to Credit Act, reforms the California Financing Law. It does this by creating an interest rate cap at 36% for consumer installment loans between $2,500 and $10,000.
Bill Reflects California’s Intention to Crack Down on Predatory Lending
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. It also required lenders to record the transactions. AB 2953 attempted to prevent title loan companies from charging interest rates above 36%.
Both bills failed to win enough votes. However, 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. Among those issues were “payday lenders who target our most vulnerable.”
Critics Contend the Bill Is Bad for Borrowers
As advocates for the bill celebrated the victory, questions arose over the bill’s efficacy. Critics also questioned its effect on struggling borrowers who need financing. Lawmakers created AB 539 to reduce “predatory lending.” This is a phrase that refers 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. Moreover, the loans are riskier for the borrower. Borrowers who default on their loans can get stuck in a cycle of debt. Their creditors can even repossess their assets.
Controversies have always surrounded these types of lenders because of concern over their targeting struggling borrowers. However, critics are asking whether or not AB 539 will help the borrowers it is meant to protect.
The Bill Targets Lenders That Target Struggling Borrowers
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 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 this bill will create more hurdles for desperate borrowers in search of a loan.
AB 539 will have grueling consequences for both lenders and borrowers alike. The bill won’t affect banks, but 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 McDonald’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 effects from the bill, borrowers will also feel the long-term effects of these company closures and the changes in interest rates.
The Bill Won’t Affect Some Payday Loan Companies
After the interest rate changes go into effect, 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 borrowers won’t have a means to get financing, since these lenders were their last resort. Starting in 2020, borrowers will need to search for alternative lenders, who may not always provide ideal solutions.
Assembly Bill 539 will not affect payday loan companies offering loans amounts under $500, since the bill applies to loan amounts of $2,500 to $10,000. Therefore, payday loan companies will still offer an alternative means to get small-dollar financing for borrowers who have poor credit.
Lenders on Tribal Land Will Be Unaffected
Lenders on tribal land are another group untouched by this California bill. The Native American community operates tribal lenders. Therefore, they are not subjected to strict regulations because of tribal sovereignty.
Tribal lenders 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 as high as 800%, since there is no interest rate cap. Borrowers also need to be aware that tribal lenders cannot be sued because of tribal sovereignty.
Business Owners with Poor Credit Will Need to Find Alternatives
Under previous circumstances, struggling business owners could use car title loans to finance their business operations. However, since loan approval will be less likely after the interest rate cap, business owners with bad credit will need to find alternative lenders who can provide other means of financing.
Businesses with at least $5,000 a month in revenue for at least three months can still get a business loan with bad credit through Opportunity Business Loans, which connects business owners with a large number of lenders in their network.
The Bill Will Affect Lenders and Borrowers Alike
All in all, AB 539 will bring big changes to the loan industry. These changes will significantly affect lenders and borrowers alike. As the changes take place in 2020, borrowers need to be aware of the challenges they will face because of limited loan options.
In short, California borrowers will need to look to new sources of funding. Although AB 539 will reduce negligent lending and dangerous risks for consumers, both borrowers and lenders will have to face the repercussions of the bill.