California Legislature Does Not Regulate Payday Lenders

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In summary

The regulatory structure for payday loans in California is weak. The law of this state is one of the weakest in the country, and significant ambiguities in the language of the law and legislative history have been interpreted as favoring the industry and harming the interests of consumers. Consumers are increasingly vulnerable to a myriad of dangers.

By Tom Dresslar

Tom Dresslar is a former reporter who served as Assistant Commissioner at the California Department of Business Oversight and helped draft the Lead Generator Legislation of 2018, [email protected] He wrote this review for CALmatters.

The dollar amount of loans made in 2017 by non-bank lenders in California – $ 347.2 billion – exceeded the aggregate economic output of 33 states. Yet state policymakers have neglected for years this huge market.

The lack of attention has served the interests of the credit industry well, but has made consumers increasingly vulnerable to a myriad of dangers.

The regulatory structure for payday loans in California is weak. The 2002 law is one of the weakest in the country, and significant ambiguities in the language of the law and legislative history have been interpreted as favoring the industry and harming the interests of consumers.

The result is a market where debt traps trap hundreds of thousands of borrowers. It’s a market where, in 2017, consumers paid an average annual percentage rate of 377% and lenders earned 70.5% of their fees from customers who took out seven or more loans during the year.

For 34 years, California’s Non-Bank Financing Act has allowed lenders to charge whatever interest rate they want on consumer installment loans of $ 2,500 or more.

The law does not impose any real requirements to ensure that borrowers have the capacity to repay loans before assuming the debt.

Another major flaw is that the law does not require main generators – entities that connect borrowers to lenders – to be licensed and regulated.

These shortcomings have produced a broken and dangerous market that inflicts widespread harm on consumers. Too often, borrowers fall victim to this scenario:

  • The aim of an unscrupulous lead generator is to recover the confidential personal information of the borrower.
  • Then, regardless of the borrower’s privacy and financial interests, the lead generator sells the information to the lenders who pay them the most money.
  • A lender then uses unfair practices to trick the borrower into a high cost loan that they did not want and cannot afford.

In 2017, 47.2% of consumer installment loans of $ 2,500 to $ 9,999 (351,786 out of 745,145) made by government-approved lenders had annual percentage rates of 100% or more.

The three-digit APR ratio for loans between $ 2,500 and $ 4,999 was 58.8%, or 321,423 out of 547,002.

For 20 of these lenders, 90% or more of the loans they made in the $ 2,500 to $ 9,999 range had three-digit annual percentage rates.

Fighting against reforms, the industry claims that while their rates may be high, they provide access to credit to higher risk borrowers who might otherwise not be able to get a loan.

This line, invariably swallowed whole by too many lawmakers, is decrepit bromide that does not survive close scrutiny.

Three-digit annual percentage rate lenders write off like an incredible number of bad loans. Such loans are called write-offs. Seventeen of the 20 high-cost lenders said that by the end of 2017, they had accumulated 85,142 write-offs. This total was equivalent to 50.1% of their outstanding loans and 64.1% of outstanding loans.

Compare those numbers to three non-bank lenders who haven’t made triple-digit APR loans. Their combined write-offs represented 6.6% of outstanding loans and 7.3% of outstanding loans.

Few events cause more damage to a consumer’s credit profile than a write-off.

Lenders report them to the credit rating bureaus, and they can stay on a consumer’s credit report for up to seven years. Thousands of high-cost lender clients whose loans are written off exit transactions with poorer credit profiles and limited access to affordable credit.

In 2018, it was the same old, the same old. Bills have been submitted to the legislature to tackle payday loan debt traps, impose interest rate caps on consumer installment loans of $ 2,500 or more, and regulate payday loan debt. lead generators. They are all dead.

Unlike in previous years, however, the Assembly adopted the measures in favor of consumers. Unfortunately, the Senate has stood firm as a bulwark for the industry.

By killing the lead generator invoice, the Senate opposed consumer groups and responsible lenders.

The upper house aligned itself with a group of opponents including: a lead generation company, Zero Parallel, dismantled by federal regulators for borrowers scam; another lead generation company, LeadsMarket, which in one month in 2015 received over $ 106,000 in payments from a single approved lender that violated state regulations; and the Online Lenders Alliance, whose board of directors includes two lenders – Elevate and Enova – among the 20 in California with triple-digit APR ratios of 90% or more, and whose members include another generation of leads, T3Leads, sued by federal regulators for abusing borrowers.

Consumer advocates this year are likely to attempt another reform. Given the events of 2018, all eyes will be on the Senate to see if the Legislature finally acts to protect consumers.


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