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The California legislature is poised to cap rates on larger consumer installment loans. Assembly Bill 539 has passed the state Assembly and the state Senate Committee on Banking and Financial Institutions. Although directed only to California Financing Law (CFL) licensees, the bill has broader implications for consumer installment lending in California.

Assembly Bill 539 and the Future of Consumer Loans in California

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The California legislature is poised to cap rates on larger consumer installment loans. Assembly Bill 539 has passed the state Assembly and the state Senate Committee on Banking and Financial Institutions. Although directed only to California Financing Law (CFL) licensees, the bill has broader implications for consumer installment lending in California.AB 539’s Key Provisions for Consumer Installment Loans The bill would amend the CFL and impose rate caps on all consumer-purpose installment loans, including personal loans, car loans, and auto title loans, as well as open-end lines of credit, where the amount of credit is $2,500 or more but less than $10,000 (“covered loans”). The CFL already caps the rates and imposes additional consumer protections on consumer-purpose loans of less than $2,500.<a id="_ftnref1" name="_ftnref1" href="#_ftn1" class="anchor">[1]</a> The July 1st version of AB 539 would require California finance lenders to:<ul><li>Avoid charges on a covered loan that exceed a simple annual interest rate of 36% plus the Federal Funds Rate set by the Federal Reserve Board. While a discussion of what constitutes “charges” is beyond the scope of this alert, note that the bill continues to allow finance lenders to impose certain administrative fees in addition to permitted charges;</li><li>Report borrowers’ payment performance to at least one national credit bureau;</li><li>Offer a free consumer credit education program approved by the California Commissioner of Business Oversight before loan funds are disbursed; and</li><li>Provide covered loans with terms of at least 12 months. However, covered loans of at least $2,500, but less than $3,000, may not exceed a maximum term of 48 months and 15 days. A covered loan of at least $3,000, but less than $10,000, may not exceed a maximum term of 60 months and 15 days, but this limitation does not apply to real property-secured loans of at least $5,000. The provisions relating to loan terms would not apply to open-end lines of credit or certain student loans.</li></ul>In addition, the bill would prohibit the imposition of prepayment penalties on consumer loans of any amount, other than loans secured by real property.AB 539’s sponsors, Assembly Members Monique Limón (D-Santa Barbara), and Tim Grayson (D‑Concord), contend that AB 539 will halt the proliferation of larger installment loans with triple-digit rates targeted to vulnerable consumers.<a id="_ftnref2" name="_ftnref2" href="#_ftn2" class="anchor">[2]</a> Nevertheless, others are concerned that AB 539 would harm subprime consumers, reducing much needed access to credit.<a id="_ftnref3" name="_ftnref3" href="#_ftn3" class="anchor">[3]</a> A Different Playing Field for BanksThe bill would apply only to loans made by California finance lenders. Thus, banks, savings associations, credit unions, and certain other classes of lenders would not be subject to AB 539’s rate cap and other protections. Banks, industrial banks, and savings institutions located outside California that are authorized by federal law to export their permitted interest rates when making loans in California will still be permitted to do so. For loans of $10,000 or more, even CFL licensees would not be required to comply with the bill’s new rate cap.<a id="_ftnref4" name="_ftnref4" href="#_ftn4" class="anchor">[4]</a>Continued Concerns Relating to UnconscionabilityImportantly, a finance lender that makes a high rate loan that is lawful under the CFL may still be subject to a state law claim of unconscionability based on the loan’s allegedly excessive rate. In 2018, the California Supreme Court held that loans made by a CFL lender could be unconscionable based on their interest rates even though the CFL exempted the loans in question from rate caps.<a id="_ftnref5" name="_ftnref5" href="#_ftn5" class="anchor">[5]</a> An earlier version of AB 539 would have clarified that a loan could not be deemed unconscionable based on its interest rate alone; however, the July 1 version of AB 539 does not contain the clarifying text.The Future of Rate Regulation in CaliforniaIf AB 539 is enacted, what can the lending industry expect the California Legislature to do next?  Will rate caps be extended to CFL loans of $10,000 or more, or to small business loans? Will the legislature seek to impose rate caps on non-CFL lenders (except those banking institutions that can make loans that preempt state interest rate laws)? Uncertainty regarding these and related issues means that the legislation should give pause to both CFL and non-CFL lenders alike.The Timeline for Legislative Enactment Leaves Little Room for AmendmentsUnder California’s legislative schedule, the full Senate must approve the bill by September 13 – but the legislature is on recess from July 12 to August 12. If the Senate approves the measure, Governor Gavin Newsome then has until October 13 to sign or veto the legislation.<a id="_ftnref6" name="_ftnref6" href="#_ftn6" class="anchor">[6]</a> As of July 2, 2019, Governor Newsome has not publicly stated whether he will sign AB 539, although proponents point to his inaugural address in which he specifically cited the need for greater protections on payday loans.<a id="_ftnref7" name="_ftnref7" href="#_ftn7" class="anchor">[7]</a>  <div data-type='hr' style='border-top: 3px solid #bbb'></div><a id="_ftn1" name="_ftn1" href="#_ftnref1" class="offset">[1]</a> Cal. Fin. Code § 22303.<a id="_ftn2" name="_ftn2" href="#_ftnref2" class="offset">[2]</a> <a href="https://a14.asmdc.org/press-releases/lim%C3%B3n-and-grayson-introduce-interest-rate-cap-predatory-loans" target="_blank">https://a14.asmdc.org/press-releases/lim%C3%B3n-and-grayson-introduce-interest-rate-cap-predatory-loans</a><a id="_ftn3" name="_ftn3" href="#_ftnref3" class="offset">[3]</a> See, e.g., California Lawmakers Seek to Squelch High Interest Loan Industry, Jeremy White, April 15, 2019,  <a href="https://www.politico.com/states/california/story/2019/04/15/california-lawmakers-seek-to-squelch-high-interest-loan-industry-966906" target="_blank">https://www.politico.com/states/california/story/2019/04/15/california-lawmakers-seek-to-squelch-high-interest-loan-industry-966906</a>; Bill to Throttle Short-Term Lending Will Prove Disastrous, Kira Davis, April 22, 2019, <a href="https://californiaglobe.com/legislature/bill-to-throttle-short-term-lending-will-prove-disastrous/" target="_blank">https://californiaglobe.com/legislature/bill-to-throttle-short-term-lending-will-prove-disastrous/</a><a id="_ftn4" name="_ftn4" href="#_ftnref4" class="offset">[4]</a> However, the bill contains certain provisions that would preclude a finance lender from attempting to circumvent the new restrictions imposed on covered loans. In addition, the bill does not cover commercial purpose loans, even if made to an individual running a small business.<a id="_ftn5" name="_ftn5" href="#_ftnref5" class="offset">[5]</a> De La Torre v. Cashcall Inc., 5 Cal. 5th 966 (Ca. S. Ct. 2018).  In concept, similar challenges might be asserted against other lenders that enjoy exemptions from the California usury law.<a id="_ftn6" name="_ftn6" href="#_ftnref6" class="offset">[6]</a> <a href="https://www.senate.ca.gov/sites/senate.ca.gov/files/2019_senate_legislative_deadlines.pdf" target="_blank">https://www.senate.ca.gov/sites/senate.ca.gov/files/2019_senate_legislative_deadlines.pdf</a><a id="_ftn7" name="_ftn7" href="#_ftnref7" class="offset">[7]</a> <a href="https://www.latimes.com/politics/la-pol-governor-gavin-newsom-inaugural-speech-20190107-htmlstory.html" target="_blank">https://www.latimes.com/politics/la-pol-governor-gavin-newsom-inaugural-speech-20190107-htmlstory.html</a>