California Enacts Interest Rate and Other Restrictions on Consumer Loans

As expected, California has enacted legislation imposing interest rate caps on larger consumer loans. The new law, AB 539, imposes other requirements relating to credit reporting, consumer education, maximum loan repayment periods, and prepayment penalties. The law applies only to loans made under the California Financing Law (CFL).[1] Governor Newsom signed the bill into law on October 11, 2019. The bill has been chaptered as Chapter 708 of the 2019 Statutes.

As explained in our Client Alert on the bill, the key provisions include:

• Imposing 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”). Prior to the enactment of AB 539, the CFL already capped the rates on consumer-purpose loans of less than $2,500.
• Prohibiting 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 finance lenders may continue to impose certain administrative fees in addition to permitted charges.[2]
• Specifying that covered loans must have terms of at least 12 months. However, a covered loan 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. These maximum loan terms do not apply to open-end lines of credit or certain student loans.
• Prohibiting prepayment penalties on consumer loans of any amount, unless the loans are secured by real property.
• Requiring CFL licensees to report borrowers’ payment performance to at least one national credit bureau.
• Requiring CFL licensees to offer a free consumer credit education program approved by the California Commissioner of Business Oversight (Commissioner) before loan funds are disbursed.

The enacted version of AB 539 tweaks some of the earlier language of these provisions, but not in a substantive way. 

The bill as enacted includes several new provisions that expand the coverage of AB 539 to larger open-end loans, as follows:

• The restrictions on the calculation of charges for open-end loans in Financial Code section 22452 now apply to any open-end loan with a bona fide principal amount of less than $10,000. Previously, these restrictions applied to open-end loans of less than $5,000.
• The minimum monthly payment requirement in Financial Code section 22453 now applies to any open-end loan with a bona fide principal amount of less than $10,000. Previously, these requirements applied to open-end loans of less than $5,000.
• The permissible fees, costs and expenses for open-end loans in Financial Code section 22454 now apply to any open-end loan with a bona fide principal amount of less than $10,000. Previously, these provisions applied to open-end loans of less than $5,000.
• The amount of loan proceeds that must be delivered to the borrower in Financial Code section 22456 now applies to any open-end loan with a bona fide principal amount of less than $10,000. Previously, these restrictions applied to open-end loans of less than $5,000.
• The Commissioner’s authority to disapprove advertising relating to open-end loans and to order a CFL licensee to submit advertising copy to the Commissioner before use under Financial Code section 22463 now applies to all open-end loans regardless of dollar amount. Previously, this section was inapplicable to a loan with a bona fide principal amount of $5,000 or more. 

Our earlier Client Alert also addressed issues relating to the different playing fields currently enjoyed by banks, concerns relating to the applicability of the unconscionability doctrine to high rate loans, and the future of rate regulation in California.  All of these concerns will remain in place once AB 539 becomes effective on January 1, 2020. Moreover, the ability of subprime borrowers to obtain needed credit once AB 539’s rate caps are effective is uncertain.

[1] California Financial Code Section 22000 et seq.

[2] California Financial Code Section 22305.