Bill That Limits Payday Lenders’ Profits Might Actually Hurt The Poor

A sign outside a 'Speedy Cash' cash loans shop in London, England on Nov. 1, 2012. Dan Kitwood/Getty Images

A California bill that was already passed by the Assembly and is now in the Senate would put a cap on how much payday lenders may charge Californians for loans between $2,500 and $10,000. It would also bar California Financing Law (CFL) licensees from imposing penalties for prepayments.

According to AB 539’s co-author, Assemblywoman Monique Limón (D-Santa Barbara), the bill fixes a loophole that allows payday lenders to charge higher interest rates on loans that are higher than $2,500. This, she wrote in an op-ed, prompted lenders to “push consumers toward much larger loans.”

The bill extends a 36 percent cap on loans between $2,500 and $10,000. However, it doesn’t apply to all payday lenders operating in California, since OneMain, Opportun, and Lendmark, which had already established limited interest rates, are exempted. These companies are also supporters of the bill, according to the California Globe.

A 2017 survey by the Federal Deposit Insurance Corporation found that 6.5 percent of Americans do not use banks, while an additional 18.7 percent are underbanked. These people use alternative financial services such as check cashing and payday loans.

Putting caps on small payday lenders could be detrimental to the poor because “banks are averse to the risks of payday lending, since it has a high default rate for repayment,” Mark Nicholson, marketing manager with Personal Money Network, told The Epoch Times. “The banks also do credit checks, and many payday loan customers have poor credit ratings, or none at all.”

J.R. Duren, the senior editor and personal finance analyst at HighYa.com, agrees.

He told The Epoch Times that if this bill becomes law, “it’s going to be really hard to get a large sum of money really quickly if you have bad credit.”

“The easiest option in terms of interest and loan amount would be a family member. However, this places undue strain on that relationship,” he said.

Limón has not voiced concerns about those who rely on payday lenders, instead focusing on greed in the industry, echoing politicians such as Rep. Alexandria Ocasio-Cortez and Sen. Bernie Sanders who are also fighting high interest rates from Washington. Still, there are experts who believe that AB 539 is more about some companies using the state government to boost their profits than about making the industry more responsible.

According to Chane Steiner, the CEO of Crediful, an online company that offers expert advice on financial matters, lenders might often be engaged in “predatory lending” but “the fact that California is exempting three bill sponsors is pure, unveiled money at play in politics.”

By putting a cap on rate limits, a Pew research from 2018 unveiled, the bill would actually give dishonest firms more incentive to exploit their consumers.

Because rate limits on small payday lenders actually prevent them from making profits off their loans, more lenders are expected to push expensive “add-on” products such as credit insurance to go around the state-imposed caps.

“Added credit insurance and other ancillary products increase the cost of borrowing in states that allow them by more than a third,” Pew reported.

In a written response to Limón and AB 539 supporters, State Senator Ray Haynes seemed to echo Pew’s findings, adding that regulations aren’t necessary. After all, “if real market forces were at work, it would be natural for a 36% loan product to beat a 100% loan product in a free market.”

“The three lenders who offer these lower interest rates are not entirely honest with the borrowers,” Haynes explained. “They engage in a practice known as ‘loan packing,’ that is, they use undisclosed or deceptive practices to increase their profits by adding on ‘products’ that are of little value to the customer, but create large amounts of revenue to the lender, that more than make up for the lost interest.”

Being honest in this business, Haynes explained, means that you’re going to charge high interest rates that “make up for the high default rate by non-creditworthy borrowers.”

“If you are a dishonest broker, you lure the borrower in with a promise of lower interest rates, then stick them with add-ons, like credit insurance or ‘debt protection’ products,“ he said. ”So, if a competitor wants to compete with the dishonest companies, they have to be dishonest too. Some companies won’t do that, so they just leave the market.”

Haynes also noted that Limón has received contributions from the lenders supporting the bill.

According to Steiner, this type of bill doesn’t protect the poor. Because in the end, she told The Epoch Times, the poor are the ones who suffer.

As AB 539 awaits for review in the Senate, organizations like the California Hispanic Chamber of Commerce (CHCC) and the California Financial Service Providers are trying to rally Californians against it.

According to CHCC, “AB 539 will have [a concerning impact] on small businesses and consumers. As proposed, AB 539 will limit lenders’ ability to provide a variety of short-term credit options to borrowers in need.”