California regulator: lenders move away from low-value loans to high-interest installment loans

According to the state banking regulator, California non-bank consumer lenders are moving away from small dollar short-term payday loans and instead opting for long-term loans with amounts greater than $ 2,500 to avoid bankruptcy. interest rate caps. According to the Department of Business Oversight (DBO), this is the conclusion of the reports it published on two key lending laws: the California Finance Act (CFL) and the California Deposit Transactions Act. deferred (CDDTL), often referred to as the payday loan law.

What happened

According to a press release on the reports citing DBO Commissioner Manuel P. Alvarez, the payday loan abandonment “underscores the need to focus on the availability and regulation of low dollar credit products between $ 300 and $ 2,500, and in particular loan products over $ 2,500. where there are virtually no current price caps under the CFL. According to the CDDTL report, payday loans in the state have fallen to their lowest levels in several years by various measures. For example, the total number of loans and the total amount borrowed fell to their lowest level since 2006. The number of consumers receiving payday loans fell to their lowest level since 2005; these customers also had fewer places to borrow as the number of physical payday lending points plunged to their lowest level since 2005.

Conversely, although the total number of CFL loans has remained remarkably constant from 2016 to 2018, according to the CFL report, unsecured consumer loans have shown a marked increase over the past year. Unsecured consumer loans of up to $ 2,500, between $ 2,500 and $ 4,999, and between $ 5,000 and $ 10,000, all saw double-digit percentage increases in total loans and loans. total amount loaned. Despite these increases, the average amount of consumer loans actually fell to its lowest level since 2014. This may be due to an increase in the number of loans between $ 2,500 and $ 4,999. Notably, over 55% of loans with principal in this range had interest rates of 100% or more. The CFL report also indicated that Internet lending also continued to increase, with nearly two-thirds of loans issued online having principal amount of $ 2,500 or more, with the accompanying deregulated rate cap.

Commissioner Alvarez’s comments about increased regulation under the CFL are consistent with actions taken by the DBO over the past year. In September 2018, the regulator DBO sent letters to twenty consumer installment lenders asking for details on their annual percentage rates and online lead generation activities. In a statement announcing the investigation, DBO said it was considering enacting regulations to more effectively oversee lead producers; According to the DBO, lead generators play a key role in providing high-interest loans to California consumers.

Why is this important

Indeed, it is a period of major upheaval for the state’s CFL lenders. Last year, the California Supreme Court ruled From La Torre case, which argued that consumers could use California’s Unfair Competition Law to claim that high-interest loans were unreasonable and therefore violated the CFL. This conclusion was drawn even though, as noted above, the state deregulated interest rates for loans over $ 2,500. The decision in From La Torre had several consequences:

• Copy litigation – The ruling sparked a string of imitation cases claiming high-rate loans from other lenders were also unreasonable. These cases are still pending before the courts.
• Regulator attention – The case also caught the attention of the DBO. In a press release regarding an enforcement action against an auto securities lender, the regulator noted that it had “started an investigation to determine whether interest rates over 100 percent [charged by the company] may be inadmissible under the law. While the DBO has yet to come up with an unreasonable theory to attack high-interest loans, this statement indicates that it may do so in the future. Additionally, this statement may further embolden local prosecutors or the California Attorney General to assert such a theory. Both can file a complaint under California’s Unfair Competition Law.
• Legislation – The decision also triggered legislative action. In February, a bill was introduced in the California State Assembly that would significantly change several aspects of the CFL, including imposing an interest rate cap of 36% plus the federal funds rate on loans greater than $ 2,500 but less than $ 10,000. The bill, AB 539, would also require that loans of at least $ 2,500 but less than $ 10,000 have a term of more than twelve months and would prohibit, among other things, prepayment penalties for any CFL loan. The legislation was passed by the California State Assembly by an overwhelming 60-to-4 majority in May and is currently under consideration by the Senate. Given the democratic control of both houses of the California legislature and the governorate, the prospects for the passage of this legislation appear high.

The CFL report suggests that consumer installment loans are on an upward trajectory alongside the domestic economy, despite the uncertainty created by the recent developments discussed above. However, both reports also reflect regulators’ concerns about the shift from small payday loans, which are subject to fee limits, to installment loans over $ 2,500, which are currently not subject to fee limits. specific statutory rates. It remains to be seen whether new litigation, laws or regulations will address this apparent concern of regulators and reduce or further exacerbate this uncertainty.

We reported on the release of last year’s CFL report here.