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.[1]
The July 1st version of AB 539 would require California finance lenders to:
- 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;
- Report borrowers’ payment performance to at least one national credit bureau;
- Offer a free consumer credit education program approved by the California Commissioner of Business Oversight before loan funds are disbursed; and
- 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.
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.[2] Nevertheless, others are concerned that AB 539 would harm subprime consumers, reducing much needed access to credit.[3]
A Different Playing Field for Banks
The bill would apply only to loans made by California finance lenders. Thus, banks...
