On September 25, California Assembly Bill 539 was presented to the Governor for signing. The Bill would prohibit licensees of the California Financing Law (CFL) from charging an interest rate greater than 36% plus the applicable Federal Funds Rate on consumer loans of at least $2,500, but less than $10,000. Currently the CFL does not regulate the interest rate a licensee may charge on consumer loans of $2,500 or greater.
The Bill’s author states in the legislative comments that the lack of an interest rate ceiling for these loan amounts “has led to a ‘wild west’ where unscrupulous lenders are charging interest rates from 100% to more than 200% on” larger installment loans. The author further asserts that, “Consumers are struggling under these egregious terms, and at least one out of three consumers default on these debts.”
In addition to creating the above interest rate cap, the Bill would also:
- Require a licensee to report the borrower’s payment history to at least one consumer reporting agency on consumer loans subject to the new interest rate cap.
- Require a licensee to offer a free credit education program or seminar approved by the Commissioner of Business Oversight on consumer loans subject to the new interest rate cap.
- Prohibit a repayment term greater than 60 months and 15 days for consumer loans of at least $3,000, but less than $10,000, excluding loans of at least $5,000 secured by real property. Currently this prohibition only applies to consumer loans of at least $3,000, but less than $5,000.
- Create a minimum repayment schedule of twelve months for consumer loans of at least $2,500, but less than $10,000.
- Prohibit prepayment penalties on consumer loans not secured by real property.
- Subject opened-end loans not exceeding $10,000 to certain provisions of the CFL. Currently only opened-end loans not exceeding $5,000 are subject to these provisions of the CFL.
As the Bill was passed at the end of the legislative session on September 13, the Governor has until October 13 to sign or veto the bill. If the Governor does not sign it, the bill will automatically become law.
If enacted, the Bill would become effective on January 1, 2020.
Troutman Sanders will continue to follow developments with the Bill. Lenders in this space should continue to track the Bill to better understand how it may impact lending activities.