The dollar amount of loans made in 2017 by non-bank lenders in California – $347.2 billion – exceeded the entire economic output of 33 states. Yet, state policymakers for years have neglected this massive market.
The lack of care has served well the interests of the lending industry, but left consumers increasingly vulnerable to myriad dangers.
California’s payday lending regulatory structure is feeble. The 2002 law ranks as one of the nation’s weakest, and significant ambiguities in the statute’s language and legislative history have been interpreted to favor industry and harm consumers’ interests.
The result is a market where debt traps ensnare hundreds of thousands of borrowers. It’s a market where, in 2017, consumers paid an average annual percentage rate of 377 percent and lenders earned 70.5 percent of their fees from customers who took out seven or more loans during the year.
For 34 years, California’s non-bank financing law has allowed lenders to charge whatever interest rate they want on consumer installment loans of $2,500 or more.
The statute imposes no real requirements to ensure borrowers have the ability to repay loans before they assume the debt.
Another major defect is that the statute does not require lead generators – entities that connect borrowers with lenders – to be licensed and regulated.
These deficiencies have produced a broken, hazardous market that inflicts widespread harm on consumers. Too often, borrowers get victimized by this scenario:
- An unscrupulous lead generator schemes to take the borrower’s confidential personal information.
- Then, with deficient regard for the borrower’s privacy and financial interests, the lead generator sells the information to lenders who pay them the most money.
- A lender then uses unfair practices to trap the borrower in a high-cost loan they didn’t want and can’t afford.
In 2017, 47.2 percent of consumer installment loans from $2,500 to $9,999 (351,786 of 745,145) made by state-licensed lenders carried annual percentage rates of 100 percent or higher.
The triple-digit APR ratio for loans in the $2,500 to $4,999 range was 58.8 percent, or 321,423 of 547,002.
For 20 such lenders, 90 percent or more of the loans they made in the $2,500 to $9,999 range carried triple-digit annual percentage rates.
In fighting reforms, the industry says that while their rates may be high, they provide access to credit to higher-risk borrowers who might otherwise not be able to obtain a loan.
That line, invariably swallowed whole by too many legislators, is a decrepit bromide that does not survive serious scrutiny.
The triple-digit annual percentage rate lenders write off as uncollectible astonishing numbers of their loans. Such loans are called charge-offs. Seventeen of the 20 high-cost lenders reported that at the end of 2017 they had a combined 85,142 charge-offs. That total equaled 50.1 percent of their outstanding loans and 64.1 percent of current loans.
Compare those numbers to three non-bank lenders who made no triple-digit annual percentage rate loans. Their combined charge-offs equaled 6.6 percent of outstanding loans and 7.3 percent of current loans.
Few events cause more damage to a consumer’s credit profile than a charge-off.
Lenders report them to credit rating bureaus, and they can remain on a consumer’s credit report for up to seven years. Thousands of customers of high-cost lenders who have their loans charged-off emerge from the transactions with worse credit profiles and less access to affordable credit.
In 2018, it was same old, same old. Bills came before the Legislature to fight payday loan debt traps, impose interest rate caps on consumer installment loans of $2,500 or more, and regulate lead generators. They all died.
Unlike in prior years, however, the Assembly passed the pro-consumer measures. Unfortunately, the Senate held firm as a bulwark for the industry.
In killing the lead generator bill, the Senate stood against consumer advocacy groups and responsible lenders.
The upper house aligned itself with a group of opponents that included: one lead generation company, Zero Parallel, busted by federal regulators for scamming borrowers; another lead generation firm, LeadsMarket, which in a one-month period in 2015 received from a single licensed lender more than $106,000 in payments that violated State regulations; and the Online Lenders Alliance, whose board includes two lenders – Elevate and Enova – among the 20 in California with triple-digit APR ratios of 90 percent or higher, and whose members include another lead generation company, T3Leads, sued by federal regulators for abusing borrowers.
Consumer advocates this year likely will take another run at reform. Given the events of 2018, all eyes will be on the Senate to see if the Legislature finally acts to protect consumers.
Tom Dresslar is a former reporter who served as a deputy commissioner at the California Department of Business Oversight, and helped draft the 2018 lead generator legislation, [email protected] He wrote this commentary for CALmatters.