Predatory, High-Interest Lending Booms In California

SAN FRANCISCO (CBS SF) — Predatory, high-APR lending in California is booming.

In 2015, the total dollar amount of installment consumer loans made by non-bank entities in California grew by almost 50 percent from 2014, according to a report released Thursday by the California Department of Business Oversight (DBO).

The DBO collected unaudited data from finance companies licensed in California and found that most loans, 54.7 percent, issued by those companies ranging between $2,500 and $5,000 had annual percentage rates (APR) of 100 percent or higher.

To put that in perspective, home buyers in California are currently advertised a 30-year fixed home mortgage APR around 3 to 3.7 percent.

“The good news is the increased lending activity reflects continued improvement in California’s economic health,” said DBO Commissioner Jan Lynn Owen. “Less heartening is the data that show hundreds of thousands of borrowers facing triple-digit APRs. We will continue to work with policymakers and hope they find the report helpful as they consider reforms of California’s small-dollar loan market.”

The report released Thursday does not include high-interest payday consumer loans in California, but the DBO plans to publish reports on California’s licensed payday lenders and mortgage lenders in the coming days.

In just one year, California consumer loans increased by over 25 percent, to roughly 1.4 million loans, according to the state’s Annual Report on Operation of Finance Companies under the California Finance Lenders Law.

The combined principal of consumer loans from licensed lenders in California totaled $34.1 billion in 2015, up almost 49 percent over the 2014 principal of $22.9 billion.

The California Finance Lenders Law provisions places no limits on loans valued at $2,500 or higher, but does cap interest rates on loans under $2,500.

Unsecured loans, in which there is no collateral seized if the loan is defaulted on, grew greatly from 2014 to 2015. Not only did the number of unsecured consumer loans under $2,500 increase by over 30 percent from 2014, but the aggregate principal increased by over 28 percent.

California mortgage lending is also booming. From 2014 to 2015, the number of residential mortgage loans in California increased by over 61 percent from 2014 and the combined principal on those loans went up  more than 55 percent, to $24.6 billion last year, the report found.

Liana Molina, director of community engagement at the California Reinvestment Coalition, a group that advocates for increased access to safe financial services in low-income communities, said Thursday following the release of the report that “while high-cost installment and car title loans are currently legal in our state, they are causing incredible financial harm for California borrowers. For consumer loans greater than $2,500, there is no interest rate cap, and it’s clear the lenders are taking full advantage.”

In early June, David Silberman, the acting deputy director of the Consumer Financial Protection Bureau (CFPB) announced a new proposed rule that would require lenders across the country to determine whether potential borrowers can afford to pay back their loans prior to issuing the loans.

“The proposed rule would also cut off repeated debit attempts that rack up fees and make it harder for consumers to get out of debt,” Silberman writes on the CFPB blog. “These strong proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment loans.”

The CFPB, which the Obama administration created in 2010, and which Republicans including Donald Trump have said they would like to eliminate, released a video in early June to explain how one type of high-cost loan, the payday loan, works:

But Molina says the CFPB’s proposed rules, while “an excellent first step in curbing the many abuses we’ve seen from this industry” still allow several exceptions and loopholes that the industry could exploit.

By Hannah Albarazi – Follow her on Twitter: @hannahalbarazi.


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