California extends restrictions on consumer loans

In addition to providing for the creation of public banks, the recent California legislative session resulted in the passage of a major bill capping interest rates on certain types of loans.

AB 539, also known as the Fair Access to Credit Act, will dramatically affect consumer loans in the state and could result in mimic bills in other states. The law comes into force on January 1, 2020.

What happened

AB 539 amends California Financing Law (CFL) to set a 36% rate cap (plus the federal funds rate) on installment loans with a principal amount of $ 2,500 or more and less than $ 10,000, with a minimum loan term of 12 months for these loans. As noted above, while the legislature probably intended these changes to apply only to consumer loans, the law as drafted applies to any loan of at least 2,500 $ but less than $ 10,000. We believe that placing the provisions of AB 539 in the “Consumer Loans” chapter of the CFL will control and limit their application to consumer loans as defined in the CFL, but small business lenders should be aware of mind that the California Department of Business Oversight (DBO) is currently issuing regulations regarding small business financing disclosures required by another recent change in California law, SB 1235.

AB 539 also prohibits CFL lenders from charging, imposing, or receiving a penalty for prepayment of a CFL loan. In addition, AB 539 further requires that financial lenders who make secured loans report on the payment performance of each borrower to at least one national consumer information agency and also offer – at no cost to the borrower – a credit education program or seminar that has been previously reviewed and approved by the DBO. AB 539 only applies to financial lenders approved under the CFL and not, for example, to banks. However, to date, licensed CFL lenders have been a major source of small loans in the amount of $ 2,500 and above for California consumers, and AB 539 will therefore have a significant impact on the availability of credit for California consumers. .

Introduced in February, AB 539 was adopted by the Assembly in May and the Senate in September. Governor Gavin Newsom signed the bill in October.

To read the new law, click on here.

Why is this important

AB 539 represents a paradigm shift for consumer loans in California. CFL lenders should be prepared to reassess not only their compliance practices to take into account the new law, but also their business models in the state in light of the new interest rate caps. CFL lenders should also be aware that other states may follow California’s lead and adopt similar restrictions as long as they are not already included in state law.

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