With the passing of The Fair Access To Credit Act passed by California’s State Assembly, lenders are being held to tighter restrictions when handing out short-term funds to consumers in emergencies.
The Bill (AB 539) caps interest on all loans written between $2,500 and $10,000 at 36%. This is for both title loans and installment loans.
The Fundamentals Of California’s Title Loan Rules and Regulations
The purpose of the updated laws in California is to protect the consumers who are continually caught up in burgeoning debt thanks to “predatory lending practices.”
Until the passing of Assembly Bill 539, the state had minimal restrictions on title loans that allowed outrageously high interest rates, nondisclosure to the consumers of pertinent information, and funds that were given regardless of the ability to repay the loans.
Notify consumers of alternatives
Upon initiating a contract with a prospective client, a licensed lender has to advise the borrower of alternative loan options from other institutions that might be accessible to them at a specific APR or annual percentage rate. It allows the consumer choices where they may not have been aware of and which might be more suitable to their particular situation.
The notice needs to be in writing, boldly written to emphasize the importance of the information for the borrower.
Before the borrower actively signs an agreement, there is an obligation on the part of the licensed lender to ensure there is knowledge of pertinent information. In providing this, making educated decisions is more straightforward for the consumer. The information needs to be in writing and reviewed by everyone involved.
- Dollar Amount Borrowed: The consumer must be advised of the total amount of the loan’s cost if the loan were to be paid back timely, including the principal, administrative costs, and interest installments. The total amount will include the APR or annual percentage rate as designated by the laws, payment amount, and following the delinquency cost schedule. The quoted statement needs to be provided for all borrowers – “Repaying your loan early will lower your borrowing costs by reducing the amount of interest you will pay. The loan has no prepayment penalty.”
- Right To Rescind: The consumer needs to receive a notice that the loan can be rescinded if the borrower so chooses by notifying the licensed lender of the intention to do so. The principal provided to the consumer needs returned to the loan agency by the time the business day closes the day following the completion of the application process. In the current digital age, many people use mobile devices for every purpose. Licensed lenders can provide their disclosures via mobile applications as long as the borrower has the option to print these out.
For title loans, the minimum that can be borrowed is $2,500 with a term of between one year and not over five years taken from a lender holding a license. Each licensed provider is expected to report to a ‘consumer reporting agency’ regarding the borrower’s payment performance as a reflection on their credit history.
The licensed lending agency is required to determine a borrower’s debt-to-income ratio in determining the loan’s approval. If the consumer’s debt is greater than 50% of the $2,500 loan amount or 36% of a loan amount higher than that, it needs to be declined.
Thorough underwriting needs instituting to verify the information, including obtaining a report from at least one of the consumer reporting agencies, bank statements, pay stubs, and other relevant documentation.
How Are Title Loan Companies Handling the New Restrictions?
Claims suggest that California is now an example in regulating the ‘financial services industry.’ After all, it is the largest among the 50 states as well as a ‘hub’ for banks, personal loan institutions, and installments lenders online. Payday loans rank the highest for short-term loans in the state, with several title lending agencies headquartered there.
It would be an understatement to say the restrictions will drastically affect these industries with reports that larger institutions may choose to no longer provide loans in the smaller ranges because it’s simply not cost-effective for their businesses.
Realistically, if the letter of the law is abided, consumer volume will considerably decline due to the implementation of verifying income stability for repayment. With fewer customers, these industries will likely see revenue declines and employ fewer people across the state.
What Will Consumers Do Now?
There has always been a debate concerning the need for ‘predatory’ lending. Some argue these are often the only answer when there is an emergency and no funds available or someone with no credit, bad credit, or low income.
Others defended the fact that loans of this kind merely put people who were already dealing with adverse situations in worse trouble. Borrowing money they often couldn’t afford to pay back, in many cases, led to a cycle of debt that many were unable to come out of.
With the Bill being passed, snowballing debt is less likely. But people who are in the situation to need these types of loans won’t be able to attain them with credit checks being implemented and income requirements needing to be met.
Since everyone can apply to whichever institution they choose, when a person goes to one of these facilities, the consumer has to receive a list of alternatives they can select in place of the title loan company. This gives the customer resources where before, they were less informed and unable to locate viable options for themselves.
Is the Law Sustainable?
Assembly Bill 539 is the government’s way of helping the citizens from creating massive debt for themselves. In California, poverty, homelessness, is out of control. In some way, somehow, there needed to be a way to take control of the situation. Is this the answer – that’s subjective.
The lenders might be restricted to a 36% APR, but their administrative fees are at will. Where they lose in one area, they make up for in another one. Although most of the institutions are ‘licensed,’ not all of them entirely play by the rules, which is how they got the reputation they currently have.
For a while, businesses will probably toe the line to avoid fines and penalties. But ultimately, revenue speaks volumes for these types of companies as it does for any organization. In adhering to regulations, many lenders may begin to do so on a ‘sliding scale,’ letting consumers pass through that don’t necessarily meet the guidelines. It seems rules have never ‘stuck’ when it comes to short-term lending despite some strong efforts. Many of these institutions have been in business for decades. Unfortunately, they may see many more as long as there is a need.
California is in an unfortunate place. It is crucial to begin to clean things up and help people there. Does that mean restrict a resource for people who have no resources? That is genuinely a debate.
The intent is understandable in attempting to prevent people from being exposed to debt cycling, often leading to bankruptcies and an increase in poverty. These are meant to protect the citizens in trying to keep people from losing everything and ending up living on the streets.
But, it’s curious. If a family can’t pay their debt and can’t get a loan to help pay that debt either, will they still lose everything and end up living on the street?
When implementing restrictions on one avenue for a specific group of people, perhaps it would make sense to adopt practical guidelines suitable for this demographic as a viable alternative.