By RICHARD MANNING
President Trump has made unprecedented strides in undoing stifling and harmful regulations in an effort to remove the government’s chokehold on consumers and small businesses. Those efforts are bearing fruit in the strong economy we are experiencing today.
Despite they Administration’s successes in this area, however, state legislatures around the country are working overtime to block Trump’s antiregulatory agenda. One such effort is happening in my home state of California and concerns the regulation of consumer short-term loans.
Short-term loans are intended to help consumers in a time of need to cover unexpected expenses, such as a car repair or medical emergency. Although some critics say these loans are a bad deal for borrowers, the reality is that millions of consumers use them, often as a necessary means of last resort because they are in a financial bind. This includes those who are financially underserved in our communities, either because they don’t have the credit history to open a traditional bank account or they have a low credit score.
Shortly before he left his post, former Consumer Financial Protection Bureau (CFPB) Director Richard Cordray announced new regulations governing these types of loans. Cordray’s rule would have been devastating to our economy, potentially cutting off millions of Americans from access to credit options.
However, thanks to the leadership of Cordray’s successors, Mick Mulvaney and now the Bureau’s permanent director, Kathy Kraninger, the rule has been re-opened for consideration to ensure that the opinions and voices of all stakeholders are carefully considered.
Which brings us back to California.
California Attorney General Xavier Becerra was one of 25 attorneys general who signed a recent comment letter opposing a delay in the implementation of Cordray’s rule. And in February, Democratic Assembly members Monique Limón and Tim Grayson introduced legislation, AB 539, which would place an interest rate cap of 36% on consumer loans ranging anywhere from $2,500-$10,000. The rationale, according to Grayson, is that “Californians deserve real access to capital, not exploitative loans that trap them in perpetual payments and compounding debt.”
While I’m sure the bill’s authors have good intentions, this legislation is a solution in search of a problem.
AB 539 would seriously impede consumers’ ability to access credit, especially in a time of great need. This includes Californians who are either homeless, on the precipice of homelessness or working to get off the streets. The Golden State is home to 134,000 homeless people and many of them not surprisingly are working.
First, AB 539 will make it harder for lenders of short-term, small dollar loans to issue them because placing an arbitrary rate cap on these loans fails to acknowledge the basic economics of the lending business. While it is easy to dismiss these lenders as “predatory,” the reality is these loans are high-risk and unsecured because many borrowers have either damaged credit or no credit history at all. Absent a formal banking relationship, consumers who rely on them are left with very few lending options that are safe and secure. As Daniel Press of the Competitive Enterprise Institute noted in a 2018 paper, “if consumers cannot access lawful forms of credit, they will be forced to either default on other loans or pursue illegal or unregulated loan sources, perhaps even loan sharks.”