California Expands Restrictions on Consumer Loans

Financial Services Law

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

AB 539, also known as the Fair Access to Credit Act, will substantially affect consumer lending in the state and could spur copycat bills in other states. The law goes into effect on January 1, 2020.

What happened

AB 539 amends the California Financing Law (CFL) to set a 36 percent 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 12-month loan term for such loans. As we have noted previously, although the legislature likely intended that these changes apply only to consumer lending, the law as written applies to any loan of at least $2,500 but less than $10,000. We believe the placement of 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 keep in mind that the California Department of Business Oversight (DBO) is currently in the process of issuing regulations regarding small-business finance disclosures required by another recent change to California law, SB 1235.

AB 539 also prohibits CFL finance lenders from charging, imposing or receiving any penalty for the prepayment of a loan under the CFL. Moreover, AB 539 further requires finance lenders making covered loans to report each borrower’s payment performance to at least one nationwide consumer reporting agency and to 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 finance lenders licensed under the CFL and not, for example, to banks. However, CFL-licensed finance lenders to date have been a major source of small loans in amounts of $2,500 and more to California consumers, and so AB 539 will have a significant impact on the availability of credit to California consumers.

Introduced in February, AB 539 passed the Assembly in May and the Senate in September. Governor Gavin Newsom signed the bill into law in October.

To read the new law, click here.

Why it matters

AB 539 represents a paradigm shift for consumer lending in California. CFL lenders should be prepared to reevaluate not only their compliance practices to account for 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 to the extent not already included in a state’s law.