California adopts rates of interest and different restrictions on shopper loans | Morrison & Foerster LLP
As anticipated, California enacted laws imposing increased rate of interest caps on shopper loans. The brand new regulation, AB 539, imposes additional necessities referring to credit score experiences, shopper training, most mortgage compensation durations and prepayment penalties. The regulation solely applies to loans made underneath California Financing Regulation (CFL). Governor Newsom signed the invoice on October 11, 2019. The invoice was Chapters 708 of the 2019 Statutes.
As defined in our Buyer alert on the invoice, the primary provisions embody:
- Impose fee caps on all installment loans for consumption functions, together with private loans, auto loans and auto title loans, in addition to open-ended traces of credit score, when the quantity of credit score is $ 2,500 or extra however lower than $ 10,000 (“coated loans”). Previous to the enactment of AB 539, the CFL already capped charges on shopper loans underneath $ 2,500.
- Prohibited costs on a secured mortgage that exceed a easy annual rate of interest of 36% plus the federal funds fee set by the Federal Reserve. Whereas a dialogue of what constitutes a “charge” is past the scope of this alert, observe that monetary lenders might proceed to cost sure administrative charges along with the allowable charges.
- Specify that coated loans should have phrases of at the least 12 months. Nonetheless, a assured mortgage of at the least $ 2,500, however lower than $ 3,000, can’t exceed a most time period of 48 months and 15 days. A assured mortgage of at the least $ 3,000, however lower than $ 10,000, can’t exceed a most time period of 60 months and 15 days, however this restrict doesn’t apply to loans secured by actual property of at the least $ 5,000. These most mortgage phrases don’t apply to open-ended traces of credit score or sure pupil loans.
- Prohibition of prepayment penalties on shopper loans of any quantity, until the loans are secured by actual property.
- Require CFL licensees to report borrower fee efficiency to at the least one nationwide credit score bureau.
- Require CFL licensees to supply a free shopper credit score training program permitted by the California Enterprise Oversight Commissioner (Commissioner) earlier than mortgage funds are disbursed.
The adopted model of AB 539 modifies a few of the earlier phrases of those provisions, however not in substance.
The invoice as enacted consists of a number of new provisions which prolong the protection of AB 539 to bigger indefinite loans, as follows:
- The restrictions on the calculation of charges for indefinite loans in Article 22452 of the Monetary Code now apply to any indefinite mortgage with a great religion principal of lower than $ 10,000. Beforehand, these restrictions utilized to indefinite loans of lower than $ 5,000.
- The minimal month-to-month fee requirement of Article 22453 of the Monetary Code now applies to any indefinite mortgage with a great religion principal of lower than $ 10,000. Beforehand, these necessities utilized to indefinite loans of lower than $ 5,000.
- The charges, prices and bills eligible for indefinite loans in part 22454 of the Monetary Code now apply to any indefinite mortgage with a great religion principal of lower than $ 10,000. Beforehand, these provisions utilized to indefinite loans of lower than $ 5,000.
- The quantity of the mortgage proceeds which should be remitted to the borrower in article 22456 of the Monetary Code now applies to any mortgage of indefinite length whose principal in good religion is lower than $ 10,000. Beforehand, these restrictions utilized to indefinite loans of lower than $ 5,000.
- The ability of the commissioner to disapprove promoting of indefinite loans and to order a CFL licensee to submit an promoting copy to the commissioner earlier than use underneath Article 22463 of the Monetary Code now applies to all indefinite loans, whatever the greenback quantity. Beforehand, this part didn’t apply to a mortgage with a great religion principal quantity of $ 5,000 or extra.
Our earliest Buyer alert additionally addressed points referring to the completely different enjoying area banks presently take pleasure in, considerations in regards to the applicability of the Damage Doctrine to high-rate loans, and the way forward for fee regulation in California. All of those considerations will stay in place as soon as AB 539 takes impact on January 1, 2020. As well as, the flexibility of subprime debtors to acquire needed credit score as soon as the AB 539 fee caps take impact is unsure.
 California Monetary Code Part 22000 et seq.
 California Monetary Code Part 22305.