Are High-Interest Personal Loans a Necessary Evil?

Angelenos at the bottom of the economic ladder often pay a higher percentage of their income for rent, face greater risk of being confronted by police and live in areas where economic opportunities, including loans, are more like economic scams.

Groups fighting for justice for the poor, the working class and people of color are trying to attract support for a proposed law that it would make it more difficult for loan companies, which the state Department of Business Oversight (DBO) says are disproportionately located in minority and low-income areas, to charge exorbitant fees for their services.

AB 1109 by Assemblyman Ash Kalra would cap personal loan interest rates at 24 percent. The cap would apply to loans from $2,500 to $10,000 (lesser amounts, including payday loans, are already capped). The loans have seen annual percentage rates higher than 100 percent, according to the DBO. In one case, an Anaheim borrower's four-year, $2,525 loan came with a 139 percent APR, resulting in a payback of $14,102, or 550 percent of the principal, according to Kalra's office.

The high fees have been tolerated because, after the Great Recession, these firms were willing to go into communities that often have fewer banks and even fewer loan opportunities.

"Banks aren't willing to lend, people need a place to turn, and these are the only places that provide these services," says Liana Molina, director of community engagement for the California Reinvestment Coalition.

The bill is in the Committee on Banking and Finance, where supporters fear it could die. They're trying to get the backing of key Los Angeles–area committee members Sebastian Ridley-Thomas and Autumn Burke. Both Assembly members remain noncommittal.

"Access to credit for South Los Angeles’ businesses and residents remains a significant barrier to our economic well-being," Ridley-Thomas said via email. "I will be evaluating AB 1109 with respect to challenges our community faces in accessing fair lending options."

A spokesman for Burke said, "She's engaging with all stakeholders to better understand the issue and how it affects her constituents."

California Financial Services Providers, which lobbies for loan stores in Sacramento, is opposed to the legislation. "It will essentially shut down credit as we know it in California," says executive director Thomas L. Leonard. "It's certainly not consumer advocate–friendly."

Loan stores grew out of the check-cashing business in the 1990s and blossomed during the Great Recession, Molina says. Even some progressive Democrats in California believe they are a "necessary evil" because they serve communities where loans and banking services are sometimes out of reach, she says.

"A lot of these entities are one-stop shops where you can cash a check, take out a loan, pay a utility bill and buy a bus pass," she says. "Working-class folks use these things."

Supporters of the bill say that if it doesn't pass, California consumers will face a double whammy in the form of Trump administration vows to loosen up rules on banking — including loans.

The legislation is supported by Coalition for Humane Immigrant Rights (CHIRLA), the Housing and Economic Development Commission of the National Baptist Convention and National Council of La Raza.

"In the age of Trump, California has positioned itself as a progressive state and a refuge for justice," Molina says. "Our hope is that the banking committee takes that to heart."

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