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Ray Haynes

AB 539 – Politicians and Pay to Play; How Bad Actors in the Small Loan Market Are Attempting to Manipulate the Law to Eliminate Competition

I’m a free market guy. Government regulation generally fails to protect the consumer, and more often benefits market actors by eliminating competition, current or potential. This article is about how a set of market actors are using government regulation to eliminate competition, and actually hurt consumers.

In the last several years, we have seen the rise of small dollar loans, usually made by lenders who are not banks, and who loan to people with less than perfect credit, people who need a small bridge loan to take care of some important reason. The consumer needs the money, the lender has the money, and the lender charges a high rate of interest, a rate of interest the borrower is willing to pay because of the need to the borrower. The fast growth of these businesses shows that there is a great need for such loans, and plenty of businesses who are willing to meet that need.

I have no problem with such loans, which can have interest rates of 40% to 100%, as long as everybody knows the terms and knows what they are paying for. AB 536 attempts to limit the interest rates on these types of loans to 36%. A noble cause you would think. 100% interest on a loan? That seems high, you say, what is wrong with limiting it to 36%? That’s still plenty of profit. At first blush, you would think so.

First problem, only three of these small loan lenders have a 36% loan product, so automatically you are pushing competitors out of the market with the legislation. Once again, what’s wrong with that? Two things, if real market forces were at work, it would be natural for a 36% loan product to beat a 100% loan product in a free market, so why is a regulation necessary? One would expect market forces to resolve the problem without AB 539. As important, if a business could make a profit with a 36% loan, why wouldn’t all the businesses in that market reduce their interest to compete?

That is because the three lenders who offer these lower interest rates are not entirely honest with the borrowers. They engage in a practice known as “loan packing,” that is, they use undisclosed or deceptive practices to increase their profits by adding on “products” that are of little value to the customer, but create large amounts of revenue to the lender, that more than make up for the lost interest. So, if you are an honest broker of high risk, low dollar loans, you charge 50% to 100% interest on the loan to make up for the high default rate by non-creditworthy borrowers. If you are a dishonest broker, you lure the borrower in with a promise of lower interest rates, then stick them with add-ons, like credit insurance or “debt protection” products which add lots of revenue to the lender, with little benefit to the consumer. So, if a competitor wants to compete with the dishonest companies, they have to be dishonest too. Some companies won’t do that, so they just leave the market.

How do I know these facts? First read pages 13-17 of the report from the National Consumer Law Center (http://www.nclc.org/images/pdf/pr-reports/report-installment-loans.pdf), which identifies these deceptive practices. Then read section 2 (adding Fin.C. Section 22202(f) to the code) of the bill which specifically exempts commissions and payments for these deceptive products from regulation. Finally, see that the companies supporting the bill (OneMain, Opportun, and Lendmark) are the companies who are the most likely to engage in these deceptive practices (https://www.consumerfinance.gov/data-research/consumer-complaints/search/detail/3139801; https://www.indeed.com/cmp/Lendmark-Financial-Services/reviews; https://www.indeed.com/cmp/Oportun-1/reviews?start=80&sort=rating_desc). The NCLC says these practices should be severely limited, so why doesn’t AB 539 do that?

Here’s where the story gets sinister. 80% of the campaign contributions received this year by Assemblywoman Monique Limon, author of AB 539, have originated from these companies of questionable character. She then introduces a bill that benefits these companies, sells it as a pro-consumer bill (which the NCLC says is anything but), and the consumer gets the shaft, while Democrats pretend to be the consumers’ friends. Assemblywoman Limon, chair of the policy committee that heard and passed the bill, said nothing about the contributions, said nothing about the sharp practices by the businesses from which she received contributions with a bill specifically designed to help these businesses, and then she advances the “pay to play” agenda of the Sacramento Democrats.

Here are the speeches on the floor of the Assembly, do you hear anything about how consumers will be shafted by this bill? (https://youtu.be/Ur6xDG742Vo, https://youtu.be/y6ucWjIp3tM). Her contributors, already identified by the NCLC and the government as engaging in the worst kind of business practices, practices specifically excluded from the reach of this bill, are described as “responsible lenders.” We have surely passed through the looking glass.

This is what the regulatory state does. Under the guise of protecting the consumer, they limit consumer choice, and market forces, to the benefit of the politicians, and those businesses who “pay to play.” I pass no judgment on the wisdom of high risk, high interest loans. I believe in maximizing the number of voluntary transactions, and allowing the market to exclude bad actors. AB 539 protects bad actors and excludes the honest ones. Sure, the honest ones charge 100% interest on their loans, but they are not lying about it, or hiding it in dishonest fees, as OneMain, Opportun, and Lendmark are. The legislators who signed onto this bill are either ignorant or dishonest, which should be seriously considered by the voters who elected them when the next election comes. Those who vote for the bill should understand they are actually hurting the people of this state, since they are neither protecting the consumer or advancing freedom. The bill deserves to die a very public and ignoble death.