California recently joined a growing list of states that want to regulate certain small-dollar payday loans deemed to have unconscionable terms.
Diane Standaert, director of state policy at the Center for Responsible Lending, said that she has seen states broadly working to tighten standards on payday lending as the Consumer Financial Protection Bureau delays its implementation of a federal standard.
Mick Mulvaney, acting director of the CFPB, said in January that the agency would launch a rulemaking process to "reconsider" a payday rule crafted by his predecessor, Richard Cordray. The rule, which has a compliance date of Aug. 19, 2019, requires lenders to conduct a "full-payment test" on a borrower's ability to repay the loan and impose caps on the number of short-term loans that can be made in succession.
The CFPB's rollbacks on consumer protection are bad, Standaert said, and most lawyers in almost every state want stronger payday loan rules.
On Aug. 13, the California Supreme Court ruled that loans can be deemed illegal even if they are above $2,500, the threshold under which California law currently imposes usury caps. Many lenders have exploited California law by only offering products, such as installment loans, in amounts greater than or equal to $2,600, thus allowing the lender to set interest rates not subject to usury caps.
The California court ruling is not unprecedented. In 2014, the New Mexico Supreme Court similarly issued a new "common law" definition that allowed lower courts to determine if interest rates on small-dollar loans are "unreasonable." The court case was followed by state legislation that imposed a 175% cap on small-dollar loans, also requiring lenders to provide at least four installments for borrowers to repay the loans.
Like New Mexico, state legislators now hope to seize on the court ruling to pass more stringent laws on payday lending.
"The Supreme Court has indicated that we need to mandate what direction we need to be going in," said Monique Limón, the chair of the California Assembly's Banking and Finance Committee. Limón said in an interview that lobbyists have killed her committee's most recent efforts to install usury caps on small-dollar and car title loans, but hopes the Supreme Court decision moves the needle when the bills are reintroduced in the next legislative session.
California Attorney General Xavier Becerra said in a statement that the court decision will give law enforcement the "viable legal basis" to police small-dollar loans, adding that the stakes are higher "given the Trump administration's rollbacks of consumer financial protections."
Isaac Boltansky, analyst at Compass Point, wrote in a note that the California decision will not kill loans above $2,500, but could "catalyze a review of product offerings."
The state's largest payday lenders, including Check 'n Go and Elevate, do not see the court ruling as an obstacle to their businesses. Check 'n Go's parent company, Axcess Financial, said in a statement that it is compliant with applicable state and federal laws, adding that the ruling will not require the company to make adjustments to its lending program.
Elevate declined to comment but pointed to a statement from the Online Lenders Alliance industry group, which saw the ruling as an affirmation that there is no "bright line" test for small-dollar interest rates. OLA CEO Mary Jackson said she hopes the lower courts "stop lawsuits that seek to arbitrarily deny access to credit."
Ohio and Florida
Since the new year, other state legislatures have moved to pass payday lending reform as well.
In Ohio, Republican Governor John Kasich signed a law minted by the state legislature that would bar lenders from charging short-term loan fees exceeding 60% of the loan amount. Ohio House Bill 123 also imposes a maximum loan limit of $1,000 and caps loan terms to 12 months.
"We need to have good, strict rules around payday lending," Kasich told local media before signing the bill.
Cordray, who is now running for Ohio governor as the Democratic candidate, said the new law is a "step in the right direction," but saw a need for even stronger protections at the state level.
Florida also adjusted the law for payday loans but chose to loosen regulations on high-cost installment loans. In March, Republican Governor Rick Scott signed Senate Bill 920, which allows lenders to originate payday loans as high as $1,000 and extends the maximum repayment period from 31 days to as high as 90 days. The change would allow payday lenders to extend the term of the loan so that it falls out of the purview of the CFPB's payday rule, which only covers loans with repayment periods of 45 days or less.
Alex Horowitz, senior research officer for the Consumer Finance Project at The Pew Charitable Trusts, said in an interview that many other state legislatures have introduced laws aimed at small-dollar lending, but noted that Florida appeared to be the only one to rollback regulations on payday lending. Horowitz said changing state law is the answer to clarifying payday loan rules and that California's Supreme Court decision is an unusual event.
"Legislatures need to establish what their goals are when it comes to small-dollar lending," Horowitz said.