Consumer Group Applauds California Effort to Regulate Fintech Loans

Advocate Andy

App based loans often carry triple digit interest rates, trap consumers in debt cycle

A leading national consumer group is applauding efforts by the California Department of Financial Protection and Innovation (DFPI) to regulate fintech lenders. These nonbank lenders - such as Dave Payactiv, MoneyLion, and others - are often found in the app store on a consumer's phone.

According to DFPI, the lenders are not only structured in a way designed to avoid financial regulation, but also disguise their high interest rates as "tips" and other fees.

The National Consumer Law Center (NCLC) says California is right to regulate these app store lenders as providers of credit and to apply interest rate caps and other restrictions on this type of lending.

“California has called out the Emperor's New Clothes by finding that earned wage advances and other fintech payday loans are loans, and that ‘tips,’ instant access fees, and other fees resulting in triple-digit interest rates must be subject to state rate limits,” said Lauren Saunders, associate director at the National Consumer Law Center. “The new California data shows these fintech payday loans, whether employer-based or direct to consumer, have the same triple-digit APRs and trap borrowers in the same debt trap cycle as traditional payday loans.”

NCLC pointed to DFPI data on the effective APR of many of these lending products.

“Data now shows that so-called ‘tips’ and other junk fees on fintech payday loans result in APRs from 328% to 348%, disguising high interest charges regardless of claims that these fees are purportedly ‘voluntary,’” Saunders added. “Junk fees add up to hundreds of dollars a year, draining wealth from communities of color and other vulnerable users of fintech payday loans, many of whom make less than $25,000 a year.

Under the proposed California rule, loans up to $2500 would be subject to a 30% APR interest rate cap and a 5% administrative fee.

NCLC says other states should follow California's lead and begin to regulate these fintech lending products.

“Other states should follow California’s lead and reject efforts by fintech payday lenders to carve loopholes in lending laws that traditional payday lenders could drive a truck through,” Saunders said. “States should reject efforts by fintech payday lenders to disguise themselves as employers paying wages.”

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Andy Spears is a middle Tennessee writer and policy advocate. He reports on news around public policy issues - education, health care, consumer protection, and more.

Nashville, TN

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