SACRAMENTO – The California Senate passed a robust consumer protection law Friday that limits the amount of interest payday lenders can charge their customers.

The passage of Assembly Bill 539 on the final day of the legislative session means the bill will head to Gov. Gavin Newsom’s desk. It would bar payday lenders from charging outrageous interest rates – sometimes as high as 200% – on loans between $2,500 and $10,000.

Currently, loans less than $2,500 are capped at 36% interest, but this created a loophole where unscrupulous lenders force borrowers to take out at least $2,500 to qualify for a loan so that exorbitant interest rates can be applied. AB 539 closes the loophole so the 36% interest rate applies to all payday loans, regardless of the amount borrowed.

“Consumers are unable to repay,” said state Sen. Holly Mitchell, D-Los Angeles, during Friday’s floor session. “We commissioned a study that shows more than 40% end up in collections.”

Other studies show that approximately 100,000 Californians default on their loans every year, many of whom do not have the financial literacy to understand exorbitant interest rates in the triple digits can be fiscally crippling.

“They can have their paychecks garnished, their bank accounts taken, and their cars repossessed,” Mitchell said.

The measure passed 30-5, indicating a willingness by some Republicans to flee the party line and support the bill.

Those in opposition said the regulation will drive some payday lenders out of business, meaning people with no credit or poor credit ratings will have decreasing options if they need money.

“Where are people going to get credit?” asked Shannon Grove, R-Bakersfield. “We can’t just expect financial institutions to take a bad risk.”

Grove argued consumers can use these high-interest payday lenders to gain a footing and begin to re-establish their credit ratings.

Proponents of the bill expressed skepticism that interest rates as high as 200% are anything but predatory.

“There is a difference between taking a risk and completely abusing poor people and forcing them into debt,” said Maria Elena Durazo, D-Los Angeles.

Newsom has 30 days to sign or veto the bill.

— By Matthew Renda