California now has more payday lenders than McDonald’s. While some states have restricted operations, the California legislature continues to bury bills aimed at cracking down on predatory lending.
When Melissa Mendez, a 26-year-old telephone bank worker, felt financially strapped a few months ago – “I was strapped for cash and needed to pay rent – she walked into the window of a Cash 1 store in Sacramento and took out a payday loan. The annual interest rate: 460%.
This rate would shock many people. Not Mendez, who once worked behind the counter at an outpost of credit giant Advance America. She had received requests for short-term loans from all kinds of people: old people needing more money because their social security check wasn’t enough, people between jobs and waiting for their first paycheck, and people like her, not having enough savings to make it to the end of the month.
Unlike Mendez, many desperate people don’t know what they’re getting into, often accepting aggressive collection practices, inflexible repayment options, and exorbitant interest. “They just point to things and run through them very quickly,” she said. “A lot of people only see the money and they don’t see the interest rates.”
In California, 1 in 20 people per year take out a payday loan, amounting to $2.9 billion per year. Payday loans have become a multi-billion dollar industry, fueled by triple-digit interest rates, high transaction fees and the ubiquity of its hundreds of stores across the state.
A California state study found that California now has more payday lenders than McDonald’s.
Yet while some states completely ban or severely restrict their operations, California is one of 26 states allowing loans with annual percentage rates above 391% on loans that must be fully repaid within two weeks. Otherwise, borrowers face collection calls, an overdraft of their accounts, or even a court order in the event of default.
Given the potential to crack down on predatory lending, the California legislature buried at least five bills intended to curb the practice. These would have capped interest rates on loans, extended the repayment period or offered installment plans to borrowers. Among them:
- AB 3010: Written in 2018 by Congresswoman Monique Limón, D-Goleta, it aimed to prevent people from taking out more than one payday loan at a time and proposed to create a database requiring approved lenders to register their loan transactions . Without the votes, Limón withdrew the bill.
- BA 2953: Also written by Limón in 2018, it aimed to prevent lenders from charging more than 36% on self-title loans, also known as pink slip loans, but failed to get enough votes to advance to the Senate.
- AB 2500: Drafted in 2018 by Assemblyman Ash Kalra, D-San Jose, the bill sought to cap interest rates at 36% for installment loans between $2,500 and $5,000. He died on the floor of the Assembly.
- SB 365: Drafted by Sen. Alan Lowenthal, D-Long Beach, in 2011, the bill proposed to create a payday loan database, but it also languished.
- SB 515: This 2014 bill by Sen. Hannah-Beth Jackson, D-Santa Barbara, sought to extend the minimum term of a payday loan and require lenders to offer installment plans, as well as develop a database and to cap loans at four per year per borrower. . He died in committee.
Limón said this year, like previous years, the billion-dollar loan industry has caught on. Both of her bills faced strong opposition at first, and she refused to make changes that would have appeased the industry.
But this year’s effort was “historic” in that it was the first time such bills had emerged from their original homes, she told CALmatters.
“We knew it was something that was going to push the envelope, but we felt it was important to introduce it,” Limón said. “As long as there is an issue, I think California will discuss it.”
Among those who voted against Limón’s AB 3010 was Assemblyman Kevin Kiley, a Republican from Roseville. After questioning the idea of limiting each person to just one payday loan, he said creating a database “seems like a big undertaking. There are privacy issues, apparently reliability issues, potential liability for the state.
Other states have taken stronger action in recent years to curb predatory lending. New York prohibits payday loans through criminal usury laws, which prohibit interest on loans of 25% or more. The Arkansas state constitution caps rates at 17%. Most other states that have a cap limit lenders to 36%.
“(California) needs to innovate in order to bring down prices for consumers,” said Nick Bourke, director of consumer credit at Pew Charitable Trusts, which has studied predatory lending nationwide.
“Conventional payday loans don’t help them when the problem comes back two weeks later. If credit is to be part of the solution, the only way is for it to be structured to be laddered at affordable rates. »
But payday loan companies and payday loan companies say what might look like a predator are really just operators in a risky business protecting themselves from customers happy to take their money but sometimes careless to pay it back. .
The California Financial Service Providers Association, the industry group that opposed Kalra’s bill, argued that lowering rates would hurt their profit margins and cause them to cut back on lending, leading consumers in the hands of unregulated lenders and services. The association represents some of the largest payday lenders in the country, including Advance America.
Advance America operates more than 2,000 stores in the United States and since 2004 has spent more than $1 million lobbying in California alone. The company did not respond to requests for comment.
“Investors consider the type of lending our member businesses undertake to be high risk, resulting in a substantial cost to our members to borrow money which they end up lending to consumers,” the trade association wrote. . “In addition, our member companies are located in the communities they serve and have significant space and operating costs. Additionally, labor costs, the cost of underwriting and compliance, the cost of credit reports, and the cost of defaults all increase the price of delivering the product to the consumer.
In California, consumers can take out a payday loan of up to $300 – which is actually only worth $255 when you factor in the $45 fee – which in most cases must be repaid completely in two weeks. But a borrower who cannot make full payment frequently takes out another loan to continue covering other ongoing costs, and the cycle escalates. In 2016, 83% of the 11.5 million payday loans were taken out by a recurring borrower, a practice known as loan stacking.
The annual percentage rate of charge, a way to measure the cost of the loan in interest over one year, gives an idea of how much a borrower will end up paying if the loan remains unpaid for one year. So, at an annual percentage rate of 460%, someone who takes out $300 may end up paying back $1,380 that year, not to mention the fees that multiply on each additional loan.
So who uses payday loans?
Because they don’t require a credit score as a prerequisite, they cater to cash-strapped borrowers who can’t get to a regular bank. Payday lenders only need income and a checking account to make these loans.
The analysis of the state also find payday lender storefronts are concentrated in places where family poverty is high.
“A lot of families in California are suffering from income volatility and a lack of emergency savings. California has a very real problem because conventional payday loans really hurt people more than they help them,” said Bourke said.
Over 60% of Payday Storefronts are located in postal codes with greater family poverty rate than the rest of the state, according to the California Department of Business Oversight. And nearly half are where the poverty rate for African Americans and Latinos is higher than the statewide poverty rate for those groups. Most borrowers earn an average annual income between $10,000 and $40,000.
The state says that medium the interest rate for payday loan transactions was 377% last year, a slight increase from the previous year. Approved lenders reported collecting $436.4 million in fees, 70% of which came from borrowers who took out seven or more loans that year.
On average, Californians take out a $250 loan, but often unaffordable interest rates sometimes force them to pay fees to take out another loan and extend the terms.
There are other options if borrowers need quick cash beyond the $300 payday loan amount, but they come with different risks.
In 2013, the state established a small dollar loan program to regulate loans between $300 and $2,500. The state caps interest on such loans at between 20% and 30%, but any loan over $2,500 is the “real Wild West,” said Graciela Aponte-Diaz, California policy director at the Center for Responsible Lending, an organization nonprofit focused on consumer lending. .
“Loans between $2,500 and $5,000 have an interest rate of 100% (annual interest rate). It is detrimental for families who cannot repay, and 40% are in default,” she said.
The Center for Responsible Lending this year sponsored the Kalra bill, which unsuccessfully sought to cap interest rates at 36% for installment loans between $2,500 and $5,000. He died recently on the floor of the Assembly.
“It has a lot to do with the industry and how much money they put into the effort to kill it,” Aponte-Diaz added. “They hire all the best lobbying firms to kill our bills.”