California now has more payday lenders than McDonald’s. While some states have restricted their 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 cramped a few months ago – “I was strapped for cash and needed to pay rent” – she walked into a Cash 1 store in Sacramento and took out a payday loan. The annual interest rate: 460 percent.
This rate would shock a lot of people. Not Mendez, who once worked behind the counter at an outpost at credit giant Advance America. She had applied for short-term loans from all kinds of people: old people needing more money because their social security check wasn’t cutting it, people between jobs and waiting for a first one. paycheck, and people like her, who didn’t have enough savings to make it through to the end of the month.
Unlike Mendez, many desperate people don’t know what they’re getting into, often agreeing to aggressive collection practices, inflexible repayment options, and sky-high interest rates. “They just show things and go 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 a year take out a payday loan, amounting to $ 2.9 billion per year. Payday loans have grown into 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 Cal State study found that California now has more payday lenders than McDonald’s.
Yet, while some states ban payday loan showcases altogether or severely restrict their operations, California is one of 26 states that allow loans with annual percentage rates above 391% on loans that must be fully repaid. within two weeks. Otherwise, borrowers face collection calls, an overdraft on their accounts, or even a court order for default.
Given the possibility of cracking down on predatory lending, the California legislature has buried at least five bills intended to curb the practice. These would have capped interest rates on loans, extended repayment terms or offered payment plans to borrowers. Among them:
- AB 3010: Written in 2018 by MP Monique Limón, D-Goleta, it sought to prevent people from taking more than one payday loan at a time and proposed to create a database requiring approved lenders to record their loan transactions . Without the votes, Limón withdrew the bill.
- AB 2953: Also written by Limón in 2018, it aimed to prevent lenders from charging more than 36% on auto title loans, also known as pink coupon loans, but failed to gain enough votes to advance to the Senate.
- AB 2500: Written in 2018 by Assembly Member 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: Written by Sen. Alan Lowenthal, D-Long Beach, in 2011, the bill proposed to create a payday loan database, but it was also launching.
- SB 515: This 2014 bill from Senator Hannah-Beth Jackson, D-Santa Barbara, sought to extend the minimum term of a payday loan and require lenders to come up with payment plans, as well as develop a database and cap loans at four per year per borrower. He died in commission.
Limón said that this year, like in previous years, the billion dollar lending industry has gained ground. Both her bills met with strong opposition early on and she refused to make any changes that would have appeased the industry.
But this year’s effort was “historic” in that it was the first time that bills like this have come out of their original homes, she told CALmatters.
“We knew it was something that was going to push the boundaries, but we thought it was important to introduce it,” said Limón. “As long as there is a problem, I think California will discuss it.”
Among those who voted against Limón’s AB 3010 was MP Kevin Kiley, a Republican from Roseville. After questioning the idea of limiting each person to one personal loan, he said that building a database “seems like a big undertaking. There are privacy issues, apparently reliability issues, potential state liability. “
Other states have taken stronger action in recent years to curb predatory lending. New York bans payday loans through criminal usury laws, which prohibit loan interest 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 lower prices for consumers,” said Nick Bourke, director of consumer finance at Pew Charitable Trusts, which has researched 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 if it is structured to be staggered at affordable rates.
But payday and pink slip loan companies argue that what might sound like a predator are really just traders in a risky business protecting themselves from customers happy to take their money but sometimes neglecting to pay it back.
The California Financial Service Providers Association, the industry group that opposed Kalra’s bill, argued that a rate cut would hurt their profit margins and force them to slow lending, pushing consumers in the hands of lenders and unregulated 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 over $ 1 million lobbying in California alone. The company did not respond to requests for comment.
“Investors consider the type of loan our member companies make to be high risk, resulting in a substantial cost for our members to borrow money which they ultimately lend to consumers,” the trade association wrote. “In addition, our member companies are located in the communities they serve and have significant accommodation and operating costs. Additionally, labor costs, the cost of underwriting and compliance, the cost of credit reports, and the cost of defaults, all drive up the cost 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 if you factor in the $ 45 fee, which in most cases has to be paid off. fully in two weeks. But a borrower who can’t make the full payment frequently takes out another loan to continue to cover other ongoing costs, and the cycle intensifies. In 2016, 83% of the 11.5 million payday loans were taken out by a recurring borrower, a practice known as stacking loans.
The annual percentage rate, a way of measuring how much the loan will cost in interest over a year, gives an idea of how much a borrower will end up paying if the loan goes unpaid for a year. So at an annual percentage rate of 460 percent, someone who takes $ 300 can 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 for cash-strapped borrowers who can’t go to a regular bank. Payday lenders only need income and a checking account to make these loans.
The condition analysis too find the windows of payday lenders are concentrated in places of high family poverty.
“Many California families suffer 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, ”Bourke said.
More than 60 percent of convenience stores are located in postal codes with greater family poverty rates than the rest of the state, according to the California Department of Business Oversight. And nearly half are located where the poverty rate for African Americans and Latinos is higher than the statewide poverty rate for these groups. Most borrowers make an average annual income between $ 10,000 and $ 40,000.
The state says that mean The interest rate for payday loan transactions was 377% last year, a slight increase from the previous year. Approved lenders said they collected $ 436.4 million in fees, 70% of which was from borrowers who took out seven or more loans that year.
On average, Californians take out a loan of $ 250, but the 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 payday loan amount of $ 300, but they come with different risks.
In 2013, the State created a small loan program to regulate loans between $ 300 and $ 2,500. The state caps interest on these loans between 20 and 30 percent, but any loan over $ 2,500 is the “real Wild West,” said Graciela Aponte-Diaz, California policy director at the Center for Responsible Lending, a non-profit organization focused on consumer loans. .
“Loans between $ 2,500 and $ 5,000 have an annual interest rate of 100%. It’s detrimental to families who can’t repay, and 40 percent 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 recently died in the Assembly.
“It has a lot to do with the industry and how much money they are investing in efforts to kill it,” added Aponte-Diaz. “They hire all the best lobbying companies to kill our bills.”