When Mary Mendoza, a 26-year-old phone bank employee, was short on cash and needed to pay rent a few months ago, she strolled into Cash Ipass.net – Bad Credit platform 1 storefront located in Sacramento and applied for a payday loan. The annual rate of interest is 460 percent.
Many individuals would be surprised by that figure. Mendoza, who used to work at the counter at a branch of the lending behemoth Advance America, isn’t one of them.
She’d received applications for short-term loans from a variety of people. These included seniors who needed more cash because their Social Security check wasn’t enough, people who were between jobs and waiting for their first paycheck, and people like herself who didn’t have enough savings to get through the month.
Many desperate people, unlike Mendoza, have no idea what they’re consenting to, and end up agreeing to harsh collection techniques, rigid repayment options, and expensive interest.
“They just point at things and stroll through it quickly,” she explained.
“A lot of people only look at the money and ignore the interest rates.”
In California, one out of every 20 persons takes out a payday loan each year, totaling $2.9 billion. Payday lending has become a multibillion-dollar industry, powered by three-digit interest rates, high transaction fees, and the hundreds of locations around the state.
Even though some jurisdictions prohibit or severely regulate payday lending businesses, California is one of 26 states that allows loans with annual percentage rates of more than 391% on loans that must be fully returned within two weeks. Borrowers who default encounter debt collectors, overdraft fees, and potentially a court order if they do not pay.
When it came time to address unfair lending, the California Legislature buried at least five proposals that would have done so. These would have capped loan interest rates, extended loan repayment terms, or provided debtors with installment options.
Among them are the following:
Introduced by Assemblywoman Monique Limón, D-Goleta, in 2018, it intended to prohibit consumers from seeking more than one personal loan at a time and advocated the creation of a database that would require regulated lenders to record their loan activities.
Limón withdrew the bill due to a lack of votes.
Introduced by Limón in 2018, this bill sought to prohibit financiers from charging over 36% interest on auto-title loans, often known as pink-slip loans, but it failed to gain enough support in the Senate to pass.
Introduced by Assemblyman Ash Kalra, D-San Jose, in 2018, the bill aimed to cap interest rates on installment loans ranging from $2,500 to $5,000 at 36 percent. It died on the floor of the House of Representatives.
Introduced in 2011 by Sen. Alan Lowenthal, D-Long Beach, the bill suggested the creation of a payday loan database, but it died in committee.
Introduced by Sen. Hannah-Beth Jackson, D-Santa Barbara, in 2014, this bill attempted to lengthen the minimum term of a payday loan. It also aimed at forcing lenders to offer installment plans, as well as create a database and limit loans to four per borrower per year. It was voted down in committee.
According to Limón, the billion-dollar lending business has had its way this year, as it has in past years. Early on, both of her legislation was met with fierce opposition, and she refused to make any adjustments that would have appeased the business.
However, she told CALmatters that this year’s attempt was “historic” because it was the first time bills of this type had passed out of their original houses.
“We knew this was going to push the envelope,” Limón added, “but we felt it was vital to introduce this. I believe California will discuss it as long as there is a problem.”
Assemblyman Kevin Kiley, a Roseville Republican, was one of those who voted against Limón’s AB 3010. He noted that creating a database “sounds like quite an undertaking” after criticizing the idea to limit each individual to one payday loan. There are privacy problems, apparent reliability flaws, and the state’s possible culpability.”
Strong government measures
In recent years, some governments have taken stronger measures to combat predatory lending. Payday lending is illegal in New York due to criminal usury laws that restrict loans with interest rates of 25% or above. The state constitution of Arkansas sets a maximum of 17 percent.
The majority of other states that have a cap limit lend to 36%.
“(California) needs to innovate to offer cheaper rates to consumers,” said Nick Bourke, director of consumer finance at Pew Charitable Trusts, which has investigated predatory lending across the country.
“When the problem reappears two weeks later, traditional payday loans are ineffective. If credit is to be a part of the answer, it must be organized in installments with reasonable interest rates.”
Payday and pink-slip lenders, on the other hand, claim that what appears to be predatory behavior is operators in a dangerous company defending themselves from consumers who are glad to accept their money but often forget to pay it back.
How will decreased rates affect lenders?
The California Financial Service Providers Association, an industry group opposed to Kalra’s bill, stated that decreasing rates would affect their profit margins and cause them to reduce loan volume, driving consumers to unregulated lenders and services. The group represents some of the country’s top payday lenders, including Advance America.
Advance America has over 2,000 outlets across the United States and has spent over $1 million lobbying in California alone since 2004. Requests for comment were not returned by the company.
“Investors view the type of lending our member businesses do as high-risk, resulting in a significant cost for our members to borrow money that they then lend to customers,” the trade association said. “In addition, our member companies are located in the areas they serve, with a considerable premise and operating costs. Additionally, personnel costs, underwriting and compliance costs, credit reporting costs, and default charges all contribute to the cost of delivering the product to the consumer.”
Consumers in California can borrow up to $300 in a payday loan, which is only worth $255 after a $45 fee, and must be repaid in full within two weeks. A borrower who can’t make the whole payment, on the other hand, frequently takes out another loan to cover other ongoing expenses, and the cycle continues. In 2016, a repeat borrower took out 83 percent of the 11.5 million payday loans, a practice known as loan stacking.
The annual percentage rate, which is a method of calculating how much a loan will cost in interest over a year, gives an estimate of how much a borrower will pay if the loan is left unpaid for a year. So, at a 460 percent annual percentage rate, someone borrowing $300 may end up repaying $1,380 in a year, not to mention costs that compound with each new loan.
So, who is it that takes out payday loans?
They appeal to cash-strapped consumers who can’t go to a traditional bank because they don’t demand a credit score. Payday lenders merely require a source of income and a bank account to make these loans. Payday lender stores are similarly concentrated in areas with high family poverty, according to a state analysis.
“In California, many families are experiencing income unpredictability and a lack of emergency reserves. California has a serious problem because traditional payday loans harm people more than they help them,” Bourke said.
According to the California Department of Business Oversight, more than 60% of payday stores are situated in zip areas with higher family poverty rates than the rest of the state.
And nearly half of them are in areas where the poverty rate for African-Americans and Latinos is higher than the statewide figure. The majority of debtors earn between $10,000 and $40,000 each year on average.
According to the state, the average interest rate for payday loans was 377 percent last year, a little increase over the previous year. Fees totaled $436.4 million, with 70% of it coming from borrowers who took out seven or more loans during the year.
Californians take out a $250 loan on average, but the often-unaffordable interest rates force them to pay a fee to roll the one into another and lengthen the terms.
If borrowers require more money than a $300 payday loan, they have additional options, but they come with greater dangers.
The state established a small-dollar lending scheme in 2013 to control loans of $300 to $2,500.
Interest rates on those loans are capped between 20% and 30% in California, but anything over $2,500 is the “true Wild, Wild West,” according to Graciela Aponte-Diaz, California policy director at the Center for Responsible Lending, a consumer lending charity.
“Loans ranging from $2,500 to $5,000 have a 100 percent approval rate” (annual interest rate).
It’s bad for families that can’t afford to pay it back, and 40% of the default,” she said.
This year, the Center for Responsible Lending sponsored the Kalra bill, which attempted but failed to cap interest rates on installment loans between $2,500 and $5,000 at 36 percent.
It was recently defeated on the floor of the Assembly.
“A lot of it has to do with the market and how much money they’re putting into trying to eradicate it,” Aponte-Diaz remarked. “They engage the best lobbying companies in the country to destroy our bills.”