California lawmakers consider legislation to restrict payday lending – The Mercury News
California has a long history of allowing payday loans and its triple-digit interest rates, which many states see as predatory. But the legislature this week will consider a bill to curb payday lending, which critics say push financially vulnerable people into a downward spiral of crushing debt.
Senate Bill 515 aims to reduce the multibillion-dollar storefront industry by capping the number of loans to four per year. But the powerful payroll lobby is expected to back down – and the bill falls short of more restrictive laws passed in a third of states.
“Payday loans create a cycle of repeated borrowing that ultimately worsens desperate borrowers,” said Paul Leonard, a former Clinton administration official who heads the west coast office of the Center for Responsible Lending. “This legislation would solve this problem first and foremost by ensuring that payday loans are used only as they are advertised – as true short-term loans for unforeseen financial emergencies.”
The bill, introduced by Democratic State Sens. Jim Beall of San Jose and Hannah-Beth Jackson of Santa Barbara, is supported by consumer advocates, civil rights activists, labor leaders, faith groups and the La Raza National Council.
The bill would track the number of loans made to each client in a state database. It would also increase the time clients have to repay their 30-day loans for every $ 100 loaned. They are now generally due on pay day after two weeks.
In addition, lenders should take a closer look at the financial situation of applicants, ensuring that a borrower’s debts do not exceed half of their gross monthly income.
However, many details of the bill remain in motion as negotiations intensify ahead of Wednesday’s hearing before the Senate Committee on Banking and Financial Institutions. It appears that the measure will be changed to allow six loans per year, not four, and that the loan repayment period will be reduced to 30 days per loan, not 30 days per $ 100 loaned. The additional financial review could also be dropped, according to senators who vote on the bill next week.
Payday lenders say the bill would hurt, not help, poorer Californians. They insist their product is needed by those who are not eligible for bank loans and credit cards – especially during crises, such as when cash-strapped people have their power cut or their car fails.
“Consumers will always need short-term credit, and they will find it elsewhere,” said Greg Larsen, spokesperson for the group representing 2,000 California payday lenders and check-cashing outlets. “One place they can very well turn is the unlicensed and unregulated Internet, beyond the reach of California and federal law – and consumers have no protection in that situation.”
According to the state’s most recent data, 1.6 million Californians took out 12 million loans in 2011, with amounts increasing over the previous four years from $ 2.6 billion to $ 3.1 billion. .
Payday loans provide quick and easy cash. Applicants simply present proof of income. They then post-date a check or authorize electronic access to their bank account in order to repay the loans within two weeks.
But the price is high. Lenders charge a fee of 15%, equivalent to $ 45 on a loan of up to $ 300. The effective annual interest rate of 460% leaves many borrowers to take additional loans to pay off the first ones.
Senator Jackson said low-income families “desperate to get by” are particularly sensitive to this debt trap, motivating her to ask for the four loan limit. “That’s what these companies make their money on – regular borrowers,” Jackson said. “And at these interest rates, almost everyone is a recurring borrower.”
In 2009, Washington state adopted annual limits of eight payday loans, which resulted in a 75% reduction in loans in two years, according to state data; this decision saved consumers $ 136 million in fees.
Nationally, 17 states and the U.S. military have gone further, essentially ending payday loans by capping interest rates at 36%.
In contrast, California lawmakers receiving substantial campaign contributions from the industry summarily rejected bills to cap interest rates. Instead, they have pushed in recent years to expand payday loans.
Four of the nine members of the Senate Banking Committee – including its chairman, Senator Lou Correa, D-Santa Ana – were among the top 10 recipients of donations from payday lenders, receiving a total of $ 70,400 from 2008 to 2012, according to state documents.
While previous bills to limit payday loans died quickly, a bill to increase the maximum loan amount from $ 300 to $ 500 was submitted to the Assembly in 2011. But it is ultimately. died in the Senate.
“Unfortunately, the industry is so powerful in this building that last year those who would like to see these loans better vetted played the defense,” Jackson said. “So at this point we’re reasonable and realistic – limiting them to four times a year allows people in emergency situations to access these loans, but that removes them as a normal fallback that puts people in terribly dangerous financial situations. “
Beall said he recognizes payday lenders have influence in Sacramento, but he hopes to convince his colleagues that more regulation is needed for the bill to leave the banking committee and reach the Senate floor. “We have to appeal to their sense of civic duty,” he added.
Ellen Orcutt, who works for a nonprofit in San Jose, said the loan limits could have helped her. Orcutt relied on payday loans for 11 years, but now bemoans the thousands of hard-earned dollars she spent on fees.
“Any bill they could do that might actually help people not get into an endless cycle will be good for them,” she said. “It becomes one more form of addiction. “
Sometimes, Orcutt admits, she thinks to herself, “If only I could get the money back.
But, she added, “I was able to do without it and say no.”
Contact Karen de Sá at 408-920-5781.