Californian Legislation Aimed to Protect Payday Loan Borrowers Shut Down
Inside Subprime: Aug 14, 2018
By Ben Moore
California Legislation recently buried several bills that were intended to curb the predatory practices of payday lenders. Among them were bills seeking to restrict borrowers from taking out more than one payday loan at a time (AB 3010), a bill aimed to cap auto-title payday loans at 36 percent (AB 2953), with another attempting to cap installment loan APRs at 36 percent (AB 2500).
While previous years have proven it difficult to push this kind of legislation forward, this year is considered historic as it was the first time bills passed out of their originating houses. The state is one of many states without interest rate caps, with APRs reaching higher than 390 percent with the expectation that the loan must be paid back in full in two weeks. Borrowers who fail to pay back within two weeks can expect harassing collection calls, overdraft fees in their checking accounts, and even possibly a court order if the loan goes into default status.
About one in twenty people a year take out a payday loan in the state of California. This equates to 2 million people creating a $2.9 billion business within the state. California has noticeably started to fall behind when it comes to protecting payday loan borrowers.
The state of New York now prohibits payday lending, with loans in the state not allowed to charge more than 25 percent annual interest. Arkansas has also implemented a cap at 17 percent APR, with other states capping payday lenders at 36 percent.
Nick Bourke, a director of consumer finance at Pew Charitable Trusts, says California needs to “innovate in order to bring in lower prices for consumers” and structure the pay installments with much more affordable rates. Bourke sees payday loans as “harming” more than helping, with the industry preying on families “suffering from income volatility and [a] lack of emergency savings.” To his point, over 60 percent of all payday loan stores are located within zip codes with substantially higher poverty rates when compared to the rest of California. Most payday loan customers make an annual income of less than $40,000 a year. Almost half of payday loan stores are located in neighborhoods where the poverty rates for African-Americans and Latinos exceeds California’s poverty rate for those groups.
However, payday lenders disagree with the assumption that the practice is predatory. Instead, they see the high interest rates as the only way to protect themselves from customers who might be excited about taking their money upfront, but who could potentially refuse to pay it back. The California Financial Service Providers Association believes that lowering interest rates would inevitably ruin their profit margins. One particular payday lending firm has spent more than $1 million lobbying the state of California. Without state legislature moving forward to protect customers, more and more families across the state will continue to use risky payday loans to supplement their low income.