Raising cap on payday loans would put borrowers into deeper hole

Allies of payday lenders are urging the state Legislature again to raise the cap on the high-interest loans, enabling desperate borrowers to dig themselves into even deeper holes. It’s a bad idea, and lawmakers shouldn’t consider raising the current limit on lending without more meaningful consumer protections than the bill’s sponsor has proposed.

In a payday loan, a customer borrows up to $300, but receives 15% less than the face value of the loan — that’s the lender’s fee. The borrower agrees to pay the lender the full face value within two weeks, after his or her next payday. The problem with these loans, beyond their extraordinarily high interest rate (more than 400% in annual terms), is that the short repayment period doesn’t allow borrowers to spread the cost over time. As a result, some borrowers find themselves taking out loan after loan after loan, caught in a debt trap they can’t escape.

AB 1158, by Assemblyman Charles Calderon (D-Whittier), would raise the maximum to $500. Supporters argue that the state’s cap is outdated and that borrowers needing more cash are flocking to unregulated lenders online. But the Pew State Small-Dollar Loans Research Project found that state restrictions on payday lenders don’t cause many would-be borrowers to look elsewhere. And without real protections against repeat borrowing — including a limit of six payday loans per year, as federal regulators have recommended, and a centralized record of loans issued to help enforce the limit — raising the state’s cap would only sink people into deeper trouble.

A broad coalition of consumer and public interest groups, including AARP’s California branch, Consumers Union and the Western Center on Law and Poverty, has called on Calderon to drop the bill unless he adds a six-loan limit, a longer repayment period and a mandate that lenders review a would-be borrower’s ability to repay before issuing a loan. The bill’s supporters have countered with a number of smaller concessions, such as giving customers who borrow more than $300 up to 24 days to repay. Those steps, however, don’t address the central problem with payday loans, which is repeat borrowing.

While Calderon’s bill has been idling in the state Senate, both houses have been advancing legislation to crack down on abusive lending practices by so-called Buy Here Pay Here auto dealerships. It makes little sense for lawmakers to clean up problems in one segment of the lending world only to invite more in another. The right approach to both is to make sure that the most vulnerable borrowers aren’t victimized by systems that, either by design or by abusive implementation, turn predatory.