Note to Legislators: Don’t Lend an Ear to Payday Lenders

One of the favorite arguments against government action is the pious assertion, “If the Legislature passes this and the governor signs it, they will put us out of business.”

It’s seldom true. In California, business can usually be pushed plenty before it will quit so big a market. But the bluff is occasionally effective.

“This is going to drive us out of business” is the argument being used as so-called payday lenders seek to block a move by Senate President Pro Tem John Burton (D-San Francisco) to reduce the fees they are allowed to charge borrowers.

In interviews this past week, both Burton and Assembly Speaker Bob Hertzberg (D-Sherman Oaks) expressed concern about the high rates levied by payday lenders. The lawmakers’ stand may presage a more serious attempt in the Legislature to put controls on the predatory dealing with consumers that this kind of lending represents.

According to Burton’s proposal, added to a bill by state Sen. Don Perata (D-Alameda) that was narrowly approved Wednesday in the Senate, the fee allowed would be reduced from $17.65 to $12 for every $100 borrowed against a future paycheck. The interest rate on a one-week loan would thus go down from 911% to 625% and on a two-week one from 456% to 313%.

This still seems a lot, but Sam Choate of one of the biggest payday lenders, Check Into Cash, with 99 stores in California, told me last week that if Burton’s provision becomes law, “I’d close my doors.”

“Come on,” I replied with a laugh. Choate kept a straight face, but later he backed down just slightly. “Some of my stores are marginal,” he said. “If the fee is only $12, I will close those.”

Choate added that a report on the payday business in his home state of Tennessee showed that the lenders were “netting only 9% after taxes.”

Burton wasn’t impressed. “That’s much more than a supermarket chain makes,” he said.

Meanwhile, I learned that Wells Fargo bank has its own payday lending system for direct-deposit customers, and it charges just $5 for a $100 advance.

Of course, Wells Fargo knows that through direct deposits, the money will be in its accounts on time. So it risks less.

But the regular payday lenders allay their risk by rolling over loans when people don’t have the money to pay them off on time, and they charge the original fee again for each renewal, a scheme that spirals many consumers into further debt.

Payday lending is just 3 years old in California. Until then, we got along happily without it. Since 1997, it has burgeoned into a million transactions a month.

At the same time as Burton and Perata have been pushing corrective action through the Senate, a bill has advanced in the Assembly that would make matters worse, increasing the maximum allowable loan from $300 to $400.

The author of this bill, Herb Wesson (D-Culver City), originally declared, “I’m not carrying industry water on this issue.”

Now, however, it turns out he is.

The Wesson bill would allow credit counselors to move in at a consumer’s request and propose a repayment plan, and it would limit a fourth renewal loan to 50% of the original total. But by the time this fourth renewal took place, the fee for a $100 loan would have totaled more than $60.

Assembly Speaker Hertzberg criticizes the whole payday concept. “I generally don’t like these loans,” he said. “Their rates just viscerally bother me, always ripping off the little guy.”

Hertzberg pledged to talk to Wesson and Perata, and he implied that he would join Burton in trying to work out some reform this year.

I asked Burton whether this would be a matter that comes down to the last night of the session, when questionable deals are often made.

“I don’t think this will happen on the last night,” he said, a hint that the public will know what happens.

The head of the state’s payday lobby, James W. Ball of Fast Cash Inc., last week joined Choate in saying that limiting the fee to $12 “would eliminate” the payday advance industry and thus “remove a valuable financial tool available for California consumers.”

Both Ball and Choate contend that payday lending has become more necessary as banks’ bad-check charges and credit-card late fees have skyrocketed. Consumers, they say, should have payday loans as an option.

The bank fees certainly have gone up. I asked Bank of America and Wells Fargo to send me their bad-check fee schedules last week and was startled when they did.

Bank of America starts such fees at $10 for each item, up to a daily maximum charge of $40, if a customer has had insufficient funds on three or fewer days in the preceding 12 months.

But the fees rise for those who have had insufficient funds on seven or more days during the preceding year to $27 for each item, up to a daily maximum charge of $108.

Wells Fargo starts its charges with $15 per bad check, and they rise, for those who have had insufficient funds at least 10 times in the preceding year, to $27 per bad check. It has no maximum daily charge.

This fortifies what I feel is a growing bad tradition in this country: sock it especially hard to the financially distressed. They pay more than anyone else.

Don’t get me wrong, I think everyone ought to keep their accounts in order. But payday lending compounds the problems of those who slip into not doing so, and sends them further into debt.

As to Choate and Ball’s insistence that such lending is a worthwhile option, a representative of the California Bankers Assn. challenged him on this point.

“If we’re saying to people who can’t manage a checking account or have maxed out on their credit cards that we’re going to provide them yet another way to avoid a day of judgment, I don’t think we’re doing those folks a favor,” said Gregory Wilhelm, a senior vice president of the association.

This recognizes, as the legislative leaders are beginning to, that payday lending is not the solution. At the very least, its rates should be restricted this year.

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Ken Reich can be contacted with your accounts of true consumer adventure at (213) 237-7060 or by e-mail at ken.reich@latimes.com.