Political Donations Not Big Factor in Payday Loan Issue
It would be satisfying in a way to find that massive campaign contributions from the “payday advance” lenders were behind California lawmakers’ failure to curtail the industry’s ability to charge consumers interest rates as high as 911%.
Satisfying, because, I suspect, many of us secretly delight in any proof our political leaders can be a bunch of scoundrels.
But in this case, the contributions thus far may not be that great. And before the Aug. 31 close of its session, the Legislature just might act.
That’s what the Senate president pro tem, John Burton (D-San Francisco), told me on Tuesday.
After checking into the payday matter, Burton declared: “I’ve got 88 things on my plate, but I’m hoping we’ll move something out of the Senate this year.”
The way payday lending works is that a customer goes into one of these storefronts and writes a check, often $117.65, which can be cashed by the lender when the borrower’s paycheck is issued a week or two hence. The borrower receives $100 in cash. The $17.65 is a loan fee.
When the due date comes, if the person doesn’t have sufficient funds in his bank account to fund his check, he can renew the loan for another period, while paying another fee. Pretty soon, the fees can exceed the principal, and since the person may be short again and again, maybe he goes to other places and does the same thing. The debt spirals.
Burton said the legislation he is contemplating could take the form of a drop in the permissible fees, and thus the interest rate, or a restriction on the number of times a loan can be rolled over. Certainly, he said, it would include a provision limiting the loan fees to a percentage of the amount borrowed, rather than a percentage of the whole amount paid.
That last change, in itself, would lower first-time fees from $17.65 per each $100 borrowed to $15--not much maybe, but a gesture.
Even James W. Ball of Fast Cash Inc., president of the payday lenders lobbying association, in an interview last week agreed that the first-time fee should come down. He said that then-Sen. Charles Calderon (D-Whittier), who authored the legislation legalizing payday advances in California in 1997, had, among other errors, ratcheted up the first-time fee from the $15 intended by the industry to $17.65.
My inquiries indicated campaign contributions from the payday lenders do not amount to very much. In 1999, the latest period for which reports are available, Assembly Speaker Antonio R. Villaraigosa (D-Los Angeles) got the most, $17,000, and Burton got $7,000 (as did Gov. Gray Davis).
These figures--though I might be missing some lawyers and lobbyists giving on the industry’s behalf--seem an insignificant fraction of the amounts the legislative leaders raised last year for their 2000 election drives.
Villaraigosa and his soon-to-be successor as speaker, Bob Hertzberg (D-Sherman Oaks), who got only $1,000, raised a total of $3.6 million for the Assembly Democratic campaigns, while Burton raised $4.2 million for the state Senate campaigns.
A scattering of payday contributions went to other lawmakers.
Dan Morain of The Times’ Sacramento staff cautions me that new legislation in the payday area could easily become a “juice” bill--in other words, something used to generate campaign contributions from an industry worried about what legislators might do to them and willing to give to prevent it.
When Ball spoke last week, he said industry negotiations with Sen. Don Perata, the Alameda Democrat who dropped earlier payday legislation under lobbying pressure, were going nowhere and the industry’s lobbyists were now talking to Assemblyman Herb Wesson (D-Culver City) about a bill that would slightly limit rollovers and possibly increase borrowing limits from $300 to $500.
Wesson, however, declared, “I want to make it crystal clear, I’m not carrying industry water on this issue.” He said that while he thinks the payday advance business should continue, because some people need emergency cash to avoid passing bad checks, he also feels the rollovers must be restricted so as to “break the cycle of debt” into which too many of the customers fall, renewing their advances for ever-escalating fees.
Restricting rollovers is the approach Perata abandoned. Ball told me that the rollovers “are probably the most pernicious aspect of this business,” but he has his own limited definition of what constitutes a rollover. The industry employs eight lobbyists in Sacramento, and they strongly resisted the Perata bill.
One argument the California payday industry makes is that it needs to charge high rates because it is making risky loans and suffers bad debts of 20% or 25% of its revenue.
In a filing with the Securities and Exchange Commission two years ago, one of the most experienced payday lenders, Sam Choate of the Tennessee-based firm of Check into Cash, reported a bad debt figure of only 3% to 5.3%.
But, reached this week, Choate said that, as he has expanded his business to riskier customers, his company’s bad debts have climbed to “between 5% and 10%" of revenue, and the California lenders’ claims of 20% to 25% result from even riskier loans.
Such a discussion implies the payday industry is dealing with a more down-and-out clientele than the middle-class citizens it claims compose most of its business.
I hope progress is made in the legislation, and if a powerful lawmaker like Burton gets behind it, it certainly will be.
But the heart of this issue has to be the interest rates. California should not allow any lender to charge hundreds of percent under any circumstances. That is, indeed, loan-sharking.
Ken Reich can be contacted with your accounts of true consumer adventure at (213) 237-7060 or by e-mail at firstname.lastname@example.org.