Lawmakers Push 2 Bills to Regulate ‘Payday Loan’ Industry

Supporters call it a last resort that rescues working people in sudden need of cash. Opponents call it a legal loan-sharking operation that entangles poor people in an endless web of debt.

It is the “payday loan” industry, a fast-growing offshoot of the check-cashing business that is exempt from usury laws and provides advance money to its customers at annualized interest rates as high as 911%.

And for the second consecutive year, the industry, legalized in California four years ago to serve needy customers underserved by traditional lending institutions, is the target of legislative efforts in Sacramento.

This time, both sides agree, change is almost certain.

Industry leaders estimate that there are 3,000 payday loan outfits in the state, serving more than 1 million customers a month, a sign that the service has struck a chord with consumers.

But consumer groups contend that the businesses are virtually unregulated predators who are spawning complaints and lawsuits throughout California, as they have in the 31 other states that allow them.

“We want to see access to credit for low- and moderate-income people,” said Shelley Curran of Consumers Union, the publisher of Consumer Reports. “But we don’t want to see an industry that creates a perpetual debt treadmill. No one should have to pay these kinds of fees.”

After backing down last year under strong lobbying pressure, state Sen. Don Perata (D-Alameda) is once again pushing consumer-backed legislation to clamp down on “deferred deposit transactions,” as the industry describes its service.

Meanwhile in the lower house, Assemblyman Herb Wesson (D-Culver City) is pursuing a less restrictive bill supported by leading payday loan providers including Los Angeles-based Nix Check Cashing, which recently sold a 40% share of its business to Union Bank of California.

Perata’s bill would require the businesses to obtain licenses and file reports with the state Department of Financial Institutions. It would also prevent them from loaning out more than 25% of a person’s paycheck, and force them to establish partial-payment plans enabling repeat borrowers to overcome their loans.

One of the most controversial aspects of the payday business is that it allows customers who cannot pay off their loans to roll them over repeatedly, building mountains of interest “fees” that often outgrow the amount they borrowed in the first place. At a hearing convened in Washington last year by Sen. Joseph I. Lieberman (D-Conn.), a Navy commander called the system a “financial death spiral” specifically targeting the nation’s military bases, and told of one sailor who was paying $2,983 in checks to cover $2,550 in cash advances.

Payday advance companies deny that rollovers are common. But Indiana, one of the few states to collect such information, found that 77% of payday loans were carry-overs of existing loans, and Illinois found that the average customer had taken out 13 loan contracts.

Perata’s bill (SB 1501) is backed by consumer groups and the American Assn. of Retired Persons, but opposed by the payday loan industry, which says its restrictions will drive it out of business.

“I am going to close a lot of stores if Perata’s bill gets passed,” said J. Samuel Choate of Check Into Cash, a Tennesee-based company that owns 100 payday loan outlets in California. “There’s lots of little time bombs in that bill.”

Wesson’s more industry-friendly bill (AB 1973) would create a state telephone hotline for customer complaints and require businesses to offer financial counseling to anyone who rolled over a loan three times. It would increase the amount one could legally borrow from a payday loan outlet from $300 to $400. It cleared the Assembly’s Consumer Protection Committee on Tuesday.