Stop Legal Loan Sharks
California now has more payday lenders--legalized loan sharks charging exorbitant interest rates on small, short-term loans--than it does McDonald’s and Burger Kings.
The payday loan industry, whose national profits are expected to exceed $2 billion this year, predictably began mushrooming in California in 1996, when the Legislature exempted it from the interest rate caps that it imposes on banks and other lenders.
The industry won its exemption by arguing that it was in the business of check cashing, not lending, so it should not have to abide by the state’s small-loan laws.
Today, however, the industry’s own studies of the more than 2,000 payday stores in the state prove this assertion false. The average payday customer, far from simply cashing checks, takes out 11 payday loans a year.
In a typical transaction, a customer seeking “emergency cash” writes a check to the payday lender for $115. A cashier, working behind a bullet-resistant window, hands the customer $100 in cash with the agreement that the check won’t be cashed until the customer’s next payday. When that payday comes, this typical customer is strapped once again and takes out a new loan to pay the interest on the first, beginning a spiral of debt.
Lawmakers cannot do much about the bad circumstances and bad judgment that get people stuck on treadmills of debt. However, they can and should rally to the support of SB 898, a bill by Sen. Don Perata (D-Alameda) that would slow the treadmill by placing modest caps on the interest rates that payday lenders can charge.
Perata’s measure allows payday lenders to charge up to $37.88 in interest on a $100, three-month loan. That’s far more generous than the $6.50 cap that Perata proposed in a 1999 bill and substantially more than the $10.28 cap that applies to small lenders on short-term loans.
The Senate is expected to approve SB 898 later this month, but payday industry lobbyists are hoping to defeat the bill when it then comes up for a vote in the Assembly.
Unfortunately, they have some reason for optimism.
Last year, Assembly Speaker Bob Hertzberg (D-Sherman Oaks) gutted an earlier version of Perata’s bill and slyly replaced it with industry-friendly wording crafted by Assemblyman Herb Wesson (D-Culver City).
Wesson received $44,030 from the payday loan industry in 2000--its largest campaign contribution to any single lawmaker that year.
Payday lenders say they are merely meeting the needs of the working poor whom traditional banks abandoned in the late 1990s. At that time, banks sharply raised transaction and minimum balance fees and closed offices in poor urban areas where the demand for small-balance accounts was highest. However, the alternative that payday lenders offer is dependency, not financial freedom.
While Sacramento cannot prevent people from mucking up their finances, it can stop encouraging the practice by placing restrictions on loan sharks. It’s time to pass SB 898.
