Payday lender rate cap fizzles

Times Staff Writers

The California Assembly's Banking and Finance Committee on Monday significantly weakened a bill that would have slashed interest rates charged on payday loans.

Assemblyman Dave Jones (D-Sacramento) said his bill to cap interest at 36% a year would afford all California borrowers the same protections extended last year to members of the military. In response to complaints of predatory lending, Congress passed a bill that imposed that limit on loans made to Americans on active duty and their families.

But industry executives and lobbyists said Monday that a 36% rate -- a fraction of the 459% now allowed by state law -- on loans to all Californians would put them out of business.

Committee members apparently agreed, with some saying that the short-term, unsecured loans fill a legitimate need for working people who live from paycheck to paycheck and sometimes need cash in a hurry.

"I'm not interested in a prohibition," said Assemblywoman Lois Wolk (D-Davis). "At the moment, there is no alternative to the products that meet the same needs that payday lending provides."

The committee wound up approving vague language suggesting that a future version of the bill would contain some consumer disclosure provisions recommended by the California Department of Corporations.

"Mr. Chairman, the bill is getting gutted?" Assemblyman Sandre Swanson (D-Alameda) asked committee chairman, Assemblyman Pedro Nava (D-Santa Barbara).

"We're making it better," Nava replied.

Nationwide, Americans pay about $5 billion a year to borrow more than $40 billion from payday lenders. More than 1.4 million people borrowed $2.5 billion from California payday lenders in 2006, the latest year for which figures are available, according to a Department of Corporations report.

California's 2,400 licensed branches made more than 10 million payday loans, the report noted, placing the average amount at $254.

With a valid ID, proof of income and a personal checking account, California customers can borrow up to $300, which translates to $255 after a $45 fee. That fee equates to 17.6% interest for the two-week period, or 459% on an annual basis.

Post-dated checks are held until a borrower's payday, usually every two weeks, and are passed on to the bank if the loans are not paid off by then.

The Department of Corporations report said that the demand for payday loans in California was high, with borrowers averaging seven loans each in 2006.

Advocacy groups contend that such borrowing frequently becomes a "debt trap" for many consumers, who may take out new loans to pay off existing ones, racking up extensive fees without reducing their principal amounts.

Industry backers say that overhead and other costs justify the hefty fees

At current rates, payday lenders earn $17.65 on each $100 lent for 16 days, Mark Thomson, a spokesman for California Financial Service Providers, an industry trade group, said in an interview.

Under a 36% cap, he said, that figure would drop to $1.60.

"No business can survive with that kind of reduction in gross revenue," Thomson said.

After Oregon legislators capped interest rates at 36% last July, more than two-thirds of the 320 payday outlets there closed shop within two months, state officials said. Thomson said Monday that about 80% of the storefront outlets eventually disappeared.

The federal measure, which took effect Oct. 1, all but outlawed payday loans to members of the military and their families.

Confronted with nearly unanimous opposition from committee members Monday, Jones at first offered to strike the 36% cap proposal in hopes of keeping his bill alive while he negotiated with the payday lending industry.

But even that mild compromise didn't appeal to committee Chairman Nava.

The watered-down bill now moves to the Assembly Appropriations Committee. In any version, it likely will continue to face stiff opposition from the politically potent payday lending industry.

It has flourished, in large part, by persuading state legislators across the nation to exempt payday lenders from small-loan laws and interest caps that would hamstring their business.

Operating in all but about a dozen states, payday lenders aren't shy about using their clout -- and their money -- to get their way.

Some of the major California players -- Advance America, Check Into Cash Inc., Check 'n Go and the California Financial Services Providers Political Action Committee -- contributed $109,850 to various political candidates last year, records show.

Jones, who co-sponsored the bill with Assembly Speaker-elect Karen Bass (D-Los Angeles), said he was disappointed that Nava and other committee members were "predisposed to kill the bill." But he said he planned to move it forward, anyway.

"The good news is that we kept the bill alive," Jones said.


Lifsher reported from Sacramento and Christensen from Los Angeles.

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