A bill before the California Legislature would restrict the number of payday loans to any one borrower — an attempt to break the "debt cycle" that ensnares some of the state's poorest residents.
Senate Bill 515 would bar the high-cost, short-term lenders from making more than six loans a year to any borrower. The bill, set to go before the Senate Banking and Financial Services Committee on Wednesday, also extends the minimum term of a payday loan to 30 days from 15.
"We need to recognize that these low-income families are desperate to get by, and they are particularly vulnerable to this type of debt trap," said state Sen. Hannah-Beth Jackson (D-Santa Barbara), who wrote the legislation.
The payday loan industry argues that the legislation attempts to severely limit or kill an already highly regulated industry that provides a vital service for strapped Californians.
"The best people to decide about their finances are the customers themselves," said Greg Larsen, a spokesman for the California Financial Service Providers. "This bill would put restrictions on the product that will raise its costs and could even risk making the product no longer available for customers in California."
The bill would also create a database of borrowers to track the loans and allow borrowers who can't repay their loans after six loans to enter a repayment plan.
The Center for Responsible Lending, along with the California Reinvestment Coalition and the National Council of La Raza, are backing the bill. They argue that borrowers are often unable to repay the high-cost payday loans on time. So they must continually take out fresh loans, racking up more fees. Adding new restrictions on the number of loans made to borrowers each year would ensure these consumers are not exploited, advocates say.
The new effort comes after consumer advocates and the industry reached a stalemate in California over past payday lending legislation attempts. Advocates have gotten nowhere in their efforts to lower the cap on loan fees — currently the equivalent of more than 400% interest. The industry, meanwhile, has been unable to increase the cap on loan amounts beyond the state's $300 limit, including the fee of up to $45.
"It's a new approach for us. We are trying to signal a willingness to engage in some kind of meaningful compromise," said Paul Leonard, California director for the Center for Responsible Lending. "We think it's a strategy that could actually work."
Representatives for payday lenders said the legislation is anything but a compromise. Such a law, they say, could put them out of business.
In a letter to State. Sen. Lou Correa (D-Santa Ana), chairman of the Senate Banking and Financial Institutions Committee, industry representatives argued that creating a database of loans would violate the privacy rights of customers. These representatives also argued against underwriting requirements in the bill that have since been scrapped.
The industry argues that the bill would also serve to push people to get payday loans online — where many companies that offer the loans are not licensed in California, making it difficult for local authorities to crack down on legal violations.
Unlicensed payday lenders are increasingly targeting consumers on the Internet. On Monday, the California Department of Corporations issued its sixth enforcement action this year, against Northway Financial Corp. and Northway Broker Ltd., which were doing business as PixyCash.com. The companies were making loans to California customers without a license and exceeding legal loan amounts.
The industry is sizable in the Golden State, with more than 2,100 payday storefronts at the end of 2011. Roughly $3.3 billion worth of payday loans were made in 2011 to 1.7 million Californians, according to the state Department of Corporations. Individual payday loan customers took out an average of seven loans that year. According to a recent report by the Pew Charitable Trusts, many payday borrowers are coping with consistent cash shortfalls rather than emergencies. The average borrower could pay back only about $50 of their loans every two weeks.