Securing payday loans

Trying to clear a path through the state Senate, supporters and opponents of a bill to raise the cap on payday loans are pushing dueling amendments that would ostensibly offer consumers more protection against predatory lending. The proposals are a mixed bag, with some going too far and others not far enough. The right approach is simply to make sure that payday loans live up to their billing as stopgap solutions for cash-strapped consumers, rather than debt traps that force low-income borrowers to return repeatedly for further loans.

The bill, AB 1158 by Assemblyman Charles Calderon (D-Whittier), would increase the maximum payday loan to $500, up from $300. Borrowers typically pay a 15% fee immediately, then agree to pay off the rest of the loan within two weeks, after their next paycheck arrives. Because the fee is extraordinarily high in comparison with other forms of credit, the loans typically are taken out by people who don’t have access to more affordable sources of cash, such as credit cards or a home-equity loan.

Lenders make their money off the upfront fee, so they have an incentive to issue as many loans as possible. Although the law forbids a payday agency from issuing back-to-back loans to the same person, the current system can’t stop a borrower from taking out a loan from one lender to pay off a loan from another. That’s the trap low-income workers can find themselves in when they fall behind on their bills while living from paycheck to paycheck.

Given this loophole, it makes no sense to raise the loan limit. And to their credit, opponents of AB 1158 have bottled it up in the Senate Judiciary Committee, demanding that payday lenders be required to verify a potential borrower’s finances, give borrowers more time to repay and limit borrowers to six payday loans a year from any source. Supporters have proposed a different set of changes: barring loans worth more than 30% of a borrower’s monthly income, providing repayment plans for delinquent borrowers and limiting the total number of payday lending outlets.

The most straightforward solution would be to have an easily enforceable rule against households taking out more than one loan at a time or in quick succession, with loans tracked in a statewide database to ensure compliance. That way, lenders would have more incentive to ensure that people who apply for loans can pay them back on time, rather than having them jump from lender to lender for loan after loan. Such a database would also enable the state to limit the total number of payday loans a household could take out in a year, providing further protection against predatory lending and irresponsible borrowing. With those protections in place to change the incentives, lawmakers could raise the maximum amount of a loan without creating a deeper debt trap.