By Aaron Blevins, 10/20/2011
Advocacy Groups Cry Foul; Loan Companies Say It Meets Demand
A bill that would allow payday loan lenders to raise their maximum loan from $300 to $500 is expected to be discussed during the Assembly’s next session, much to the dismay of some consumer advocacy organizations. The bill, authored by Majority Leader Charles Calderon (D-City of Industry), is currently in the Senate Judiciary Committee after being introduced during the 2011 session.
While AB 1158 has been lobbied for by a handful of payday loan businesses, it’s been opposed by consumer advocacy organizations such as the California Reinvestment Coalition (CRC).
“If people are struggling to pay off a $300 loan, it’s highly likely that they’ll struggle more with $500 loans,” CRC organizer Liana Molina said.
Molina referred to payday loans as a type of “predatory lending,” and said companies that offer them generally target low-to-moderate income communities. She said many consumers who use the product do so several times a year, as opposed to only using the loans for emergencies. According to a California Budget Project study, nearly half of California payday loan consumers use the loans every month.
“It traps people in a cycle of debt, and that’s the main problem,” Molina said. “They strip assets from communities.”
She said the form of credit is expensive. If the fees were calculated as an annual percentage rates, they would be around 459 percent, Molina said. While the companies claim that they generally do not charge interest, the fees are usually approximately $17 for every $100 loaned.
“An APR is the only way a consumer can compare the cost of credit,” she added.
Tom White, Calderon’s chief of staff, said the legislator opted to raise the maximum loan limit because it had not been changed since the mid-1990s. He said $300 is the lowest rate in the country, and constituents have expressed a need for larger payday loans.
“It’s a matter of trying to keep up with the times and the need,” White said.
He said payday loans are heavily regulated and are fee-based, so consumers basically know what they’re getting into before conducting business with payday loan companies. White claims approximately 93 percent of payday loans are paid off within two weeks.
“If you don’t pay it off on time, they work with you,” he said.
At Payday Advance, 6767 West Sunset Blvd., customers are charged $15 if they don’t pay the loan back within about two weeks. If payment is never received, the company files a claim against the customer in small claims court.
White said the bill was introduced in January and passed through the Assembly. He said AB 1158 passed the Senate Banking and Finance Committee before the session ended. Next year, the bill will begin in the Senate Judiciary Committee.
Assemblymember Mike Feuer (D-Los Angeles) voted against the bill in June, and said he and former Assemblymember Karen Bass had previously introduced a bill to cap the interest on payday loans. He said the bill “got clobbered” and didn’t pass committee as a result of intensive lobbying in Sacramento.
“This has been an issue I’ve been concerned with for a very long time,” said Feuer, who once ran Bet Tzedek, a nonprofit organization that provides free legal advice. “The charge is enormous.”
According to the Secretary of State’s website, several payday loan companies lobbied for AB 1158 earlier this year. Advance America spent nearly $40,000, Ace Cash Express spent almost $50,000, California Check Cashing Stores spent $6,000 and Check Into Cash Inc. spent more than $17,000. However, the majority of those companies also lobbied other bills.
Feuer said he doesn’t see the need to increase the maximum loan amount on a business model that encourages consumers to get deeper into debt.
“I don’t think there’s been an adequate explanation,” he said. “I think it’s a way to aggravate that problem.”
When AB 1158 passed the Appropriations Committee 11-1, Assemblymember Holly Mitchell (D-Culver City) was the only legislator to vote against the bill. The bill passed through the committee during negotiations to balance the budget, when massive cuts were being made to “safety net programs,” she said. Mitchell said the bill would add an incentive for the poorest Californians to mismanage their increasingly meager resources.
“Payday loans are often used by those whose income won’t get them from this week to the next,” Mitchell said. “Unfortunately, while they’re paying off Paul, they’re getting robbed by Peter — in the form of some payday lender’s steep fee. We’re already cutting safety net protections for the most vulnerable among us, so I couldn’t add this insult to that injury.”
Jamie Fulmer, the vice president of public affairs for Advance America, said the company lobbied for the legislation to allow it to further meet its customers’ needs.
“The current amount allowed in California really doesn’t meet the needs of consumers,” Fulmer said, adding that $500 is more suitable, especially when considering car repairs and other emergency needs. “It makes it more applicable to the needs of the consumers.”
He said the industry is transparent and well-regulated, “which we think is important.” Fulmer said there is a strong demand for Advance America’s products, and few options exist for consumers with an immediate need for funding. The loans also keep their customers from dipping into their savings, bouncing checks, over-drafting their bank accounts or using other lines of credit, he said.
“They choose the products we offer for a variety of reasons,” Fulmer added.
He said Advance America displays posters and other illustrations to ensure that the fees and conditions are obvious. The company charges fees as opposed to interest because fees are less complicated, Fulmer said.
“We go to great lengths to make sure the customers have that information,” he said.
Many of the company’s customers use the loans appropriately, Fulmer said. He said Advance America has a free extended payment option that allows customers to make payments in four installments.
“It’s up to them to evaluate those options … and make the best choice for them or their families,” Fulmer said, adding that 95 percent of the company’s customers pay their loans back on time. “They should use any credit option carefully.”
He also said it is uncommon for payday loan companies to seek judgments against their clients.
“That’s not representative of the norm,” Fulmer said.
Molina, of the California Reinvestment Coalition, said there are other avenues consumers can take to help themselves when faced with a financial emergency. She suggested using a credit card, borrowing from friends and family, asking an employer for an advance, doing business with credit unions, delaying purchases, using social services and charities or creating an emergency savings account. Similar products offered by Wells Fargo and U.S. Bank are not much better, Molina said.
She said payday loan companies have been trying to increase the maximum loan amount for years. The CRC suggested amendments to the current bill, such as limiting the amount of loans a consumer can take out in a given year, creating a minimum repayment period of at least 31 days and increasing some underwriting standards. The industry, however, was not willing to consider any of them, she said.
“Predatory lending is what got us to this point (economically),” Molina said. “Why would we continue to allow that type of lending to take place?”
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