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September 15, 2013
Editorial: Legislature fails again to rein in payday lending


(Sept. 15 -- By the Editorial Board)

In tough times, with many Californians living paycheck to paycheck, lawmakers still cannot manage to get a bill out of the banking committee to protect Californians from usurious payday lending.

California remains among the most lax states when it comes to payday lending. Take out a two-week loan of $300 and you pay a fee of $45, leaving you $255 in cash. That fee is equivalent to an outrageous annual percentage rate of 460 percent.

Of 29 states that do little regulation of payday lending, California accounts for $578 million of the $3.4 billion that borrowers pay in fees - behind only Texas - according to a new report by the Center for Responsible Lending. In California, 82 percent of the fees - $474 million - come from borrowers taking out a new loan within two weeks of paying off their last loan.

This is an industry that depends on strapped families continuously, not occasionally, borrowing.

As our legislative session ends with no action on payday lending, other states and the federal government are moving. There's lots going on everywhere but here.

Interest rate caps

In 2007, Congress established a rate ceiling of 36 percent annual percentage rate for payday loans for active military service members and their families. Fifteen states and the District of Columbia have similar caps for all payday loans.

Consumer Protection Bureau

Director Richard Cordray told the Washington Post on Sept. 11 that this new federal bureau would begin the rule-making process "in the near future." This follows a year-long study the bureau did of more than 15 million payday loans, released in April, which found that only 13 percent of the payday borrowers took out only 1 or 2 loans over a year. Forty-eight percent took out 11 or more. Fourteen percent had 20 or more.

Some states get at the problem of repeat borrowing by setting an annual cap on the number of payday loans lenders can give to any borrower, enforced by a statewide database. For example, Washington has a limit of six loans per borrower.

Bank regulation

Six banks, including Wells Fargo and U.S. Bank in California, have gotten into payday lending with so-called "deposit advances." It works like this: If a customer gets a direct deposit paycheck of $500 every two weeks, the bank might give him or her an advance of $500 with a fee of $50. The bank takes the entire $500 paycheck, leaving no money to pay bills. At the next paycheck, the bank takes the remaining $50, leaving the customer $450 to pay bills.

The Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, which oversees the nation's largest banks, have issued "guidance" to rein in bank payday lending before it expands.

Online payday lending

This is the new frontier, a way to avoid the laws in states that restrict or ban storefront payday lending, as a Sept. 9 McClatchy story details. New York and Maryland are going after the banks that allow online payday lenders to automatically withdraw loan payments from their customers' accounts. New York, for example, sent letters to 117 banks. The FDIC also has told banks to monitor requests for withdrawals from customer accounts on behalf of payday lenders.

The California Legislature did pass a bill (Senate Bill 318) that would establish a pilot program for small-dollar loans from $200 to $2,500, with an annual percentage rate capped at 36 percent - similar to the federal small-dollar loan pilot program that proved that banks can profitably offer affordable small-dollar loans.

But this is no substitute for reining in payday loans, a task for the next session.

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