Mercury News editorial: If state won't ban predatory payday lending, cities and counties must restrict itDecrying lobbyists' influence in the state Capitol, a range of California leaders on Monday called for curbs on payday lending to better protect consumers from the spiraling debt that accompanies the triple-digit interest rate loans.The reactions from statewide officials, city leaders and philanthropists come after a Bay Area News Group investigation published Sunday outlining the hazards of payday loans and the industry's warm reception in Sacramento.
Payday loans, which burden the working poor with annual interest rates as high as 460 percent, have grown in California, even as 17 states and the U.S. military have effectively banned the cash advances on paychecks. In contrast, state lawmakers here are now pushing a bill to expand lending amounts and fees, while accepting ever-more campaign contributions from payday lenders.
On Monday, however, two state senators joined Insurance Commissioner Dave Jones in calling for stepped-up regulations on payday lenders, either through a ballot measure or new legislation.
"People are having to forgo food on the table or clothes on their backs or transportation in order to pay back these loans," Jones said. A former Assembly member, Jones said he introduced a bill in 2007 similar to those in other states that cap interest rates at 36 percent because "the evidence was really compelling that the rules needed to be changed in California."
Two senators who sit on the committee that will soon hear the industry-backed bill to expand payday lending -- state Sens. Ellen Corbett, D-San Leandro, and Mark Leno, D-San Francisco -- agreed with Jones that interest rates need to be capped.
"The industry needs serious reform due to the financial damage it has caused many families," Leno said in a statement. "Allowing borrowers to get into deeper debt is not a realistic solution."
Corbett said that because lobbyists have repeatedly blocked bills to cap interest rates on payday loans, "if we can't solve this, maybe a ballot measure is the way people will need to go."
Greg Larsen, of the California Financial Service Providers Association, defended payday lenders' sway and their political contributions, which have more than tripled in the past decade. "Consumers often say, 'It's the best option for me right now,' " he said. "You hear this anecdotally from consumers on a consistent basis."
Yet a growing number of skeptics are joining consumer advocates in efforts to protect low-income borrowers from the debt trap that often accompanies payday loans. Lt. Gov. Gavin Newsom told this newspaper in April that curbing the industry was one of his top priorities and that he was in discussions about a 2012 ballot measure to bypass the Legislature. "These guys just buy us off," Newsom said at the time.
At the local level, San Jose Councilman Ash Kalra said he will push for a payday lending moratorium as soon as the city's staff completes a study on payday lenders. And Tuesday, the East Palo Alto City Council will discuss ways to limit the lenders from coming to their small, working-class town.
Cities and counties can't limit interest rates, but they can use local land-use and permitting laws to curtail new businesses and restrict their scope.
"By taking action at the local level, we're showing the seriousness of the issue," Kalra said. "But obviously the greater role lies in Sacramento."
Many local efforts are receiving funds from the Silicon Valley Community Foundation, the largest funder of Bay Area nonprofits. The foundation has directed almost $1 million to anti-payday lending campaigns, which include stepped-up local rules.
Payday lenders argue they are already adequately regulated in California, where loan amounts have been capped since 1996. A pending bill by Assemblyman Charles Calderon, D-City of Industry, would increase limits on payday loans from $300 to $500, increase one-time fees from $45 to $75.
Interest rates on the typical two-week loan are calculated on an annual basis, which amounts to 460 percent. But lenders have limited recourse to go after delinquent borrowers, and cannot pursue criminal charges.
Larsen, the industry spokesman, challenges the growing nationwide movement to cap interest rates at 36 percent saying it has limited short-term credit options for needy consumers.
Although payday loans are advertised for one-time emergencies, state statistics show the vast majority of borrowers, such as Mark Laws, take out successive loans.
Strapped for cash with a daughter to raise and a wife working on a college degree, Laws first went to a payday lender in 2001 to buy an airline ticket to his mother's funeral in Illinois. The Check 'n Go store in San Francisco was near Al's Good Food Cafe, where Laws worked as a $10-an-hour cook.
After postdating a $300 check, he got $255 in return. But two weeks later, his cash flow had not improved, and he had to repay his loan. Laws found another payday shop, Money Mart, to pay off the Check 'n Go loan.
Laws said he doesn't blame payday lenders for seeking a profitable market. He just wishes more people knew about alternatives such as the credit union he eventually turned to for better loan terms.
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