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Press Release Tuesday, April 11, 2000 |
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AB 1973 Fails to Adequately Regulate Payday Loans
and Could Make Matters Worse for Low Income
Consumers
SACRAMENTO -- By a vote of 10 to 0 late yesterday, the California
Assembly Banking Committee passed AB 1973, a measure that enacts new
rules for the state's payday loan industry. AB 1973 (Wesson) was
opposed by a wide range of consumer groups that charged that the bill
fails to meaningfully regulate the industry and would actually
exacerbate many of the worst problems associated with such loans.
"California lawmakers need to enact legislation that will rein in
payday loan abuses," said Shelley Curran, Policy Analyst at Consumers
Union. "But AB 1973 will actually make matters worse for many low
income consumers who get stuck on the payday loan debt treadmill."
Payday loans are small, short-term loans made by check cashers or
similar businesses at extremely high rates. Typically, a borrower
writes a personal check for $100-300, plus a fee, payable to the
lender. The lender agrees to hold onto the check until the
borrower's next payday, usually one week to one month later. Only
then will the check be deposited. In return, the borrower gets cash
immediately.
The fees for payday loans are exorbitant: up to $17.50 for every
$100 borrowed, up to a maximum of $300. The interest rates for such
transactions are staggering: 911% for a one-week loan, 456% for a
two-week loan, and 212% for a one-month loan. Consumers who take out
payday loans are usually in desperate debt. The high rates make it
difficult for many borrowers to repay the loan, thus putting many
consumers on a perpetual debt treadmill. Unlike consumer finance
lenders, payday lenders are virtually unregulated.
AB 1973 would worsen the problem of perpetual debt by increasing
the amount of money that consumers can borrow with a payday loan from
$300 to $400, and increasing the NSF fee that can be charged by
payday lenders from $15 to $25. The bill enacts bonding and
reporting requirements for payday lenders, but fails to include any
audit, licensing or examination requirements as other states do.
Under the bill, consumers would be referred to credit counseling
after taking out four payday loans and on their fifth loan would be
able to only borrow 50 percent of what they previously borrowed.
Yet, the consumer has already paid $60 in fees to borrow the same
$100.
"Credit counseling is an alternative that should be offered before
a consumer ever takes a payday loan and certainly long before their
fifth transaction," said Curran. "Lawmakers should offer true relief
to repeat borrowers by enacting legislation that allows customers who
cannot pay a loan in its entirety to pay the loan in
installments."
