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Press Release Tuesday, May 16, 2000 |
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SACRAMENTO -- By a vote of 6 to 0 today, the California Consumer
Protection Committee passed AB 1973, a measure that enacts new rules
for the state's payday loan industry. AB 1973 (Wesson) is opposed by
consumer groups that charge that the bill fails to meaningfully
regulate the industry and would actually exacerbate many of the worst
problems associated with such loans. The bill is supported by
members of the payday loan industry.
"AB 1973 lets the payday loan industry off the hook and fails to
provide any meaningful relief for consumers," said Shelley Curran,
Policy Analyst at Consumers Union. "California lawmakers need to
pass legislation that will help low income consumers get off 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 many other lenders
who make small loans, 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 plus a fee. The bill enacts bonding and reporting
requirements for payday lenders, but fails to include any audit,
licensing or examination requirements as is required of other small
lenders. Under the bill, consumers would be referred to credit
counseling after taking out three 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, which they still owe.
"AB 1973 would make a difficult financial situation even worse for
consumers who get stuck in a cycle of debt with payday loans," said
Curran. "Lawmakers should address the issue of the debt treadmill by
enacting legislation that allows customers who cannot pay a loan in
its entirety to pay it off in installments."
Last week, the Senate Judiciary Committee passed SB 1501, a payday
loan bill supported by Consumers Union, AARP, and many other consumer
groups and community-based organizations. SB 1501 would help
consumers get out of perpetual debt by creating a payment plan for
subsequent payday loans. Under the bill, a consumer who takes a
consecutive payday loan (within 72 hours of the close of the previous
transaction) will pay $12 per $100 borrowed but may choose to
participate in a payment plan that gives them the chance to make
partial payments over four paydays. In addition, SB 1501 protects
consumers by requiring industry licensing, improved disclosure,
stronger penalties for violations, and better industry record-keeping
and reporting.
Consumers Union, publisher of Consumer reports, is an independent, nonprofit testing and information organization, serving only the consumer. We are a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition, and other consumer concerns. Since 1936, our mission has been to test products, inform the public, and protect consumers.
