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Press Release Tuesday, July 10, 2001 |
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CALIFORNIA ASSEMBLY BUSINESS & PROFESSIONS COMMITTEE
PULLS THE PLUG ON PAYDAY LOAN REFORM
Industry
Lobbying Defeats SB 898 (Perata),
Which Aimed to Break the Payday Loan Debt Treadmill
SACRAMENTO - The California Assembly Business & Professions Committee, at the urging of Chairperson Lou Correa, voted to shelve the prospects for payday loan reform this year by sending SB 898 to interim study. Payday loans are $100-$300, short-term loans made by check cashers at extremely high interest rates. SB 898 would have protected consumers by enacting new rules for the industry and by enabling repeat borrowers to pay off their loans in installments. Consumer advocates were particularly upset at the Committee's action because the bill had been modified to address some industry concerns and enjoyed the support of some payday lenders.
"We are extremely disappointed that lawmakers on this Committee have decided to shelve payday loan reform for the year and send this bill to interim study," said Shelley Curran, Policy Analyst at Consumers Union's West Coast regional Office. "This issue has been debated for nearly three years. Consumers who have suffered payday loan abuses need relief from lawmakers in Sacramento not more delay."
Under a typical payday loan transaction, a borrower writes a personal check for the amount of the loan, plus a fee, payable to the check casher. The check casher agrees to not deposit the check until the borrower's next payday. In return, the borrower gets cash immediately. The fees for payday loans are extremely high, ranging from $17.50 for $100 to $45 for $255. The interest rates for such loans are staggering: over 900 percent for a one-week loan, and over 450 percent for a two-week loan.
According to a 1999 study by the Indiana Department of Financial Institutions, 91 percent of borrowers renewed their payday loan. Of those who renewed their loan, the average number of renewals was 10.19 loans per customer. Because lenders will not take partial payment on the loans and patrons frequently cannot pay the loan back in its entirety, consumers must take out an immediate subsequent loan. By doing so, these repeat borrowers are forced to pay the high loan fees again and again without reducing the principal.
SB 898 would have reduced the fee for payday loans from the $17.50 to $15 and would prohibit the practice of some payday lenders who collect a $10 administrative fee. The bill would also improve the disclosure of borrower's rights to consumers, establish a toll-free hotline operated by the state for customer complaints, and require lenders to report data regarding their business practices to the Department of Justice.
But most importantly, the bill would have helped consumers retire their payday loan debt by allowing them to pay off their loan over three months. Under the bill, a consumer who takes one loan is guaranteed a second loan for up to 14 days after the first transaction has ended. At the end of the second transaction, the consumer can choose to retire their debt through a payment plan. Under the payment plan, the consumer will give the lender three checks equal to the amount the consumer owes and the three checks will be cashed over the next three months.
"This bill would have provided payday loan consumers a realistic opportunity to pay off their debts," said Curran. "Unfortunately, lobbying by the state's increasingly powerful payday loan industry has once again stood in the way of a common sense consumer protection measure."
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Consumers Union, publisher of Consumers 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.
