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Press Release Tuesday, May 9, 2000 |
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SACRAMENTO - By a vote of 6 to 3, the California Senate Judiciary
Committee today passed SB 1501, a bill designed to protect consumers
from payday loan abuses. Payday loans are $100-$300, short-term
loans made by check cashers at extremely high interest rates. SB
1501 would protect consumers by enacting new rules for the industry
and by establishing a partial payment plan that would enable repeat
borrowers to gradually pay off their loans.
"Many consumers who rely on payday loans end up deeper in debt
because the high fees make it difficult for them to pay off their
loan," said Shelley Curran, Policy Analyst at Consumers Union.
"This bill will protect consumers from payday loan rip-offs and help
them get off the debt treadmill."
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. Most consumers cannot repay the loan in the typical two-week period and end up renewing the loan over and over again and paying the fees without paying down the principal. 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 10.1 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.
SB 1501 would reduce the fee for payday loans from the $17.50 to
$12 for a $100 loan. But most significantly, 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 a series of 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.
"Unlike many other lenders who make small loans, payday lenders
are virtually unregulated," said Curran. "SB 1501 will help rein in
payday loan abuses and protect consumers from unscrupulous lenders."
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.
