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Press Release Wednesday, May 31, 2000 |
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SACRAMENTO, CA - The California Senate today approved SB 1501, a
bill sponsored by Senator Don Perata (D-Oakland), which will help
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 establishing a partial payment plan that will enable
repeat borrowers to pay off their loans in a series of installments.
The Senate passed SB 1501 by a 21 to 16 vote.
"Far too often, consumers who rely on payday loans get trapped in
a cycle of perpetual debt," said Shelley Curran, Policy Analyst at
Consumers Union. "SB 1501 will rein in payday loan abuses and help
cash strapped consumers get off the debt treadmill."
Under a typical payday loan, a borrower writes a personal check
for $100-$300, plus a fee, payable to the lender. The lender agrees
not to 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 back the loan in its
entirety, consumers must take out an immediate subsequent loan.
SB 1501 would reduce the fee for payday loans from $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.
A competing payday loan bill supported by industry and opposed by
consumer groups will soon be considered by the full Assembly. AB
1973 (Wesson) 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 borrow only half of what they previously
borrowed. Yet, the consumer has already paid $60 in fees to borrow
the same $100, which they still owe.
"The payday loan industry has been able to take advantage of low
income consumers because it is virtually unregulated," said Curran.
"Lawmakers should reject AB 1973 because it lets the payday loan
industry off the hook and fails to provide any meaningful relief for
consumers."
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.
