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Press Release Thursday, May 31, 2001 |
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CALIFORNIA SENATE PASSES BILL TO PROTECT
CONSUMERS FROM PAYDAY LOAN ABUSES
SB 898 (Perata) Aims to Break the Payday Loan Debt Treadmill
SACRAMENTO - By a vote of 22 to 13, the California Senate today passed SB 898, 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 898 would protect consumers by enacting new rules for the industry and by enabling repeat borrowers to pay off their loans in installments.
"For far too many consumers, payday loans end up making a bad financial situation worse by creating a mountain of new debt," said Shelley Curran, Policy Analyst at Consumers Union. "We applaud the Senate for supporting this bill, which 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. 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 reduce 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 help consumers retire their payday loan debt by allowing them to pay off their loan over three months. Under the payment plan established by the bill, a consumer would pay a 15 percent administrative fee as well as 3 percent per month. A consumer who chooses the payment plan will give the lender three checks over the course of three months equal to the entire amount owed.
"This bill provides payday loan consumers a realistic opportunity to pay off their debts," said Curran. "We urge the Assembly to follow the Senate's lead and pass this legislation so that the state can rein in payday loan abuses and protect consumers from unscrupulous lenders."
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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.
