Payday Loans: Who Uses Them and Why
The sight of payday lenders packing the streets of Valley communities has become more rare – though they are far from going extinct.
Ten years ago, as the central San Joaquin Valley began feeling the effects of recession and spiking unemployment, nearly 200 payday lending businesses operated out of no-frills storefronts up and down the region.
Many were prevalent in low-income neighborhoods where many families struggle to make ends meet.
Now, with unemployment rates at lower levels not seen in two decades, the number of payday lenders has also fallen.
As of last year, the Valley had 133 payday lenders. But as in 2008, low-income areas remain the most prevalent sites where the businesses flourish.
Their ranks could grow again under a plan by the Trump administration to do away with a couple of key components of federal regulations developed under the Obama administration that were due to take effect later this year.
One would require that payday lenders assure borrowers could afford to repay their loans, and another would limit the number of times a customer could “roll over” a loan, or take out another payday loan to pay off an earlier loan.
The Consumer Financial Protection Bureau announced Wednesday its proposal to reconsider the ability-to-repay requirements.
“The Bureau is concerned that these provisions would reduce access to credit and competition in states that have determined it is in their residents’ interest to be able to use such products, subject to state-law limitations,” the agency said.
Rolling back the rule would apply not only to payday lenders, but also to vehicle-title lenders and longer-term balloon payment loans.
When a customer takes out a payday loan, or a “deferred deposit transaction,” he or she writes a check to the business for the amount of money they want. In California, state law caps that amount at $300.
In exchange for holding the check for up to 31 days before depositing it, the payday lender charges a fee of up to 15 percent, or $45 on a maximum $300 check. That leaves the customer with $255 after the fees to cash a $300 check.
The state Department of Business Oversight reported that in 2017, the number of customers who took out payday loans was 1.68 million, down from 1.8 million in 2016. The average amount of a loan was $250, and the average length of time between writing the check and the lender depositing it was 17 days.
The average payday loan customer took out more than six loans during the year, and almost 429,000 borrowers took out more than 10 payday loans. Overall, more than 83 percent of payday loans were from customers who had already taken out another one.
That “rolling over” of a loan is what worries consumer advocates, just as it did 10 years ago. They say payday loans are an example of how the poor pay more for everyday things. People with more money or better credit can dip into their savings or use credit cards to get cash far more cheaply for unexpected expenses.
The payday loan industry says its businesses provide a needed service at a reasonable cost. But advocates say that by planting their stores primarily in low-income neighborhoods, they prey on working-class families and create a debt trap for the vulnerable.
In California, for example, state regulators reported that payday loan fees represented an annual percentage rate of 377 percent in 2017. More than half of customers who took out payday loans that year had an average annual income of less than $30,000.
Regulators also noted that about 60 percent of payday loan offices were in ZIP codes with higher family poverty rates than the statewide average. More than half were in ZIP codes where, on average, 40 percent of families are headed by single mothers who live in poverty.
The Community Financial Services Association, an industry group representing payday lenders, issued a statement indicating that it was pleased with the proposed rollback of the federal rules, but said it believed the reversal doesn’t go far enough.
“These rulemakings are good first steps, and we appreciate that the CFPB has recognized some of the critical flaws of the final rule” from 2017, said Dennis Shaul, CEO of the lenders’ association. He added, however, that “we believe the 2017 final rule must be repealed in its entirety.”
The remaining portions of the rule forbid payday lenders from making multiple debits on a borrower’s bank account, which advocates said cause hardship to customers through overdraft fees. “These provisions are intended to increase consumer protections from harm associated with lenders’ payment practices,” the CFPB said in its rule announcement.
The rule announcement stirred criticism from Richard Cordray, who led the agency under the Obama administration.
“I think this is a bad development for consumers,” Cordray told The Associated Press. “We looked carefully at this industry and there was a common problem of borrowers getting trapped in long-term debt. We had put together what I thought was a modest proposal. The change is really disappointing and hasty.”
The announcement was the first abolition of regulations by Kathy Kraninger, who became the Consumer Financial Protection Bureau’s director in late 2018. Her predecessor, Mick Mulvaney, was appointed by President Donald Trump as acting director in late 2017, and a year ago announced plans to examine the rules.
As a member of Congress from South Carolina, Mulvaney received tens of thousands of dollars in political donations from the payday lending industry, prompting concerns that he was too connected to the industry to effectively regulate it.
Shaul’s trade group, the Consumer Financial Services Association, is holding its annual conference at Trump National Doral Golf Club in Miami, owned by President Trump’s Trump Organization.
Government watchdog groups have criticized the use of Trump hotels and resorts by businesses and lobbying groups as legal bribery – a way to influence regulation and policy by steering business to companies owned by the president.