Little regulation, high fees

Experts say that the drop in usage last year is good for Californians, but the industry still lacks necessary regulation to lower the risk of the loans for low-income consumers.

California lawmakers have an extensive history of attempting to regulate predatory lending in the state, but have failed to enact significant consumer protection from payday loans. The most notable legislation came in 2017, when California began requiring licences from lenders. The law also capped payday loans at $300, but did not cap annualized interest rates, which averaged a whopping 361% in 2020.

In addition to exorbitant interest rates, one of the industry’s major sources of income is fees, especially from people who serially depend on payday loans.

A total of $164.7 million in transaction fees – 66% of the industry’s fee income – came from customers who took out seven or more loans in 2020. About 55% of customers opened a new loan the same day their previous loan ended.

After multiple failed efforts in years past to regulate the industry, California legislators aren’t pursuing major reforms this session to fight the industry. Torres called for continued legislation efforts that would cap interest rates as a way to alleviate what she calls the debt trap.

“It is wild to think that a policymaker would see that and say, ‘This is okay. It’s okay for my constituents to live under these circumstances,” Torres said. “When it’s actually in the power of California policymakers to change that.”

Payday loan alternatives

There is evidence that the decrease in payday activity correlates with COVID-19 relief efforts. While there are a number of factors in the decrease, they likely include the distribution of stimulus checks, loan forbearances and growth in alternative financing options. Most commonly known as “early wage access,” the new industry claims it is a safer alternative.

The companies lend a portion of a customer’s paycheck through phone applications and don’t charge interest fees. The product is not yet regulated, but the state’s financial oversight agency announced that it will begin surveying five companies that currently provide the service.

The problem with this model, according to Torres, is that there is no direct fee structure. To make a profit, the apps require customers to leave a tip for the service.

“Unfortunately, that tip often clouds how much the loan ultimately costs you,” Torres said, adding that some companies go as far as using psychological tactics to encourage customers to leave a large tip.

“Customers voiced relief to know our industry was still here for them during the most trying circumstances and we have been proud to be there during this time of need,” Leonard said.

Despite last year’s drop in activity, 1.1 million customers borrowed a total of $1.7 billion dollars in payday loans last year, 75% of them returning for at least one more loan within the same year.

Torres said that the Center For Responsible Lending is continuing to work with legislators to write bills that would cap interest rates to make payday loans more affordable. Requiring lenders to assess the customer’s ability to pay the loan would also prevent customers from falling into a debt trap, she said.

“They act like they are providing this life saver to somebody,” Torres said. “That is not a lifesaver. They are tying (customers) down with an anchor.”

Lawmakers throughout California have begun establishing pilot programs that would alleviate some of that economic pressure. Stockton was the first payday loans in Willoughby city to experiment with guaranteed income for its residents. Compton, Long Beach and Oakland followed suit through the national Mayors of Guaranteed Income effort. California approved its first guaranteed income program earlier this month.