A look across Mission Street this morning revealed a queue waiting patiently at a payday lender a stone’s throw away from MEDA’s Plaza Adelante. This is unfortunate, as MEDA works to promote financial stability for its over 6,800 clients, with staff knowing that predatory lending is a major issue for low-income communities. This is especially true of immigrants, and two-thirds of MEDA clients fit this category.
“Too many of our families are vulnerable to predatory-lending scams,” explains MEDA Adelante Fund Business Lending Manager Diana Matei-Golopenta, who oversees the organization’s providing of access to capital, currently tailored for small businesses, with an eye on expanding into consumer products.
MEDA is also part of advocacy work to address these payday-loan abuses.
Advocacy in place
MEDA is lending its support to the statewide “Stop the Debt Trap” campaign being led by the California Reinvestment Coalition (CRC), an organization that has long advocated for fair and equal access to credit statewide. CRC’s Director of Community Engagement Liana Molina has been working with organizations across the state to advocate for strong rules from the Consumer Financial Protection Bureau (CFPB) to safeguard consumers against harmful payday, car-title and high-cost installment loans.
CRC’s Molina explains the issue as follows: “In California, as in other states that authorize it, payday lending is advertised as a short-term solution to unexpected financial needs. The reality is that payday lending is a predatory product that relies on customers’ extended spells of repeat borrowing. Such repeat borrowers are the core of the payday lending business model, contradicting the industry’s marketing claims that they offer short-term loans to address emergency needs.”
Data on the issue
There is overwhelming data to support these claims. For example, an analysis of state data by the Center for Responsible Lending found that 76 percent of all payday-loan fees are to borrowers mired in seven or more payday loans per year, with 60 percent of payday loan fees from borrowers with 10 or more annual loans. This creates a vicious cycle of never-ending debt.
The problem is getting worse. Installment loans of greater than $2,500 and similarly sized car-title loans, where a borrower pledges their vehicle’s title as security for a triple-digit interest rate loan, now represent the fastest-growing segment of the small-dollar loan market. Triple-digit interest rate car-title loans tripled between 2011 and 2014, according to the Department of Business Oversight (DBO).
Currently, California law provides no limits on the interest rates that lenders can charge for these loans. This lack of regulation translates to most installment lenders charging greater than 100 percent interest for these larger, longer-term loans, with many routinely charging an annual percentage rate (APR) of more than 200 percent. Many payday lenders are also in the business of high-cost car title and installment lending, and they are seeking to keep growing their market in California.
Anticipated outcome
CRC has rallied support for reform, with California’s Attorney General Kamala Harris penning a letter urging the CFPB to ensure that states may choose to adopt stronger laws and protections. The community is grateful for this support, recently sending a letter of thanks* to Harris for her endeavoring to address this issue and protect Californians.
Many organizations that signed this letter have been working for more than a decade to compel the California legislature to strengthen state protections around these programs. Prior legislation has been introduced that would have created a 36 percent annual rate cap on payday loans — legislatively termed “deferred deposit transactions” — and on car-title loans. These proposals were defeated in the Assembly banking committees.
Additional legislation has been introduced that would have capped the number of loans that could be provided to an individual borrower in a 12-month period. This approach was directly targeted at stemming the debt trap of repeat borrowing — the hallmark of payday loans.
There has been other support for proposals to establish basic ability-to-pay underwriting requirements for payday loans.
The CFPB has been charged by Congress to regulate payday lending and is preparing in the next few months to issue the first nationwide regulatory framework for payday loans. As part of a national “Stop the Debt Trap” campaign, over 40 California organizations joined more than 500 other national and state groups to sign a letter to CFPB Director Richard Cordray, urging the bureau to adopt strong rules around payday loans.
This advocacy campaign will continue for the long haul, through the lengthy rule-making process that lies ahead.
Predatory lending must be regulated in California, and beyond. For more information, or to get involved in the “Stop the Debt Trap” campaign, please reach out to CRC’s Liana Molina at liana@calreinvest.org.
*The letter was signed by the following:
Bet Tzedek Legal Services, Los Angeles County
California Capital Financial Development Corporation, Sacramento
California Reinvestment Coalition (CRC), Statewide
California Association for Micro Enterprise Opportunity (CAMEO), Statewide
Center for Responsible Lending (CRL), National
Coalition Against Payday Predators of Silicon Valley (CAPP), Santa Clara County
Communities Organized for Relational Power in Action-Industrial Areas Foundation (COPA-IAF), Santa Cruz, Monterey and San Benito counties
Community Financial Resources (CFR), National
Community HousingWorks (CHW), San Diego
Community Legal Services of East Palo Alto (CLSEPA), East Palo Alto
Community Resource Center, North County San Diego
Consumer Action, National
Consumers Union, National
Dreams for Change, San Diego
East LA Community Corporation (ELACC), East Los Angeles
Faith in Community (FIC), Fresno
Fresno CDFI, A Subsidiary of Fresno EOC, Fresno
Housing and Economic Rights Advocates (HERA), Statewide
Housing Rights Center, Los Angeles
HPP Cares: Housing People Properly, Long Beach, Compton and Watts
Labor Community Services, AFL-CIO, Los Angeles County Federation of Labor, Los Angeles County
MAAC, San Diego County
Mexican American Opportunity Foundation (MAOF), Los Angeles and Kern counties
Mission Economic Development Agency (MEDA), San Francisco
Multicultural Real Estate Alliance for Urban Change, Los Angeles County
North County Lifeline, North County San Diego
Nuestra Casa de East Palo Alto, East Palo Alto
Orange County Community Housing Corporation (OCCHC), Orange County
Project Sentinel, Fremont, Gilroy, Modesto, Redwood City, Sacramento and Santa Clara
Public Counsel, Los Angeles County
Public Good Law Center, Statewide
Public Justice, National
Public Law Center (PLC), Orange County
Public Interest Law Firm, Law Foundation of Silicon Valley, San Jose
Renaissance Entrepreneurship Center, Bay Area
Thai Community Development Center (Thai CDC), Los Angeles U.S.-Mexico Border Philanthropy Partnership (BPP), San Diego
Valley Economic Development Centers (VEDC), National
Youth Leadership Institute (YLI), Statewide
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