Like a zombie that refuses to stay in the grave, some bad policy ideas periodically reemerge to haunt the land. Our nominee for zombie of the week: AB 1158 (Calderon), the most recent effort to significantly increase the maximum allowable payday loan that California’s 2,000-plus lenders can make. The Assembly Banking and Finance Committee passed AB 1158 on a 7-1 vote this week and the bill is now headed to the Assembly Appropriations Committee. A similar effort failed in the state Senate in 2009.
Payday loans, which are obtained using a personal check, have extremely short repayment periods and excessive fees that equate to an annual percentage rate of up to 460 percent for a 14-day loan. AB 1158 would allow California borrowers to write a personal check for up to $500 to secure a payday loan, up significantly from the current maximum of $300. State law already allows payday lenders to charge a fee of up to 15 percent of the face value of the check, and nearly all do, according to state officials. Therefore, under the proposed change, a borrower who writes a $500 check to a payday lender would pay a $75 fee for a $425 loan, which generally must be repaid in full on the borrower’s next payday, typically two weeks or so. For borrowers who take out “back-to-back” loans, a common scenario, total fees would reach $450 – larger than the original loan amount – after six consecutive loans. That’s quite a payday for California’s payday lenders, who made 11.8 million loans in 2009, a 20 percent increase compared to 2005, even though the number of borrowers stayed relatively flat during that period.
Letting payday lenders make larger loans is not sound public policy. Statistics released by the state Department of Corporations and analyzed in our report, Payday Loans: Taking the Pay Out of Payday, show that payday loans encourage chronic borrowing. Why? Because borrowers often lack sufficient income to both repay the loan and meet their basic living expenses. State data for 2006, the most recent available, show that more than 170,000 Californians took out 13 or more payday loans, and fewer than 4 percent of payday loans went to Californians who took out just a single loan during the entire year.
Californians have other credit options. Our report highlighted a number of less-expensive alternatives to payday loans, including small-dollar loans offered by credit unions, banks, and a less-well-known category of lenders called consumer finance lenders. The Assembly Appropriations Committee should rethink the current effort to increase the size of payday loans and bury this bad policy idea once and for all.