On Monday we blogged about AB 377 (Mendoza), which would allow Californians to write a personal check for up to $500 to secure a payday loan, up significantly from the current maximum of $300. Under this proposed change, a borrower who writes a $500 check to a payday lender would get a $425 loan – which must be repaid in full in just two weeks or so – and pay a $75 fee. That’s quite a payday for payday lenders. But more than that, a larger loan size would likely increase the number of Californians who become repeat payday-loan borrowers – paying off one loan and then immediately taking out another (and another) because they lack sufficient income to both repay their initial loan and meet their basic living expenses for the next two weeks.
The Senate Banking, Finance and Insurance Committee heard the bill on Wednesday, and things did not go well for the bill’s opponents, who included the Center for Responsible Lending and Consumers Union. The committee passed the bill on a bipartisan 7-1 vote. Despite overwhelming evidence that payday loans trap many borrowers in long and expensive cycles of debt, the committee decided that allowing payday lenders to make much larger loans is sound public policy. One Democrat asked rhetorically: “Is the industry perfect? No. Does it provide a valuable credit option for Californians? Absolutely.”
This concern about credit options was echoed by several committee members. Legislators seem to believe that Californians who currently use payday lenders would have nowhere to go but “Louie the Loan Shark” if the state made it harder for payday lenders to stay in business or legislated them out of existence, as many states have done. But that’s not the case. A 2007 survey of low- and moderate-income residents in North Carolina, which ended payday lending in 2006, found that households used an array of strategies to deal with financial shortfalls, including borrowing money from family or friends. In addition, our September 2008 report, Payday Loans: Taking the Pay Out of Payday, showed that Californians currently have 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.
— Scott Graves