Sacramento Bee: Editorial: An Incremental Step to Stem Payday Loans

California's $3.3 billion payday lending industry preys on the poor and the financially unsophisticated. Attempts to rein it in have failed. California remains among the most permissive states when it comes to payday lending.

Senate Bill 515 by state Sens. Jim Beall, D-San Jose, and Hannah-Beth Jackson, D-Santa Barbara, would offer minimal protections to prevent borrowers from being ensnared in a cycle of repeat borrowing at triple-digit interest rates.

A key vote occurs Wednesday in the Senate Banking and Financial Institutions Committee. Make no mistake, as in the past, this is a giant uphill battle. The chairman, Sen. Lou Correa, D-Santa Ana, received $70,400 from 2008 to 2012 from the industry – and he is not alone. Getting this bill to the Senate floor will require pressure from the public, Senate President Pro Tem Darrell Steinberg and Gov. Jerry Brown.

The need for change is clear. Under current California law, for a two-week payday loan of $300 – from companies such as Advance America, Moneytree Inc., Checksmart Financial and Cash Plus Inc. – borrowers pay a fee of $45, leaving $255 in cash. That fee is equivalent to an outrageous annual percentage rate of 460 percent for a two-week loan.

By comparison, a loan for a new car typically has an APR of 4 percent to 7 percent.

And if you cannot afford to repay in full at the end of two weeks? A cycle of repeat borrowing begins. As a Pew Trusts report noted last year, "despite its promise of short-term credit, the conventional payday loan business model requires heavy usage to be profitable."

In California in 2011, 12.4 million payday loans were taken out by 1.7 million individuals. That suggests an average of seven loans per borrower, but does not take into account payday borrowers who borrow from multiple stores or where different people from the same household take out multiple payday loans.

When the California Department of Corporations did a one-time study in 2007, it found that 1.01 million families accounted for 10 million payday loans – an average of nearly 10 loans per family. Further, payday lenders reported that "more than 80 percent of their business is attributed to repeat customers." The reality is that triple-digit interest rates trap borrowers in a long-term cycle of repeat loans from which it is difficult to recover.

In the past, legislators have attempted to establish a 36 percent interest rate cap – the limitation adopted by 17 states and by Congress for active military service members and their families. Those bills went nowhere.

This time, SB 515 focuses on the core problem of repeat borrowing. The bill's centerpiece is creation of an annual cap on the number of high-cost payday loans lenders can give to any borrower, enforced by a statewide database (similar to databases in 11 other states).

The authors have settled on a six-loan cap, modeled on FDIC guidance to banks that says high-cost debt should not be provided for more than 90 days in a 12-month period, or six loans. That is watered-down from the bill's original four-loan cap, an attempt to be responsive to the payday loan industry. Delaware has a five-loan cap; Washington state, an eight-loan cap.

If legislators won't limit interest rates for payday loans, they should at least hold the payday industry accountable for loans being used as advertised – as a short-term cash-flow tool for one-time financial emergencies. Lawmakers should approve an annual cap on the number of payday loans per borrower.