Payday lenders looking to rebound

Breanna Reeves |

California payday lenders saw a sharp drop in lending and borrowing in 2020 during the pandemic despite initial rates of job loss and unemployment.

The Department of Financial Protection and Innovation (DFPI) reported a 40% decline in payday lending in 2020, according to its 2020 annual report on payday lending activity.

“Payday lending is believed to have declined during the pandemic for a number of reasons which may include factors such as stimulus checks, loan forbearance and the growth of alternative financing options,” the commissioner said per Acting DFPI, Christopher S. Shultz, in a press release. .

Payday lenders suffered a loss of more than $1.1 billion based on the total amount of payday loans in 2019.

Pandemic stimulus provided short-term relief

“This drop is likely a combination of additional government payments, like stimulus checks, and an increase in unemployment. Also, the consequences of not being able to pay your rent or student loans and, in some cases, your utilities are less significant,” explained Gabriel Kravitz, consumer finance project manager at Pew Charitable Trusts. “Our research shows that seven out of 10 borrowers take out these loans to pay those recurring bills.”

California residents’ declining reliance on payday loans can be attributed to federal and statewide stimulus and rental assistance programs that have helped millions pay their rent. , their utilities and other urgent bills. However, these protections have ended or will soon end with the state returning to business as usual.

“As the pandemic provisions wind down, it’s likely that we’re going to see a rebound in lending volume and the number of borrowers,” Kravitz said.

California is one of 14 states with high payday loan interest rates, according to the Center for Responsible Lending (CRL). The CRL classifies these states as “falling into the payday loan interest rate debt trap.”

California borrowers experience some of the highest APR rates in the country. (Source: Map and data courtesy of responsible credit center.)

State data for 2020 found that the average California borrower who took out a $246 loan was in debt for 3 months of the year and paid $224 in fees alone, for a total repayment of $470. Although the loan is advertised as being due in two weeks, it’s actually due all at once, according to Kravitz.

“And that’s about a quarter of a typical California borrower’s salary. And it’s very difficult for someone who is struggling to make ends meet to lose a quarter of their salary and pay bills like rent (or) groceries,” Kravitz said. “And so what ends up happening is that often the borrower will take out another loan, the same day, and end up in debt for months instead of just two weeks.”

Who is concerned ?

A 2012 report by the Pew Charitable Trust identified research findings on payday loans, including who borrows and why.

A notable finding that the report found was aside from the fact that most payday loan borrowers are white, female, and between the ages of 25 and 44, “there were five other groups that had higher odds of use payday loans: those without a four-year college degree, renters, African Americans, those earning less than $40,000 a year, and those who are separated or divorced.

“And we also know specifically in communities of color, black communities, brown communities, that payday loan dealers have (have) been located in those communities for quite some time,” explained Charla Rios, a researcher at CRL who focuses on payday loans and predatory debt practices. “So they may present themselves as access to quick cash, but we know the harms that have exacerbated the racial wealth gap for these communities for some time.”

A 2016 study by the California Department of Business Oversight found that there were a higher number of loan retailers per population in communities of color than their white counterparts.

“Nearly half of the payday storefronts were located in ZIP codes where the family poverty rate for Blacks and Latinos exceeded the statewide rate for those groups,” the report noted.

This table shows the average APR rates for payday loans in California. In 2020, APRs fell to 361% in 2020 from 369% in 2019. (Source: Table provided by the California Department of Financial Protection and Innovation)

“I think the really important data point in this California 2020 report is that the bulk of revenue, 66% of revenue, is generated by borrowers who took out seven or more loans in 2020. And that shows the harm of this unaffordable price. initial loan, that first unaffordable loan generates additional loans in a sequence,” Kravitz said. “And that’s where most of the revenue comes from and that’s the core of the problem.”

Although California has capped payday loans at $300, payday loans are considered financial traps for consumers, especially those on low incomes, despite being labeled as “short-term” loans. Borrowers in California are charged two to three times more than borrowers in other states with reformed payday loan laws.

Payday loan protections

Consumer protections for small dollar loans in California are almost nonexistent, except for the $300 payday loan cap and lender licensing requirement. SB 482, consumer loan restrictions legislation, was introduced in the state in 2019 but died in the Senate in 2020.

In 2019, California instituted a 36% rate cap for large loans between $2,500 and $9,999 under the Fair Access to Credit Act, but Rios explained that the extension of these protections to small loans would be beneficial for consumers.

In 2017, the Consumer Financial Protection Bureau (CFPB) introduced a rule that allowed lenders to determine if a borrower had the ability to repay a loan before approving the loan. However, in 2020, the CFPB rule was amended to clarify collection agent prohibitions and practices, eliminating some protections that were initially in place.

“The CFPB does not currently have any sort of payday rule in place that would protect consumers. And that’s a really important point because (the 2017 rule) would have guaranteed some look at the ability to repay these types of loans, which really plays into, kind of, this cycle of the debt trap and the fact that payday lenders don’t look at a person’s ability to repay the loan before issuing the loan,” Rios said. “And so begins the cycle.”

Pew Charitable Trust research shows that the CFPB and California lawmakers have an opportunity to make small loans affordable and safer by implementing more regulations and instituting longer disbursement windows.

According to Pew, in 2010 Colorado reformed its two-week payday loans, replacing them with six-month payday loans with interest rates nearly two-thirds lower than before. Now the average Colorado borrower is putting 4% of their next paycheck on the loan instead of 38%.

“I think probably the most important thing to focus on right now is what federal regulators can do: The Consumer Financial Protection Bureau can quickly reinstate its 2017 payday loan rule that would strongly protect consumers. against the harms of these two-week payday loans,” Kravitz said.

Breanna Reeves is a journalist in Riverside, Calif., who uses data-driven reporting to cover issues affecting the lives of Black Californians. Breanna joins Black Voice News as a member of Report for America Corps. Previously, Breanna reported on activism and social inequality in San Francisco and her hometown of Los Angeles. Breanna graduated from San Francisco State University with a bachelor’s degree in print and online journalism. She obtained her Masters in Politics and Communication from the London School of Economics. Contact Breanna with advice, comments or concerns at [email protected] or via twitter @_breereeves.