Payday lenders are looking to bounce back

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Breanna Reeves |

California payday lenders have seen a sharp decline in loans and borrowers in 2020 during the pandemic despite initial rates of job loss and unemployment.

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

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

Payday lenders suffered a loss of over $ 1.1 billion based on 2019 payday loan total dollar amounts.

Pandemic stimulus provided short-term relief

“This decrease is likely a combination of additional government payments, like stimulus checks, and increased unemployment. In addition, the inability to pay your rent or student loans and, in some cases, your utilities, has lesser consequences, “said Gabriel Kravitz, consumer finance project manager at Pew Charitable Trusts.” Our research shows that seven out of ten borrowers take out these loans to pay those recurring bills.

The decreasing reliance of California residents on payday loans can be attributed to federal and statewide stimulus and rental assistance programs that have helped millions of people pay off. rent, utilities and other urgent bills. However, these protections have ended or will soon end with the return of the state to its normal activities.

“As the pandemic arrangements come to an end, it is likely that we will 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 Center for Responsible Lending.)

State data for 2020 revealed that the average California borrower who took out a loan of $ 246 was in debt for 3 months of the year and paid $ 224 in fees only, for a total repayment of $ 470. Although the loan is advertised as due in two weeks, it is 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 paycheck while paying bills like rent (or) groceries, ”Kravitz said. “And so what ends up happening is that a lot of times the borrower takes out another loan on the same day and is left in debt for months instead of just two weeks.”

Who is concerned ?

A 2012 report by the Pew Charitable Trust identified the results of payday loan research, including who borrows and why.

One notable finding the report uncovered was apart from the fact that most payday loan borrowers are Caucasian, female, and between the ages of 25 and 44, “there were five other groups that were more likely to use payday loans: those without a four-year college degree. graduate, 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 been (have been) located in those communities for some time,” said Charla Rios, researcher at CRL who focuses on payday loans and predatory debt practices. “So they can sell themselves as quick access to cash, but we know the damage that has exacerbated the racial wealth gap for these communities for some time.”

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

“Almost half of the payday storefronts were located in zip codes where the family poverty rate for blacks and Latinos exceeded the statewide rate for these groups,” the report notes.

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

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

Although California has capped payday loans at $ 300, payday loans are seen as financial traps for consumers, especially those with low incomes, although they are labeled as a “short term” loan. California borrowers are charged two to three times as much as borrowers in other states with reformed payday loan laws.

Payday loan protections

Consumer protections for small dollar loans in California are almost non-existent, except for the $ 300 cap for payday loans and the licensing requirement of lenders. SB 482, consumer loan restriction legislation, was introduced in the state in 2019, but died in the Senate in 2020.

In 2019, California instituted a 36% cap rate 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 for small loans would be beneficial for consumers.

In 2017, the Consumer Financial Protection Bureau (CFPB) introduced a rule that allowed lenders to determine whether a borrower had the capacity to repay a loan before approving the loan. However, in 2020 the CFPB rule was amended to clarify the prohibitions and practices of debt collectors, thereby removing some protections that were initially in place.

“The CFPB currently does not 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 a certain look at the ability to repay these kinds of loans, which really plays into, in a way, 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 the potential to make small loans affordable and more secure by implementing more regulations and establishing longer payment windows.

According to Pew, in 2010 Colorado overhauled its two-week payday loans, replacing them with six-month installment payday loans with interest rates nearly two-thirds lower than before. Now, the average Colorado borrower is paying four percent of their next paycheck for the loan instead of 38 percent.

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

Breanna Reeves is a reporter in Riverside, Calif., And uses data-driven reports to cover issues affecting the lives of black Californians. Breanna joins Black Voice News as a member of Report for America Corps. Previously, Breanna had spoken about activism and social inequalities in San Francisco and Los Angeles, her hometown. Breanna graduated from San Francisco State University with a bachelor’s degree in print and online journalism. She received her MA in Politics and Communication from the London School of Economics. Contact Breanna with any advice, comments or concerns at [email protected] or via twitter @_breereeves.

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