The following story has excerpted parts of a longer piece focusing on the inability of state lawmakers to keep the state's growing payday lending industry in check.—Editor
Against the backdrop of an impotent state legislature and a growing awareness of the predatory nature of payday lenders, local governments in California have had to pick up the slack and adopt laws to stifle the industry. Last week in Morgan Hill, the charge was to take action before bad news comes in the form of three—or more.
"We have two (payday lenders)," Morgan Hill Mayor Steve Tate said from the dais, "we don't need any more."
The council voted unanimously to allow the existing two businesses to remain but not expand or move. The vote wasn't driven by specific complaints against the two businesses, but by a growing concern that they disproportionately target African American and Latino communities—and the fact that Capitol lawmakers are spending more time taking campaign money from predatory lenders than combating the check-advancing succubae with strict legislation.
California is one of 32 states that have allowed the proliferation of payday lenders over the past two decades. Others, like New York, have had longstanding bans on the controversial lending practice.
Payday lenders are a popular borrowing option for people of lesser means without access to credit. And the deal looks good, at least on paper: The lenders offer small-dollar loans meant to be paid off in weeks, for a fee ($15 for every $100 loaned under California law). There are hundreds of businesses spread around the state, with high concentrations in urban areas with significant Latino populations.
But repayment plans often drag out for months, and the loans are frequently re-upped as soon as they're paid off. And then there's the small print: Outsized service charges and interest-rate spikes along they way, if the borrower happens to miss a payment. Annual interest rates, when compounded, can sometimes balloon past 400 percent.
The state has failed to enact any limits on payday lenders beyond what's already on the books, says State Sen. Noreen Evans (D-Santa Rosa). Since payday lending became legal in California in 1996, the industry has been on hand at every turn to stymie reform, and has relentlessly called for greater lending limits than allowed under California law.
Evans says that in her 10 years as a Sacramento lawmaker, "the biggest part of what I have done is to kill bad bills." There have been a lot of them.
But one stands as a sort of benchmark for Evans, whose 2nd District seat comprises much of the North Bay: Assembly Bill 1158 from 2011, which would have lifted a $300 state cap on individual "payday loans"—one of few restrictions placed on a financial-services lobby that holds sway among Sacramento lawmakers.
The bill from retired Assemblyman Charles Calderon (D-Los Angeles) would have let an individual borrow up to $1,000 against a future paycheck, in an attempt to expand small-dollar loan opportunities for people of limited means—while also pleasing a lobby that's poured more than $16,000 into Calderon's campaigns.
The fight over 1158, Evans says, was "basically hand-to-hand combat. I killed it several times." Eventually, the bill was finally brought to heel in the Senate judiciary committee. That fight was emblematic.
It's a stalemate, and state efforts to reform the industry have been an "epic fail," says Liana Molina, an organizer on payday reform with the California Reinvestment Coalition.
In 2012, San Jose became the largest U.S. city to limit payday lenders, capping the number of money shops at 39, and the first to ban them from low-income neighborhoods. The rule also required a minimum quarter-mile distance from other payday lenders.
Council member Ash Kalra, whose district covers the city's eastern corridor heading south on Monterey Street and Highway 101, led the charge.
"The state's inaction by itself has grown the problem," he says. "When I was trying to get the city to come down on payday lenders, [the state] increased the cap from $350 to $500—the amount they can borrow per paycheck. It went completely against what we were trying to do. That only quickens the cycle of poverty."
The South Bay has payday lenders all over the map—65 total, with 39 in just San Jose. Wells Fargo and U.S. Bank are also in the payday-loan business. As evidence of how hard the fight can be for local jurisdictions, it took 18 months to get the local ordinance passed. The result was "the most expansive payday lending ordinance of any big city in the nation," Kalra says, adding that it put a cap on the number of businesses, set distance requirements prevented predatory lenders from setting up shop in low-income neighborhoods, which were determined by census designation.
"It was basically a permanent moratorium," Molina says.
City council members Sam Liccardo, Xavier Campos, Ash Kalra and Don Rocha noted in a joint memo that they hoped the city's stance on the issue would "send a message to our state legislators that the time has come to take meaningful action to address concerns surrounding payday lenders in California."
Around the same time, Santa Clara County banned payday lenders from taking refuge in unincorporated areas. Even affluent Los Altos took steps to prevent any from opening up within the town limits; one councilman called it a moral obligation since the state offers so little protection to consumers.
In 2013, Sunnyvale passed a six-store cap, a 1,000-foot buffer between payday lenders and restrictive zoning and operational requirements.
Gilroy took a similar action in January, revising its zoning rules to exclude businesses offering payday lending. Mayor Don Gage noted that the six payday loan businesses in the city lie on the east side of town, home to Gilroy's "most vulnerable populations."
Molina says her group has shifted its focus from local advocacy to lobbying for sweeping federal reform.
"We're gearing up for a fight," she says.
The Consumer Financial Protection Bureau, formed four years ago in the thick of economic crisis to provide oversight to the financial industry, has been studying the payday loan business for a couple years now. It plans to issue a new set of rules governing payday lending sometime in the next year—a prospect that has companies shilling high-interest financial products ramping up in defense.
Earlier this year, the bureau issued a damning report that illustrated how so-called "short-term" loans routinely drag on for months, even years, as consumers dig themselves deeper into debt.
"This is a key opportunity we have to reform the industry as the (state) legislature has been unwilling to pass any consumer protections," Molina says.
Kalra, who led the charge in San Jose and plans to make a run for the State Assembly in the near future, agreed that the onus lies with Capitol lawmakers.
"As much as you're able to do in San Jose, the reality is that the real opportunity to make significant change on payday lending exists in Sacramento, at the state level," he says. "But rather than taking the opportunity to rein in the ever-growing industry of payday lending, Sacramento has facilitated their growth."
One problem: Compliant politicians whose pockets have been lined with payday-loan cash.
Online records show that Calderon was among the top ten recipients of payday lender campaign contributions. He accepted $16,100 from the industry between 2009 and 2012, according to data assembled by the watchdogs at Maplight.org. But upon further review, almost none of the Bay Area's state legislators can say they haven't accepted money from the payday/title loan industry.
Records at Maplight.org show that Evans accepted $7,500 from the industry between 2008 and 2012. Bay Area assemblymembers Luis Alejo (D-Watsonville), Nora Campos (D-San Jose), Paul Fong (D-Cupertino) and Rich Gordon (D-Menlo Park) each received more than $4,000 from the payday/title loan industry between the beginning of 2011 and end of 2012, according to Maplight. And records show that state Sen. Jerry Hill (D-San Mateo) received $18,550 over a three-year period, spanning from January 2009 to December 2012, while Sen. Jim Beall (D-San Jose) collected $4,000 over that same time frame.
In an oft-repeated defense amongst elected officials, Evans says her constituents expect her to raise money for her campaigns—but also expect that she'll put the public interest before those of her corporate contributors. She's adamant that she has done just that, even if there was a learning curve, of sorts, on the payday loan issue.
"I have also taken contributions from banks," Evans notes, "but I also wrote the Homeowners Bill of Rights."
Molina cautions against looking too closely at contributions as a bellwether of support for the industry.
"Money in politics is a big issue beyond payday lenders," she says. "If everyone is taking money, yeah, they should stop. But, it's more about how are you protecting your constituents from egregious financial predatory entities?"
The state as a whole, she says, has failed when it comes to meaningful payday-loan reform.
Tom Gogola, Jennifer Wadsworth and Josh Koehn contributed to this report.