Payday lenders concentrated in poor ZIP codes

By J.D. Morris, December 16, 2016, in The Press Democrat.

A new study that found payday lenders are concentrated in poorer areas of California is fueling calls from consumer advocates for tighter regulations on the state’s 2,000 short-term loan stores.

More than 60 percent of the state’s payday stores are located in ZIP codes with family poverty rates above the state average, according to an analysis by the state Department of Business Oversight, which regulates the industry. The study, issued this month, matched 2014 Census Bureau data with the location of payday stores in California as of March.

In Sonoma County, more than 40 percent of the area’s 17 payday lending storefronts were located in three Santa Rosa ZIP codes where poverty rates are higher than the county average, according to the department.

The agency will use the findings as it considers regulatory changes that, if implemented, would prevent borrowers from taking out more than one payday loan at a time. To assist with that effort, the department may also call for a database that would track payday lending transactions in real time.

Payday lenders made 12.3 million loans in California in 2015 totaling $4.2 billion, state regulators reported last July. Borrowers took out 6.5 loans, on average, during the year.

The pattern of repeat loans, combined with the concentration of payday lenders in poor communities, is significant, department spokesman Tom Dresslar said.

“When you combine the fact that repeat customers are a significant part of the business model in California with the fact that the storefronts are concentrated in areas of high poverty, then you have an evidentiary basis — at least the beginnings of one — to seriously consider limiting customers to one loan with any (payday) licensee, as opposed to one loan with the same licensee,” Dresslar said.

Payday loans are short-term cash advances provided to borrowers in exchange for a personal check.

The borrower’s check, which includes an agreed-upon fee, is cashed by the lender in 31 days or less.

State law limits the lender’s fee to up to 15 percent of the borrower’s check, which is itself limited to no more than $300.

Consumer advocacy groups cast payday lenders as predatory, arguing their steep interest rates often trap consumers in debt. And concentrating payday stores in poor ZIP codes makes it easy for people to take out one expensive loan to pay off another, said Liana Molina, director of community engagement at the San Francisco-based California Reinvestment Coalition.

“I’ve literally sat down with people and done some back of the envelope calculations, and been there at that heartbreaking moment of, ‘Oh my god, I’ve spent $5,000 in fees?’ ” Molina said. “That’s a car. That’s money to pay for some classes at the community college. That’s real money. To realize that you’ve just completely thrown it away, it’s really difficult.”

Molina supported limiting payday loans to one per customer at a time.

The study also found that, among ZIP codes with six or more payday lending stores, the share of black and Latino residents exceeded their share of the overall state population. Graciela Aponte-Diaz, director of California policy for the Center for Responsible Lending, said that supported the notion that payday lenders were targeting those communities.

She also supported limiting payday loans to one per customer at a time.

However, the payday lending industry contends its business practices are ethical, and that it fills an economic void for borrowers who need access to credit but cannot secure funds from banks and other traditional lenders.

Thomas Leonard, executive director of the California Financial Service Providers Association, pushed back against the DBO study’s findings.

Leonard noted the industry has been criticized before for clustering its stores but argued that, like banks and other businesses, lenders set up shop “where they feel the consumer is going to utilize the product.”

“We certainly don’t put ourselves only in areas that you would call impoverished. We get a pretty good distribution around the city,” Leonard said. “One of the things that has impacted our ability to locate in other areas, or sometimes better areas, of a city is there are so many city ordinances that we simply are prohibited from being in particular areas, which is just a real hindrance on access to credit.”

Leonard also opposed limiting consumers to one payday loan at a time, on the basis that doing so would reverse a longstanding permissible practice in California and unfairly constrain borrowers.

But state Sen. Mike McGuire, D-Healdsburg, said the department’s research showed “concerning trends” indicating some payday lenders prey on vulnerable residents.

“There has always been this undercurrent of chatter, particularly in communities of color or communities that have higher poverty rates, that there have been predatory lending practices,” McGuire said. “As with any business, the vast majority operate legally and responsibly. Unfortunately, there are outliers in these communities that have taken advantage of some of the most vulnerable, and that is why the department is advancing some desperately-needed advanced oversight and moving forward with … stricter regulations.”

McGuire expressed support for creating a statewide database and limiting the number of loans consumers can have outstanding.

On the federal level, the Consumer Financial Protection Bureau proposed requiring payday lenders to take steps to ensure borrowers can repay their loans, and limiting repeated debit attempts from lenders.

But Molina said that effort is “totally in question” under the administration of President-elect Donald Trump.

If the state Department of Business Oversight decides to embrace a requirement of one payday loan at a time per customer, it could submit a rule to the Office of Administrative Law in July, Dresslar said.

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