“Each year the Department of Business Oversight for the State of California is required by law to publish a payday lending report,” said Tom Dresslar, communications and media coordinator for the DBO. “The annual report reflects unaudited data submitted by licensed lenders and does not account for activity by those lenders who are unlicensed.”
One of the main points that Dresslar wanted to stress was the fact that in terms of California State Law payday loans are defined as “deferred direct deposit transactions.” “In a deferred deposit transaction,” explained Dresslar, “the consumer provides the lender a personal check for the amount of money desired.” There are restrictions.
“The lender provides the consumer the money, minus an agreed-upon fee,” he said. “The fee cannot exceed 15 percent of the check amount. The lender then defers depositing the consumer’s check for a specific period of time, which cannot exceed 31 days. The maximum amount a consumer can receive is $300, minus the fees.”
The purpose of the Department’s annual report and outreach is to better inform consumers and policy-makers, when considering the use of this form of lending. He also said that the Dept. of Business Oversight is not making any judgments upon this form of lending, only that consumers should be aware of what to expect when obtaining a payday loan.
For example Dresslar noted, Payday loan transactions in 2014 averaged $235. While that was 9.6 percent below the 2013 average, and the lowest figure on record, the average APR on transaction fees in 2014 was 361 percent. While according to the report, the amount of interest went down by 11.5 percent from 408 percent the prior year, the 2014 average APR also was the lowest on record for a payday loan.
But as Conrad Kiechel, communications coordinator of the Milken Institute points out, 408 percent is exorbitant for interest on an average paycheck for a working class person.
In an article published last year in the Milken Institute Review, “Some 12 million American people borrow nearly $50 billion annually through “payday” loans – very-short-term unsecured loans that are often available to working individuals with poor (or nonexistent) credit. The implicit interest can be up to 35 times that charged on typical credit card loans and roughly 80 times the rates on home mortgages and auto loans. On the other side of the ledger, noted the Milken report, the process is quick and convenient. A person need provide only a driver’s license, a Social Security card, proof of income and a bank account number, (and a loan is provided). After writing a postdated check for the loan amount, plus fees and interest, the customer leaves with cash in hand.
According to James Barth, Priscilla Hamilton and Donald Markwardt, researchers at the Milken Institute, their findings point out that in places where banks are few, payday lenders thrive. “What probably won’t surprise you, says report author James Barth, is that banks and payday loan stores serve different markets. In California, payday stores dominate lending to the working poor, especially those who are Latino or African-American.”
Barth and the Milken research team points out that, “it does not necessarily follow, though, that payday borrowers are being exploited, in the sense that lenders must be making monopoly profits. For one thing, the transaction costs of making these short-terms loans are high. For another, one might expect defaults to be relatively high since the loans are not collateralized and borrowers are generally poor.”
This reporter observed that the figures of the DBO annual report reflect what seems as slight fluctuations; with some of the percentages averaging from over 2 to to over 6 percent over the past four years. And, for most everyday people seeking a cash advance details about those percentages may seem superfluous, especially when in need of quick money. Still, what is important is that while these small unsecured loans are frequently paid back by the borrowers, the inclination to falling into a cycle of debt is high.
The Milken review article mentions that California was among the first states back in the 1990s to establish regulations to help protect consumers. Yet, even with regulations also established by the U.S. Congress, “There is no limit, however, on the number of payday loans that a customer may recycle per year,” notes Barth.
“Here is where the consumer can get into financial trouble,” said Dresslar. Revolving debt becomes an entanglement, that few working class people can avoid.
As explained by the Center for Responsible Lending, “legitimate lenders assess the ability of potential borrowers to repay it. Payday lenders do not.” In fact, noted Ginna Green, former media rep of CRL, “their business is built on making loans borrowers cannot afford to pay off, so that they will keep coming back and paying repeated fees on the same small amount of money borrowed.”
In many situations, points out CRL after paying all the fees, plus interest, the borrower is entrapped in paying new fees about every two weeks, not really able to pay off entirely the original loan started with.
As Milken reports, the $30 charged on a $200 two-week loan, (for example) may not seem especially onerous for the typical borrower. But borrowers with six or more loans each year generate over half of all payday loan store revenues in California. Nationwide, most borrowers are indebted to payday lenders for five months out of the year and typically shell out $800 for what amounts to a $300 revolving loan.
What is most interesting that the Milken research team found with regards to California’s financial landscape is, California accounts for about 7 percent of all the bank branches. And, slightly more than 10 percent of all the payday stores nationwide. A much more interesting picture emerges at the county level, the Milken Review report says. California has only one county with no banks, but 14 counties with no payday lending stores. At the other end of the spectrum, Los Angeles County has the most banks and payday lenders, with 2,120 and 521, respectively. The situation is quite different on a per capita basis, where in every county but one, the number of banks per capita is greater than the number of payday lender stores per capita.”
“We collected demographic and personal finance data by county to see how they correlate with the location decisions of banks and payday lenders,” said Milken report author, James Barth. “The first thing to note is the strong negative relationship between the number of bank branches and the number of payday lender stores, adjusted for population.”
“It’s possible this is simply the consequence of market forces, he said, that banks and payday lenders locate where their own customers live. Or it could mean that banks are unwilling to take on the challenge of expanding into new demographic segments, in spite of the potential for profit.” “Either way, said Barth though, it puts residents of counties with relatively few banks at a disadvantage in borrowing.”
Barth and the Milken researchers view this as especially disturbing “because it is likely to reduce social and economic mobility, (likely to create a divided between) less-banked counties which are home to relatively more poor and minority households, while the populations of more-banked counties have both more education and higher incomes.”
When this reporter covered this topic of payday lenders back in 2006 for The Mission Dispatch, a local publication serving San Francisco’s Mission District, traditional mainstream banks were becoming aware of the “unbanked, or underbanked.” This reporter also covered the City Attorney’s efforts to hold payday lending outlets responsible for the predatory loan practices they unleashed upon vulnerable customers.
Providing more multi-lingual service outreach and taking the time to explain basic banking procedures to customers who seldom even approached a bank, was some of the steps a few major banks were making at that time. According to a recent study completed by the FDIC, 20.0 percent (24.8 million) of U.S. households were underbanked in 2013. That translates to that they had a bank account but also used alternative financial services outside of the banking system.
While the FDIC report noted the rate of the unbanked fluctuated slightly by about 1 percent between 2009 and 2013, the percentage of the population that was underbanked (or underserved by a bank) was at about 20 percent, while the majority of people in the nation using a full service bank was over 65 percent. While the underbanked statistic included those people who were partial served by banks only 7 percent of the population were “unbanked” without any mainstream banking services.
That number of 7 percent of the population might appear small. Yet this averages out to be about 24 to over 50 million people nationwide who are not fully served by mainstream banking. Even with 20 percent of that 24 to over 50 million people being considered as underbanked, (those who use both mainstream banking and payday lending) the numbers of people vulnerable to predatory lending practices remains high.
In its survey and data report the FDIC noted that one reason why unbanked or underbanked consumers did not use a bank was because of a lack of trust. And, because of things like minimum balance requirements and the fees associated. The Milken report said one approach to offset the allurement of payday lending to vulnerable working class people is more transparency.
While the FDIC report did not say much about what could be done to off-set the proliferation of payday lenders, the report did mention that use of pre-paid credit cards have increased in underbanked households.
The Milken Institute report sees that banks themselves could do more to help those who are in need more banking services. While ideas on how this could be achieved vary, depending upon which researcher or analyst one consults with, the most important thing as Dresslar noted is, consumers (especially those most vulnerable living from paycheck to paycheck) need to be very cautious of payday lending.
To learn more about the annual report released by the State of California Department of Business Oversight, check out the departments web site.
