Muntasir took it anyway: “You can’t look at a hungry baby,” she said.
While lenders attribute the increase in these loans to innovation, critics say this resulted from the fact that regulators under the Obama administration turned on payday lenders.
“The increased surveillance and limitations imposed by federal agencies have encouraged the industry to turn more to installment loans,” said Quyen Truong, former deputy director of the Consumer Financial Protection Bureau. The Trump administration is now trying to reverse some of these limitations, even as progressives in Congress push for stricter rules.
Maeve Elise Brown, executive director of Housing and Economic Rights Advocates, a legal aid provider in Oakland, has seen a four-year increase in the number of clients teetering on larger-than-needed loans with triple-digit interest rates .
“People don’t realize how dire this is going to be,” she said. “Most people are not very good at math. “
The industry’s argument: if someone decides to take out a particular loan, the state shouldn’t get involved.
“There is a misunderstanding about who the average borrower is,” said Roger Salazar, spokesperson for Californians for Credit Access, a coalition of small loan lenders. “They’re smart, hard-working people who understand what the product is.”
At a state assembly committee hearing last month, some borrowers spoke out against Limón’s bill, arguing that high-cost loans, though expensive, were helping them get through a difficult financial period.
But other borrowers say they are amazed at the high cost of their loans. Muntasir from Richmond said she cried when she realized the full amount she would have to pay (she ultimately defaulted). Even for those who understand the terms, calculating compound interest can be misleading.
Angela Garcia, a 35-year-old single mom from South Gate, southeast Los Angeles, remembers the feeling of throwing away hundreds of dollars, month after month, for a problem that never seemed to diminish. She called it a “nightmare”.
Garcia, who now works as a medical assistant at Kaiser Permanente, said she was unemployed when she took out her car title loan. She had six children. Gas prices were high. Christmas was approaching. Credit seemed to be the only option – and it was everywhere.
“Everywhere you drive you see these scary signs: ‘Get a loan’, ‘Get a loan’, ‘Get a loan,’ she said. ” That sounds good. It looks like, “Well, shoot, if they’re willing to help me, why not? ” But no. It’s not. They don’t help you at all.
In 2014, Garcia borrowed $ 3,200 from LoanMart. She remembers sitting in her kitchen one morning when she heard the sound of chains on the street. She said she ran outside to grab her toddler’s car seat before her Chevrolet Suburban was towed.
Garcia said she remembers spending hundreds of dollars each month, but can’t remember the exact percentage rate on the loan.
It’s not uncommon, said Rosie Papazian, who manages the personal finance program at New Economics for Women, a Los Angeles-based nonprofit. Many clients are reluctant to delve into the details of their own financial situation, either out of shame or lack of understanding.
“They think, ‘My God, it’s been three years and I’m still paying off this loan and I’m not sure why. “”
A third of high-cost loans go into default, according to legislative analysis.
Consumer advocates say there would be fewer defaults – which can ruin a borrower’s credit rating even if collection agencies keep asking for repayment – if only lenders offered loans. lower rate. Lenders argue that so many of their borrowers fail to repay loans because they are, by definition, in dire financial straits.
“No one wants to run a loan transaction that has a high number of defaults,” Salazar said. But “it is a clientele at risk,” she noted.
Even though around 40% of customers default – as is the case with CashCall, court says documents of an ongoing class action lawsuit against the lender – the remaining 60% are using the product “effectively,” said Jackson of the Online Lenders Association.
She added that the proposed rate cap would prevent its members from lending to customers most in financial desperation.
“People are finding ways to get around certain prohibitions. Look at what happened when we banned alcohol, ”she said.
A 2016 study found that states where payday loan restrictions took effect saw a 60% increase in pawn shops, which are generally more expensive. Another study found more bad checks, more bad loan complaints, more bankruptcies.
Tatiana Homonoff, a professor at New York University and author of the 2016 study, said the response to a bill like Limón’s could be different because payday loans are smaller and have a bigger wide range of substitutes. But it’s important to think about the consequences, she said, “When these loans aren’t available, what do people do instead? “
Here’s how State Senator Ben Hueso, a moderate Democrat from San Diego County who opposes a rate cap, framed the dilemma:
“What do I prefer? ” he said. “That we have people in default? Or people who have their knees broken? “
Not everyone agrees that lenders should charge triple-digit interest rates to serve low-income borrowers. This includes some lenders.
If Limón’s bill becomes law, “collectively we can serve these consumers,” said Ezra Garrett, vice president of Oportun, one of more than a dozen lenders in California that offer loans at consumption between $ 300 and at tight state interest limits.
But high-cost lenders argue that the state’s opportunities would not be able to profitably serve the state’s riskier borrowers.
Last year two rate cap bills lack – blocked by a coalition of pro-business Republicans and Democrats. But the political climate has changed.
Last August, the State Supreme Court raised new questions about the legality of high cost loans – without specifying what interest threshold would be too high. There is also some anxiety about a possible election fight, which Garrett called “the hammer approach”. The prospect of endless litigation or voter-imposed mandates has prompted more lenders, including OneMain Financial and Lendmark Financial Services, to back Limón’s bill.
In the first quarter of this year, lenders opposed to the bill spent more than 3 to 1 on lobbying. But for now, the political odds may have tilted in favor of the bill.
Assembly Speaker Anthony Rendon called the loans “salt water in the desert – a thirsty person will drink it, but no better.”
With so much support in the assembly, lobbyists on both sides are bracing for the real fight in the Senate, where moderate Democrats skeptical of the proposal are well represented on the banking and finance committee. Tom Dresslar, a retired deputy commissioner from the Department of Business Oversight, called the committee “the industry’s last hope for preserving this operating system.”