By EDVARD PETTERSSON

Staff Reporter

A high-stakes battle has broken out over “payday lending,” the business of providing Californians with quick cash until their next paycheck.

On one side are state legislators and the Consumers Union, who claim that the industry is gouging the working poor, many of them living in Los Angeles. On the other side is the growing number of payday lenders and their lobbyists hired to fight legislation aimed at cracking down on the industry.

“(Payday lending) is aimed at people who live from paycheck to paycheck, and it is as expensive a form of credit as is legal,” said Shelley Curran, a policy analyst with the Consumers Union. “The APR (annual percentage rate) on these loans is as high as 300 percent, whereas even the highest rates on credit cards is no more than 20 percent.”

Such sentiment led Sen. Don Perata, D-Oakland, to author a bill (SB 834) co-sponsored by Sen. Kevin Murray, D-Los Angeles that would drastically reduce the maximum fee that a payday lender can charge. For example, the current maximum allowable fee of $17.62 for a short-term $100 loan would be slashed to $6.50.

Last month, the bill was approved by the Senate Judiciary Committee and referred to the Senate Appropriations Committee, where it will be voted on in the coming weeks.

But the payday lenders, also known as the “deferred-deposit” industry, have undertaken an aggressive lobbying campaign that already is swaying opinions in Sacramento.

“The Consumers Union misrepresented our product to the Legislature,” said Jim Ball, president of California Financial Services Providers, a trade organization for cash-checking and payday-loan businesses. “Once the legislators are educated about the deferred-deposit industry, they will turn around, and this bill will not make it out of committee.”

Consumers Union’s Curran conceded that the legislative outlook is unclear. “It is always going to be tough to pass a bill that is going to change an entire industry,” said Curran. “We are still very hopeful that it will pass.”

Many in the industry vehemently oppose the legislation.

“This bill is a prohibition bill, and if it passes, it will be a disaster for the industry,” said Tom Nix, president of Nix Check Cashing, a Carson-based company that operates 60 stores in Southern California. “Our company won’t be able to continue to offer payday services, and companies that depend exclusively on payday advances for their revenues will not be able to stay in business at all.”

Nix said the industry would welcome some form of legislation that would make it harder for people to get into financial trouble by becoming too dependent on payday loans.

“We support legislation that would focus on the pitfalls of the product, such as limiting the number of loans a person can take out over a given period, but this bill (SB 834) tries to make sure that payday lenders will be driven out of business,” he said.

Payday lenders, legalized in California just two years ago, provide short-term loans (essentially cash advances) to workers in a cash crunch.

The borrower writes a post-dated personal check for the amount of the cash advance, plus a lender’s fee. The lender then deposits that check on the borrower’s next payday. Qualifying for such loans only requires a current driver’s license, bank checking account statement, a recent paystub and phone bill.

Though lenders argue that it’s unfair to use annual percentage rates to measure their fees against the interest that credit card issuers charge, Curran maintains that APR is the traditionally accepted way of comparing credit sources.

Nonetheless, industry participants say their service is worth the fee.

“For many people, it is the only alternative they have to writing a bad check, for which the banks charge a higher penalty than the fees that we charge,” Nix said. “Most payday customers, unlike our check-cashing customers, have a higher income level, of around $35,000 a year, and use the services correctly. Our biggest branch is across from the Inglewood City Hall and is used by many city employees.”

Payday loans are provided mostly by check-cashing businesses. The niche is lucrative, given the fact that 590 of the 1,169 licensed check-cashing establishments in Los Angeles County now offer payday loans, according to the California Department of Justice.

“They are making a lot of money,” said Gerald Lewis, an analyst with investment bank Stephens Inc. “With fees of $15 to $20 for a two-week period, the margins for payday lending are very high, considerably higher than for other cash-checking services.”

And those high margins have drawn a number of the large, national payday-loan chains to California. Check Into Cash, Check and Go and Advance America which are exclusively in the business of payday loans have each opened more than 100 stores in the state, said Ball.

He estimates that between 750,000 and 1 million payday loan transactions take place in California every month.

Some see the industry itself as at least partially responsible for the financial hardship that is created when customers start to abuse payday loans in order to make ends meet.

“They don’t have any intention to help the consumers,” said Lance Triggs, vice president with Operation Hope Inc., a non-profit banking organization. “They say they don’t want people to rely on short-term loans, but they don’t offer them a vehicle to rise up to the next level where they would no longer need to depend on such loans.”

One such customer might be Sibylle Williams, a single parent who works as a security officer. Two years ago, needing to renew her car registration and being short of cash, Williams went to a payday lender she had been hearing about. She got the cash, and paid it back without any problem two weeks later. But then getting payday loans became a habit for her, she said, and soon she was paying $200 a month in fees alone.

“For a long time, I was taking out three loans a month at different lenders,” she said. “At one point I was on the brink of filing for bankruptcy because I couldn’t pay for all the loans anymore.”

Ball says such tales are not reflective of the industry norm.

“Our typical customer is a dental assistant who needs a short-term advance to pay for a car repair,” he said.

Curran said he hopes the industry will soon begin modeling itself after Broadway Federal Bank, which is in the process of developing what he calls a socially responsible approach to check-cashing and payday-loan services.

Robert Marrujo, a Broadway Federal vice president, explained that the new services, rather than exploiting those in a short-term cash crunch, are being developed as a way of attracting customers and bringing them in the banking mainstream.

“You need to be part of the market in order to attract customers,” he said. “But we don’t plan to gouge our customers by charging the fees that payday lenders charge, which are a little ridiculous.”