Payday Lenders Face Crackdown

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Check-cashing and payday loan businesses are often likened to predatory lenders that take advantage of low-income customers, and the movement to crack down on them appears to be gaining momentum.

The City Council in Long Beach, the second largest city in Los Angeles County, has voted to place a six-month citywide moratorium on new check-cashing and payday loan businesses on the grounds that they cause blight and foster crime.

Industry representatives dispute that and argue the storefronts provide a much-needed service for customers.

“Our industry as a whole is evolving, and more and more of the businesses are larger corporations and not the mom and pops,” said Mark Thomson, director of government relations for Washington-based MoneyTree Inc. “The companies are located by Wal-Marts or Starbucks and fit very much into the strip mall surroundings.”

The Long Beach City Council had adopted a one-year moratorium that covered the downtown area last month. It had been proposed by Vice Mayor Bonnie Lowenthal and proved so popular that the latest vote took it citywide for six months.

Tom Nix, president of Nix Check Cashing, said he disagreed with the council’s decision even though it wouldn’t affect his two locations in Long Beach. Nix is owned by Manhattan Beach-based Kinecta Federal Credit Union.

“The action does limit competition for consumers, which is never positive,” Nix said. “For that reason we disagree with the Council’s decision.”

Industry representatives say they are willing to work with city officials on any concerns they may have.

Critics claim the businesses take advantage of low-income customers by charging high interest rates and fees for short-term loans.

Other local cities that have placed moratoriums on check-cashing and payday loan businesses include Baldwin Park, Norwalk and Montebello.

The Norwalk City Council voted last month to place a temporary moratorium on new payday loan businesses. Officials will review planning and zoning regulations during the moratorium. Baldwin Park city officials in March voted to enact a moratorium stopping more such businesses from opening. Los Angeles officials have considered moratoriums in the past.

Other California cities, including Oceanside, Oakland, Sacramento, Santa Monica and South Gate, have ordinances limiting locations and hours of operation.

But as Los Angeles area cities continue to clamp down on these businesses, Thomson said officials are curbing competing business that could help weed out check-cashing and payday businesses that take advantage of low-income borrowers.

“If there are problems or bad actors within the marketplace, the thing that you can do to ensure they will stay is to prevent competition from coming in,” said MoneyTree’s Thomson.


State regulations

Industry standards for payday lenders and check-cashing companies such as the interest rates and fees they can charge are regulated by the state legislature. Cities in California cannot regulate those things, but can set zoning limits including bans on new shops.

“There is very specific case law that says cities are prevented from regulating things that are regulated by state law,” Thomson said. “And specific issues about the terms of our transactions are addressed by state law.”

However, by passing moratoriums, cities can try to force the lenders to self-regulate, possibly lowering their interest rates and fees.

“People have come out to share their concerns about interest gouging and that may or may not be part of the discussion,” Lowenthal said.

California law limits payday loans to $300. The state also requires that businesses post a clear and comprehensible fee schedule, make customers sign an agreement accepting the fees, and limit customers to one loan per pay period.

Despite these regulations, advocacy groups such as San Francisco-based California Reinvestment Coalition argue that because interest rates for payday loans can soar to 400 or 500 percent on an annual percentage rate basis, they are abusive.

At MoneyTree, which has one location in Long Beach and 13 locations in California, customers are charged 1.75 percent to cash payroll checks and 5.99 percent to cash personal checks.

For payday loans up to $255, MoneyTree charges $17.65 per $100 borrowed. As a result, the APR on a 14-day term loan can reach 460 percent.

Some city officials said they feel they need to protect their citizens through education rather than zoning.

Councilman Val Lerch, whose district in Long Beach houses a large portion of the city’s check-chasing and payday loan business, said the city should be educating customers, not stopping the businesses from opening up shop.

“Some people in the industry have talked to me, and we are on the same page,” Lerch said. “I would like to see education.”

Lerch doesn’t think government should over-regulate business, and he opposed the original one-year moratorium, but voted in favor when it was whittled to six months.

“We know that convenience stores in the inner city charge 10 or 20 percent more for a bag of sugar,” he said. “So do we ban all convenience stores because they are taking advantage of the people?”

Instead, Lerch wants to bring more traditional banks into his area so constituents can have alternative options to check-cashing and payday lending companies.

Currently, Lerch’s district houses only one bank branch, which he said is in the process of shutting down. Banks don’t offer emergency cash loans, though.

“They don’t supply the needs of the community,” Lerch said. “They are not going to give a two-week, short-pay loan.”

Meanwhile, the reinvestment coalition is trying to pass statewide legislation capping the interest rates for payday loans.

“We are aiming for the next legislative cycle, which would be January 2009,” said Liana Molina, an organizer for the coalition. “But we are aware of the possibility that it could be a multi-year campaign. This is a contentious issue that the industry fights tooth and nail to keep off the books.”

It wouldn’t be unprecedented for a state to cap the interest rates of payday loans. Last year, Oregon passed a law that caps interest rates at 36 percent for an annual percentage rate, and many national check-cashing companies closed their Oregon stores.

Thomson isn’t worried about California placing a cap on interest rates since the state already heavily regulates the industry.

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