900% Interest on Cash Advances Exorbitant, Not Illegal

“Usury” is defined by Webster’s New World Dictionary as “a rate of interest that is excessive or unlawfully high.” And the term “loan shark” is defined as “a person who lends money at exorbitant or illegal rates of interest.”

In 1997, California allowed so-called “payday advance” lenders to begin operating in this state. They are permitted to make one-week loans at an annualized interest rate of 911%, or two-week loans at a rate of 456%.

So, such rates are not illegal in California, though they certainly are exorbitant. And consumer protections here lag behind those in many other of the 30 states that permit such businesses to operate within their borders.

We need only look around to see the cash advance stores proliferating everywhere, but especially in the areas populated by the working poor, immigrants and racial minorities.

According to the industry’s own figures, at least 1,500 such outlets owned by various companies have sprung up in just the last three years. Together, they perform more than a million transactions every month.

A customer goes into one of these places and writes a check for, say $100, which can be cashed by the lender when the borrower’s paycheck is deposited a week or two hence. The borrower receives $85 in cash, a “payday advance.” The lender’s fee is $15.

But, when the due date comes, if the person hasn’t got the money to fund his check, he can renew the loan for another period, while paying another $15 fee. Pretty soon, the fees can exceed the principal, and since the person may be short again and again, maybe he goes to other places and does the same thing. The debt spirals, collectors harass the borrower, and bankruptcy moves closer.

California hasn’t adequately studied the precise way all this works out. But the state of Indiana did a study last year of 1,434 payday lenders in 36 outlets, and found 91% of the borrowers had rolled over their loan at least once, and the average person had rolled it over 10 times.

I have an opinion on this matter. I believe the law authorizing this business, by that frequent friend of the special interests, former state Sen. Charles Calderon of Whittier, should be repealed outright, and this industry abolished in California, just as it was in many states early in the 20th century.

But that is probably not going to happen in this Legislature.

Indeed, just this week, there was the spectacle of three liberal Democratic senators--Don Perata of Alameda, Martha Escutia of Whittier (Calderon’s successor) and Betty Karnette of Long Beach--getting together to scuttle Perata’s own bill to reform the payday advance industry. His earlier bill on the issue died last year for lack of support.

Perata’s latest effort, among other things, would have required that five pay periods pass before an advance that had not been repaid need be rolled over at an additional fee. This, in effect, would have lowered the interest rate considerably and cut into the industry’s income. Its representatives declared it would put them out of business, although I suspect that was hyperbole. This would still be far too lucrative a business to vanish.

Perata’s press secretary, Mark Capitolo, told me Perata decided to withdraw his bill when he was informed Escutia and Karnette had met with a leading payday advance and check cashing businessman, Tom Nix of Carson, and emerged with a “soft” position on his bill.

Perata said he had become convinced his bill would not clear the Senate Appropriations Committee, and he now plans to compromise with the industry on a new bill.

So often, our legislators are prepared to compromise to such an extent that when something does pass, it contains very little reform. They seldom recognize that sometimes it is better to hold to principle and go down to defeat for awhile until legislative opinion changes.

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As was the case years ago, the payday advance business may become ever more unpopular as time goes by and its consequences become more evident. I don’t despair that even our lawmakers--so often influenced by contributions and clever arguments--may ultimately come around to the public interest.

Escutia, who represents many low-income consumers, said she had been uncertain how she would vote on Perata’s bill because she felt the big banks do not serve her community well. While the payday advance stores charge “excessive amounts of interest,” she said, they do serve the community.

I think she is mixing apples and oranges. The banks may not be perfect, but they don’t stick their customers with 911% interest.

Karnette said she too was not necessarily a vote for the measure, because “people do use this service” and the Legislature must be careful before it imposes controls.

According to Nix, Escutia and Karnette arranged a meeting for him with Perata. The result: An agreement to kill this bill and pursue a new, weaker one more to the industry’s liking.

Nix and his senior vice president, Darline Gavin, told me they feel it is preferable in many minority and lower middle-class neighborhoods that people in need of money get it this way, even with high fees and interest, rather than pass bad checks or run up large credit card bills. Their argument is that their industry--long banned in California--is really helping the economically hard pressed.

But Earl Lui of the Consumers Union observes, “When you’re having money problems the worst thing to do is to go to someone who’s going to charge you 400% or 900% interest.”

Lui was nonetheless somewhat resigned to Perata’s decision.

“One of the things we’ve learned is that once a bad industry gets legal, it’s really hard to get rid of it,” he observed. “The best we can do is to give people more time to repay the loans.”

But Perata seems willing to compromise even that.

It isn’t just conservative, “pro-business” Republicans who help questionable commercial enterprises in Sacramento. Liberal Democrats often cave to well-financed lobbyists just as readily. I wish somewhere in government there was a lot more fight.

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Ken Reich can be contacted with your accounts of true consumer adventures at (213) 237-7060 or by e-mail at ken.reich@latimes.com.