Brianna Reeves |
Payday lenders in California experienced a sharp decline in loans and borrowers in 2020 during the pandemic, despite initial levels of job loss and unemployment.
The Department of Financial Protection and Innovation (DFPI) reported a 40 percent cut in payday loans in 2020, according to their figures. Payday Lending Activity Annual Report 2020…
“Payday loans are believed to have declined during the pandemic for a number of reasons, which could include factors such as incentive checks, loan abandonment and the rise in alternative financing options,” Acting DFPI Commissioner Christopher S. Schultz said in a press release. …
Payday lenders incurred more than $ 1.1 billion in losses based on total payday loans in 2019.
Pandemic incentives provided short-term relief
“This decline is likely due to additional government payments, such as income stimulus checks, and an increase in unemployment. In addition, not being able to pay rent or student loans, and in some cases utilities, have less impact, ”explained Gabriel Kravitz, Pew Charitable Trusts Consumer Finance Project Associate. “Our research shows that seven out of 10 borrowers take these loans to pay recurring bills.”
The decline in California residents’ dependence on payday loans can be attributed to federal and state rental incentives and assistance programs that have helped millions of people pay their rent, utility bills, and other urgent bills. However, such protection has ended or will soon end when the state returns to its normal activities.
“As the response to the pandemic shrinks, it is likely that we will see a recovery in lending and borrowing,” Kravitz said.
California is one of 14 states with high interest rates on payday loans, according to the Center for Responsible Lending (CRL). The CRL classifies these conditions as “trapped in the payday interest rate debt trap.”
State data for 2020 showed that the average California borrower who took out a $ 246 loan was in debt for 3 months a year and paid $ 224 in fees only, for a total repayment of $ 470. According to Kravitz, while the loan is said to be due in two weeks, in fact it should be repaid right away.
“And it takes about a quarter of the salary of a typical Californian borrower. And for someone who is struggling to make ends meet, it is very difficult to lose a quarter of their salary and still pay bills such as renting (or) buying groceries, ”said Kravitz. “As a result, it often happens that the borrower takes out another loan on the same day and is in debt for months, rather than two weeks.”
Who was hurt?
A report A 2012 Pew Charitable Trust revealed research findings on payday lending, including who borrows and why.
One notable finding found in the report was besides the fact that the majority of payday loan borrowers are white, women between the ages of 25 and 44, “there were five other groups that were more likely to use payday loans: those who did not attend four-year college. degree, renters, African Americans, those earning less than $ 40,000 a year, and those living separately or divorced. “
“And we also know, particularly in the Colored Communities, the Black Communities, the Brown Communities, that payday loan resellers (have been) in these communities for quite some time,” explained Charla Rios, a researcher at CRL who lends to salaries and predatory debt practices. “So they can position themselves as access to quick cash, but we are aware of the harm that has exacerbated the racial wealth gap in these communities for some time.”
Research 2016 California Department of Business Oversight found that the number of loan retailers per population in communities of color was higher than their white counterparts.
“Nearly half of the payday shopping windows were in zip codes, where family poverty rates for blacks and Hispanics were higher than those for these groups nationwide,” the report said.
“I think the really important data from this California 2020 report is that the bulk of income, 66 percent of income, is generated by borrowers who took out seven or more loans during 2020. And it shows the harm of this inaccessible initial loan, this first unavailable loan generates additional loans in succession, ”said Kravitz. “This is where the bulk of the revenue comes from, and that’s the crux of the problem.”
Although California has capped payday loans at $ 300, payday loans are considered a financial trap for consumers, especially those with low incomes, despite what they call “short-term” loans. Borrowers in California are charged two to three times more fees than borrowers in other states with reformed payday loan laws.
Payday Loan Protection
Consumer protection for small dollar loans in California is virtually nonexistent, with the exception of the $ 300 payday loan limit and license requirements from lenders. SB 482The Consumer Credit Restriction Act was introduced in the state in 2019, but died in the Senate in 2020.
In 2019, California set a 36 percent rate cap for large dollar loans between $ 2,500 and $ 9,999 under the Fair Access to Credit Act, but Rios explained that extending this protection to small dollar loans would benefit consumers.
In 2017, the Consumer Financial Protection Bureau (CFPB) introduced a rule that allows lenders to determine whether a borrower has the ability to repay a loan prior to loan approval. However, in 2020 the CFPB rule was fixed clarify the prohibitions and practices of debt collectors, removing some of the protections that originally existed.
“The CFPB does not currently have any payroll rule that protects consumers. And this is really an important point, because (the 2017 rule) would guarantee some look at the ability to repay such loans, which really plays a role in this cycle of the debt trap and the fact that payday lenders are not looking at a person’s ability to repay a loan before disbursement. loans, ”Rios said. “And so the cycle begins.”
Research by the Pew Charitable Trust shows that CFPB and California lawmakers have the ability to make small loans affordable and safe by introducing more rules and longer installment periods.
Colorado reformed its two-week payday loans in 2010, replacing them with payday loans with six-month installments and an interest rate nearly two-thirds lower than before, Pugh said. The average borrower in Colorado now pays four percent of his next paycheck on credit instead of 38 percent.
“I think probably the most important thing to focus on right now is what federal regulators can do: The Consumer Financial Protection Bureau can quickly reinstate its 2017 payday loan rule, which will effectively protect consumers from harm of these two-week payday loans, ”said Kravitz.
Brianna Reeves is a reporter based in Riverside, California and uses data-driven reporting to highlight issues affecting the lives of black Californians. Brianna joins Black Voice News as a reporting member for the American Corps. Brianna has previously reported on activism and social inequality in San Francisco and Los Angeles, her hometown. Brianna graduated from San Francisco State University with a BA in Print and Network Journalism. She received her MA in Politics and Communications from the London School of Economics. Contact Brianna with tips, comments or concerns at firstname.lastname@example.org or via twitter @_breereeves.