Tristin Hernandez has a steady job in Irvine as a special education instructor, but he occasionally runs short on cash before his monthly paycheck arrives.
When that happens, there aren’t a lot of options.
Last week, in need of a few hundred bucks to cover weekend expenses, the 26-year-old stopped by a Tustin payday lender, which offers short-term advances with annual interest rates sometimes in excess of 460 percent. Hernandez pays as much as $45 in fees for each loan, which he has been getting on and off since college.
“I’d heard that they’re expensive,” he said, “but if you’re really in desperate need for that money, what’s $45?”
Hernandez is one of nearly 2 million Californians turning to payday lenders each year as the annual market for so-called deferred deposit loans has ballooned to more than $3 billion. Orange County, in particular, has become an epicenter for payday loan growth, with 145 storefronts mostly clustered in low-income neighborhoods in Santa Ana and Anaheim.
With the growth of the payday loan market, lawmakers, regulators and consumer-rights groups nationwide have increased scrutiny of the industry, yet lenders in California have mostly avoided the severe limits put in place in many other states.
Last month, the industry won a key battle over a state bill that would have capped the number of loans a borrower could take out each year and extended repayment periods – changes some lenders say would have virtually killed payday lending in California.
The loan market has been propped up by steady consumer demand in an uncertain economy. The industry also has found support from California legislators, including state Sen. Lou Correa, D-Santa Ana, who last month was appointed chairman of the powerful Senate Banking and Financial Services Committee.
Still, opponents of payday lending say the movement to rein in the business is gaining momentum at both the state and federal level.
“We’re not backing away from this fight,” said Paul Leonard, California director for the nonprofit Center for Responsible Lending. “Payday lending reform is an issue that is not going away in California.”
Payday lending is a relatively new practice in California. Lawmakers formally authorized the form of short-term credit in 1997; in 2003, the California Deferred Deposit Transaction Law became effective, which set licensing requirements and appointed the state Department of Corporations as the oversight agency.
The loans, which can be obtained with little more than a checking account and pay stub, typically must be paid back in about two weeks. Online lenders have begun to proliferate and a handful of banks offer such products, but much of the activity is handled through payday loan storefronts.
Because the businesses keep cash on the premises, some storefronts have become a target for thieves, who have even cut through roofs to plunder the loot. Many payday companies install safety glass and other security features.
Under California law, the total amount of a single payday loan transaction is capped at $300, while the fees on each transaction cannot exceed 15 percent. The amount a payday lender can hand out at one time, therefore, is about $255 once the 15 percent fee is factored in.
Mark Leyes, spokesman for the Department of Corporations, said the clear limits on the industry, combined with the regular audits of state-licensed payday lenders, amount to robust regulatory oversight. “It’s regulated at least as strictly as other consumer lending and arguably more so,” he said.
Dan Gwaltney, chief financial officer of Payday Loan LLC, the Anaheim-based operator of 19 area Payday Money Centers stores, noted that each location is required by state regulations to post prominent signs, with half-inch letters, explaining the fee structure for all loans, and explain to borrowers the legal extent to which the company can seek repayment.
“I’d love to be able to walk into a bank and get the same disclosures,” he said. “There’s a perception out there that the industry is not very well-regulated. That’s not the case.”
Still, California is far from restrictive. In an analysis of payday lending regulations by nonprofit organization Pew Charitable Trusts, California was found to be one of the more lenient states.
According to the 2012 report, 22 states either have no payday storefronts or place severe restrictions on them. California, which has no limit on the number of loans a borrower can take out and a comparatively high interest rate cap, was one of a handful of states labeled “permissive.”
Jer Ayler, who started a local payday loan company in 1998, found California to be a fruitful market. He grew his business to 15 locations before selling it. Now chief executive of Trihouse Inc., a payday lending consulting firm, the Newport Beach resident cited New York as an unfriendly state for payday lenders, but called California relatively lenient and said the demographics are favorable.
“California is a highly desirable state to be in,” he said. “It’s a good place to start.”
Over the past five years, the amount of money issued by payday lenders in California has jumped 28 percent to an annual total of nearly $3.3 billion, according to a report by the Department of Corporations. The number of borrowers has risen 21 percent to more than 1.7 million.
As the industry has grown, so too has criticism. In particular, opponents say lenders charge exceedingly high interest rates to people in desperate need of affordable credit.
Though each two-week transaction carries just a 15 percent fee, when compounded over an entire year, the effective rate can climb well over 400 percent. In 2011, the most recent year for which data are available, payday lenders in California charged an average annual percentage rate of 411 percent.
Lenders say annual rates are misleading because the product is meant for only short periods – akin to criticizing hotels for $200-a-night rooms that would cost $73,000 for a full year.
But opponents counter by pointing to studies from groups such as Pew, which found that many customers borrow repeatedly and can remain in debt for as much as five months a year.
Hernandez, the special education instructor in Irvine, said he was introduced to payday loans by a friend “who actually lives off of them.”
Critics have seized on the phenomenon, pointing out that such cycles can result in astronomical costs.
“As far as I’m concerned, it’s usury,” said state Sen. Hannah-Beth Jackson, D-Santa Barbara, who has pushed legislation to restrict payday lending. “There should be limits to the amount of money that a lender can charge to borrow money, particularly in situations where the money is being lent to people who are frequently in desperate circumstances.”
Senate Bill 515, which Jackson introduced earlier this year, would restrict lenders from issuing more than six payday loans to any single customer in a year, a move she said would help end the “debt trap.” Backed by the Center for Responsible Lending and other advocacy groups, the bill also would extend payday loan periods from about two weeks to 30 days and create a database tracking borrower activity statewide.
Jackson said she is also willing to compromise by raising California’s loan limit from $300 to as much as $500.
Still, the proposal has unsettled many California payday lenders, who say it would drive up costs significantly.
“It would put us out of business,” Gwaltney said. “That would make the product pricing unaffordable for anyone to offer. (It would) kill the industry.”
Payday lenders won a reprieve last month when the Senate Banking and Financial Services Committee voted 5-3 against Jackson’s bill, a move that consumer advocates said diminished chances of reform this year.
But Jackson said the bill is eligible for reconsideration and she has asked that it be brought back soon. She also said she has begun talking to banks, credit unions and even venture capitalists about the possibility of offering short-term loans at lower rates than existing payday lenders. “There have been a number of different options that have been presented to me,” she said.
Leonard, of the Center for Responsible Lending, said California has fallen behind Washington, Oregon, Arizona, Colorado and other states that have taken steps to reform payday lending, including instituting interest rate caps and placing limits on the number of loans borrowers can take out.
“Many of them have taken meaningful actions to rein in the excesses of payday lending,” he said, noting that as many as 17 states have effectively eliminated payday lending. “California is on a little bit of an island.”
‘Forceful lobbying operation’
Leonard contends that a key reason California hasn’t kept up is because lenders have “a very effective and forceful lobbying operation” in California that has helped block proposed legislation for years.
“The payday lending industry and their interests are very well-represented in Sacramento,” he said.
One of the payday loan industry’s prominent supporters is Correa, the Santa Ana state senator and new chairman of the banking committee. Correa’s district, which also includes Anaheim and Fullerton, is home to nearly 100 payday loan centers, or about two-thirds of all the storefronts in the county. Santa Ana, in particular, has more payday loan stores (32) than bank branches (30), according to regulatory data.
Correa, one of the five senators to vote against Jackson’s bill last month, said he doesn’t like payday loans, but they are a necessity for some people.
“It’s a very expensive product, a product I would never use,” he said. “But it is a product that’s used and it’s used because it’s needed. It’s used by folks that need to pay their water bill, need to buy groceries, need to buy gas.”
Correa said he would rather expand the ability of lenders to offer small-dollar loans than restrict their options. “I don’t believe making it harder for people to get a loan is a solution,” he said.
According to campaign finance records, Correa, who is exploring a bid for state attorney general, has received dozens of campaign contributions over the past seven years from payday lenders, including at least $10,000 from Check Into Cash Inc., which has seven locations in his district.
As of the current legislative session, Correa ranked as the top recipient in California of donations from payday and title lenders, according to OpenGovernment, an independent and non-partisan website tracking information on state legislatures. He has accepted more than $57,000 from the industry, OpenGovernment found. (The No. 2 recipient, state Sen. Ron Calderon, D-Montebello, also is a member of the banking committee and voted against Jackson’s bill.)
Correa said he does not consider himself an ally to the industry and that he never votes based on the preferences of donors. He also said he has an independent fundraiser to solicit donations.
“I don’t even look at the money that comes in, so therefore there’s no connection,” he said. “I vote on issues and how they affect my constituents.”
Calls to Check Into Cash were directed to industry trade group California Financial Service Providers Association, whose spokesman, Greg Larsen, said there is no organized effort on the part of payday lenders to donate to politicians.
“Some members of our association participate, as they individually choose, in the California political process,” he said.
Though the industry has successfully fended off challenges at the state level, several U.S. agencies have begun to examine payday lending.
Last month, the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency issued proposed guidance for the banking industry that called on institutions offering payday loans to better assess borrowers’ ability to repay. The move came as the Consumer Financial Protection Bureau released a white paper detailing the high costs of payday loans, which it said trap consumers in a cycle of debt.
Nick Bourke, a payday loan researcher and director of the Safe Small-Dollar Loans Research Project for the Pew Charitable Trusts, called the actions “the first shoe to fall” in what he expects to be a tightening of payday loan regulations.
Industry backers say new restrictions could put companies out of business and simply push borrowers to unregulated online lenders, a number of which are headquartered in countries such as Belize and Malta.
“If you do away with a legitimate, regulated option for short-term credit in the marketplace, you don’t do away with the demand for short-term credit,” Larsen said. “Those customers are going to go someplace.”
Dawn, an Orange resident who declined to give her last name, took out a payday loan for the first time last week. Recently diagnosed with breast cancer, she said the medical bills have made it difficult to keep up with regular expenses, and she is grateful to have the option of short-term credit.
“I have unexpected things that are happening, so it’s kind of put me in a spot,” she said. “I think it’s nice to have something like this available because it really helps in a bind.”
Gwaltney, of Payday Money Centers, said payday loans evolved organically in response to the unexpected expenses that people incur, such as medical bills or car repairs. California lenders made more than 12 million loans in 2011.
On a recent weekday afternoon, as customers streamed in and out of the company’s Tustin store, Gwaltney cited that demand as proof that a need exists for small-dollar loans.
“Regardless of how you feel about the product,” he said, “it’s serving customers.”
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