Payday lenders: Neighborhood scourge or financial saviors?
‘We hope to regulate what is essentially an unregulated business’ — Councilman Todd Gloria
By Jenna Frazier
With payday loan and check cashing establishments proliferating in North Park, City Heights and other neighborhoods, many residents, business groups and elected officials fear that the industry is threatening the economic vitality of their communities.
Critics of payday lenders say that besides targeting low-income populations who are often already struggling financially, the businesses hinder economic development and revitalization in the city’s more vulnerable areas.
“You know you’re entering a low-income area when you see lots of payday lenders,” says Judi O’Boyle, a local resident who has served on both the North Park Planning Committee and the Redevelopment Agency for North Park. “It’s a signal.”
Liz Studebaker, executive director of North Park Main Street, says that a heavy concentration of payday lending storefronts sends negative signals to investors, which can in turn stunt the growth of other local industries. “It sends a signal to investors that this is not a good community to invest in, which makes it more difficult for us to attract and retain business,” she says.
Councilman Todd Gloria, who represents District 3, where many of the payday lenders are located, is exploring options to stop the businesses from spreading in vulnerable districts, which he hopes will help revitalize communities.
“There is definitely an appearance that is consistent with these businesses,” Gloria says, citing bright signs, late hours and gaudy marketing ploys. “This communicates an aesthetic that is usually out of step with surrounding areas. Our responsibility is to remove blight and replace it with things that will improve the community.”
About Payday Lending
Payday loans have many pseudonyms — cash advance loans, check advance loans, post-dated check loans, deferred-deposit check loans — but they typically follow a similar business model: small, short-term loans (averaging around $500) with high interest rates that commonly hover around 400 percent and can even approach 1,000 percent annually.
Applicants for payday advances may already be living paycheck to paycheck and suddenly find themselves saddled with a large expense. They may have too much existing debt to qualify for more credit, or they might lack the documentation and financial education that could help them obtain loans at more traditional institutions such as banks or credit unions.
Payday lenders eliminate these obstacles by dangling incentives that often include no up-front costs, no credit checks and no disclosure of financial information. The process is quick and discreet — applications can be completed in person, by phone or on the Internet in less than 20 minutes and funds are deposited into the recipient’s bank account within 24 hours.
Some applicants believe they will be able to repay their loan by their next payday, and some do. Many, however, opt to renew, extend or postpone their loans, underestimating the consequences of high interest rates. What seems like an innocuous $15 fee for a $100 loan can snowball into a debt several times the size of the initial amount.
Over 10,000 payday loan outlets sprawl across the United States, not to mention the multitudes that operate online. Their numbers in a specific area are often difficult to monitor, as many outlets also advertise for alternate services like jewelry pawning, automotive services and sundry retailers.
Regulation
Regulation of payday loans varies by state and locality, and different levels of government possess different powers for taking action. Fifteen states have banned the practice, mostly with usury laws that prohibit exorbitant interest rates.
In 2006, Congress passed federal regulation limiting rates at 36 percent APR for military personnel. Many industry opponents favor state legislation modeled after this law that would extend the same lower rates to civilians.
Because San Diego city officials lack the authority to cap interest rates and are limited to working with land use, Gloria said he is exploring “potential options that could include a moratorium or an ordinance that would regulate the number of lenders in a given area, much the same way we have limits on other types of businesses that have detrimental effects on communities.”
Last year, the San Diego City Council Land Use and Housing Committee, which Gloria chairs, held a hearing on the effects of payday loan establishments and, pending a staff report, may pursue moratorium options in the future.
“There are plenty of businesses, including establishments that sell alcohol and adult entertainment, where we dictate the signage, appearance, hours, security, concentration and overall presence,” Gloria says. “We have control of all that, and I think payday lending needs regulation as well. We hope to regulate what is essentially an unregulated business.”
Alternatives
Because many believe that payday loan outlets prey on low-income individuals in financial trouble, the industry’s critics also advocate for financial literacy programs that can educate payday lenders’ target audiences about other financial options.
“We want to see a great deal more mainstream establishments like banks and credit unions, and we have to work to find out how we can get them in our community so that folks relying on payday lenders can have access to more appropriate levels of interest rates,” says Gloria.
O’Boyle advises those considering payday loans to borrow from family or friends or to work with community organizations like the International Rescue Committee in City Heights. “Let them help you figure out how to get a loan in a more conventional fashion,” she says. “There are a lot of groups out there that will help with that kind of counseling.”
“I think as a community, we’d be better off if we found alternative ways to get emergency money to people through credit unions or major employers instead of having people resort to payday lenders,” O’Boyle says.
The Defense
Payday lenders contacted for interviews either did not respond or declined to comment. Employees at most outlets said their businesses were franchises, and that they were prohibited from speaking to the media.
However, a common argument in defense of payday lenders claims that processing costs for short-term loans are comparable to larger, more traditional loans (like home mortgages), but that matching interest rates would not be profitable on such a small scale. Thus, they charge significantly higher rates to compensate for a return that might be smaller if borrowers pay on time rather than rolling over loans.
O’Boyle believes that even law-abiding payday lenders threaten the economic stability of neighborhoods through rapid proliferation. “The problem is that they don’t go away because they’re so profitable,” she says. “If you’re pulling a nearly 400 percent interest rates on these small loans, you’re not going to go out of business. You’re going to multiply.”
When Gloria’s Land Use & Housing Committee addressed the problem last year, it found that the actual business model of payday lenders is to concentrate heavily in certain areas. He says he hopes that land use control will enable officials to prevent lenders from taking advantage of targeted neighborhoods.
Studebaker adds that oversaturation also harms other businesses. “A disproportionate increase in any one type of business creates a problem for other businesses,” she says.
Blurring The Lines
Although payday loan critics encourage borrowers to utilize traditional financial institutions, a few mainstream banks have appropriated some elements from the cash advance industry.
Wells Fargo, for example, offers cash credit available for immediate withdrawal to its customers who deposit funds electronically. After authorities expressed interest in regulating the accompanying fee, Wells Fargo claimed the fee was voluntary and offered to waive it for any reason. The bank’s current payday loan model is called Direct Deposit Advance and charges 120 percent APR.
Most authorities want to help the public realize the dangerous pitfalls of payday loans, and to understand that the convenience of fast cash can rapidly accumulate into a mountain of insurmountable debt. Though other options require documentation and more thorough scrutiny, officials believe these options provide more financial security in the long run for individuals and are more beneficial to local communities.
