Muntasir took it anyway: “You can’t look at no hungry baby,” she said.
While lenders attribute the rise of these loans to innovation, critics say it resulted from regulators under the Obama administration turning against payday lenders.
“The increased scrutiny and limitations placed by federal agencies has encouraged the industry to look more toward installment lending,” said Quyen Truong, former assistant director of the Consumer Financial Protection Bureau. The Trump administration is now attempting to reverse some of those limitations, even as progressives in Congress push for tighter rules.
Maeve Elise Brown, executive director of Housing and Economic Rights Advocates, a legal-aid provider in Oakland, has seen a four-year increase in the number of clients staggering under larger-than-needed loans with triple-digit interest rates.
“People don’t realize how disastrous it’s going to be,” she said. “Most people are not that great at math.”
The industry’s argument: If someone decides to take out a particular loan, the state shouldn’t get in the way.
“There’s a misunderstanding of who the average borrower is,” said Roger Salazar, spokesman for Californians for Credit Access, a coalition of small-loan lenders. “They’re working folks who are smart and understand what the product is.”
At a state Assembly committee hearing last month, some borrowers spoke against Limón’s bill, arguing that high-cost loans, though expensive, helped them weather difficult financial times.
But other borrowers report being stunned by the steep cost of their loans. Muntasir from Richmond said that she cried when she realized the total amount she would be expected to pay (she eventually defaulted). Even for those who understand the terms, the math of compound interest can be deceiving.
Angela Garcia, a 35-year-old single mother from South Gate in southeast Los Angeles, recalls the feeling of throwing hundreds of dollars, month after month, at a problem that never quite seemed to get smaller. She called it a “nightmare.”
Garcia, who now works as a medical assistant at Kaiser Permanente, said she was unemployed when she took out her car title loan. She had six kids. Gas prices were high. Christmas was coming. Credit seemed like the only option — and it was ubiquitous.
“Everywhere you drive you see these freaking signs: ‘Get a loan,’ ‘Get a loan,’ ‘Get a loan,” she said. “It sounds great. It sounds like, ‘well, shoot, if they’re willing to help me, why not?’ But no. It’s not. They’re not helping you at all.”
In 2014, Garcia borrowed $3,200 from LoanMart. She remembers sitting in her kitchen one morning when she heard the sound of jangling chains on the street. She said she raced outside to grab her toddler’s car seat before her Chevy Suburban was towed away.
Garcia said she remembers spending hundreds each month, but doesn’t recall the loan’s exact percentage rate.
That’s not uncommon, said Rosie Papazian, who manages the personal finance program at New Economics for Women, a Los Angeles non-profit. Many clients are reluctant to dig into the details of their own financial situation, either out of shame or a lack of understanding.
“They think, ‘Gosh, it’s been three years and I’m still paying off this loan and I don’t really know why.’”
A third of high-cost loans end in default, according to one legislative analysis.
Consumer advocates say there would be fewer defaults — which can trash a borrower’s credit score even as collections agencies continue to seek repayment — if only lenders offered lower rates. Lenders counter that so many of their borrowers fail to pay back the loans because they are, by definition, in dire financial straits.
“Nobody wants to run a lending operation that has a high number of defaults,” said Salazar. But “it’s a risky customer base,” she noted.
Even if roughly 40% of customers are defaulting — as is the case with CashCall, according to court documents from an ongoing class-action lawsuit against the lender — the remaining 60% are using the product “effectively,” said Jackson of the Online Lenders Association.
She added that the proposed rate cap would make it impossible for her members to lend to the most financially desperate customers.
“People find ways to work around some prohibition. Look at what happened when we banned alcohol,” she said.
One 2016 study found that states where payday loan restrictions went into effect saw a 60 percent increase in pawnshop loans, which are typically more expensive. Another study found more bounced checks, more complaints of abusive lending, more bankruptcy.
Tatiana Homonoff, a New York University professor and an author of the 2016 study, said the response to a bill like Limón’s could be different, since payday loans are smaller and have a wider array of substitutes. But it’s important to think through the consequences, she said: “When these loans aren’t available, what do people do instead?”
Here’s how state Sen. Ben Hueso, a moderate Democrat from San Diego County who opposes a rate cap, framed the dilemma:
“What do I prefer?” he said. “That we have people that are defaulting on loans? Or people that are getting their knees broken?”
Not everyone agrees that lenders need to charge triple-digit interest rates to serve low-income borrowers. That includes some lenders.
If Limón’s bill were to become law “collectively we will be able to serve those consumers,” said Ezra Garrett, a vice president at Oportun, one of the more than a dozen lenders in California who offer consumer loans between $300 and $2,500, subjecting themselves to the state’s tight-interest caps.
But high-cost lenders argue the Oportuns of the state would not be able to profitably serve the state’s riskiest borrowers.
Last year, two state rate-cap bills failed — stymied by a coalition of Republicans and business-friendly Democrats. But the political climate has shifted.
Last August, the state Supreme Court raised new questions about the legality of high-cost loans — without specifying what interest threshold would be too much. There’s also some anxiety over a potential ballot fight, which Garrett called the “sledgehammer approach.” The prospect of unending litigation or voter-imposed mandates has pushed more lenders, including OneMain Financial and Lendmark Financial Services, to back Limón’s bill.
In the first quarter of this year, lenders opposed to the bill have outspent those in favor on lobbying by more than 3-to-1. But for now, the political odds may have tilted in the bill’s favor.
Assembly Speaker Anthony Rendon has called such loans “salt water in the desert —a thirsty person will drink it, but they will not be better off.”
With so much support in the Assembly, lobbyists on both sides are preparing for the real fight in the Senate, where moderate Democrats skeptical of the proposal are well represented in the Banking and Finance Committee. Tom Dresslar, a retired deputy commissioner at the Department of Business Oversight, called that committee “the industry’s last best hope to preserve this system of exploitation.”