Kerry Chan/Daily Journal
Payday lenders, like this one on Fourth Avenue near downtown San Mateo, offer other services like check cashing and money transfers. City officials are considering restrictions on such businesses.
San Mateo is joining cities across the county in considering restrictions of payday lenders by regulating land use and promoting educational programs to prevent consumers from furthering the cycle of debt.
There are currently four payday lenders in San Mateo and the city is considering creating an ordinance preventing any more from opening up, restricting where they can be located and developing outreach efforts to educate individuals through financial literacy programs.
But industry representatives say payday lenders are already overseen at the state and federal level and there are few alternatives for those who need immediate cash. It isn’t economically viable for a lender to serve those who can’t pay off their loans and high interest rates correlate to high default rates, Paul Soter, outside general counsel for California Financial Service Providers Association, wrote in an email.
“Payday lending provides short-term small-dollar credit to consumers who need that service and are unable to qualify for competing forms of credit such as credit cards,” Soter wrote in an email. “Payday loans should never be a consumer’s sole long-term financial strategy, but they may be a realistic mechanism to meet immediate short-term need.”
Borrowing, however, is most often cyclical and the majority of those who use the service end up taking out 10 loans, said Keith Ogden, anti-predatory lending staff attorney at Community Legal Services in East Palo Alto. Annual interest rates are often up to 460 percent for a two-week loan and borrowers on average ultimately pay $800 for a $300 loan, Ogden said.
“There are studies … in terms of looking at the economic harm that go with churning debt. You have high rates of incidents of default, you have more frequent credit card delinquencies that can lead to bankruptcy, there’s no other way out. The term trap is used because a lot of times it’s advertised this could be a solution to your problem. But it creates a bigger problem.”
State and federal bank regulations prevent cities from setting interest rate maximums, Ogden said. Instead, local jurisdictions have turned to land use policies to restrict hours of operation, lighting requirements, window coverage and where lenders can be located. Other cities that regulate payday lending are Redwood City, Pacifica and East Palo Alto. The cities of Menlo Park and Daly City are also working on a regulations.
During a February San Mateo City Council goal setting session, the council prioritized a review of payday lending and instructed staff to research and possibly develop a restrictive ordinance, said City Attorney Shawn Mason.
In 2012, the county passed an ordinance which applies to the unincorporated areas and prohibits payday lenders from being within a 1,000-foot radius of one another and within 500 feet of residences, pawnshops, liquor stores and any bank or credit union. The city of San Mateo is considering something similar, Mason said. City staff will research legal means by which they can regulate payday lenders and the council will be presented with options around September or October, Mason said.
Councilman David Lim said he would like to consider placing a moratorium on payday lenders to prevent any more from opening in the city. Education will also play a critical role in ultimately dissuading the practice, Lim said.
“What you have is, a lot of folks who use payday lending are immigrants in this country. … A lot of it is an educational component. Just helping our newest neighbors learn how to save money,” Lim said. “These folks haven’t been educated or it’s the only way they know. So we want to do an aggressive educational campaign.”
Saul Gonzalez, financial empowerment manager at Samaritan House, said payday lending can be detrimental to individuals and their families. Gonzalez said Samaritan House helps teach courses on financial literacy and the dangers of compounding payday loans.
Gonzalez said he’s working with a client who began with a two-week loan and was turned on to online payday lenders. Before she knew it, she racked up $25,000 in debt in just four months.
Greg Larsen, with California Consumer Finance Association, wrote in an email that brick and mortar payday lenders are strictly regulated; they can only loan up to $300 at a time, cannot issue another loan to a customer to pay off a current loan and there are restrictions on what they can do to collect.
Consumers can choose the best solution for their own situation and it’s harmful to arbitrarily limit choices in any marketplace, Larsen wrote in an email.
“While never appropriate for use as a long-term credit solution, payday loans can help consumers bridge a short-term cash flow shortage … and can be much less costly than other options such as bounced check fees or late payment, interest and reinstatement charges on bills such as utilities,” Larsen wrote.
Gonzalez said empowering clients means explaining the details and consequences of payday loans.
“It’s versus walking in and being educated by the person that’s selling a product. And that’s all they’re trying to do. So it’s misguided information,” Gonzalez said. “It’s not being discussed, the consequences of the APR or the profit aspect of ‘what I’m going to make and how my attitude is going to change if you can’t pay it back.’”
Ogden said with the state stalled in creating regulations limiting payday lenders and the harmful consequences individuals in need suffer, having cities begin through land use regulations and educational programs is critical.
“If more cities are addressing it, in my mind it sends a signal that payday lending is a horrible practice and ultimately we want to limit and change it,” Ogden said. “Ultimately that can happen on the state level, but cities can build that from the ground floor up.”
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