In seeking to protect those who may be vulnerable and in need of quick cash, San Mateo city officials are moving to create an ordinance restricting payday lenders while studying the impacts of the often cyclical loans that can propagate debt.
The City Council met Monday night to discuss means to regulating a practice it feels can be socially detrimental while still having to navigate around the state’s jurisdiction over payday lenders.
Currently, there are four payday lenders in San Mateo that, per state law, can offer up to a $300 cash advance at no more than 15 percent interest rate.
Payday lending can be a slippery slope as people often compound loans that end up compiling an average annual percentage rate of more than 400 percent — meaning borrowers on average ultimately pay $800 for a $300 loan, according to payday lending opponents.
“Payday lending is a sensitive land use, particularly given the well-document social hazards,” said Liana Molina with the nonprofit California Reinvestment Coalition. “These are not just your average personal service business, these are not your local coffee shops … these are businesses that rely on vulnerable communities.”
But industry representatives argue payday lenders are already heavily regulated and say consumer advocates often misrepresent the loan process that must be paid back in full within 30 days. Short-term loans can help individuals avoid having utilities turned off from failing to pay bills or being hit with higher fees from overdrafting accounts, said Thomas Leonard, executive director of California Financial Service Providers Association.
State and federal laws preempt the city from regulating these businesses’ practices; however, San Mateo can implement land use restrictions or require special use permits. The council unanimously supported considering restricting where payday lenders can be located, such as prohibiting them from being near schools, parks, liquor stores, pawn shops or within a certain distance from one another.
City officials may also consider having businesses secure permits that could require lenders hire security guards, have lighting requirements and restrict the hours of operation.
Having made regulating payday lenders a priority at its 2014 goal setting session, the council unanimously instructed staff to proceed with researching impacts it seeks to curtail, such as higher rates of crime near established lenders, and begin to draft an ordinance.
“I think we should be as aggressive as possible to curtail their uses. So yes, I think we need to be bold,” Councilman David Lim said.
The council also moved to lobby state and federal lawmakers to create stricter legislation regulating payday lenders.
Leonard said California has some of the highest expenses in the nation yet boasts the lowest payday loan maximum. Leonard said businesses don’t force the product on consumers, they offer a line of credit to those who may have few other options.
“We’re not in it for giving our money away, we do expect it back. So we do take a look at what we think is the best option for them to pay it back and if we don’t think they can pay it back, we’re not about to lend it to them,” Leonard said.
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, previously wrote in an email.
A significant challenge in reducing predatory lending practices is educating those who are most vulnerable on alternate financing options.
Based on census data, three of San Mateo’s four payday lenders are located in low-income areas and the other is established in a primarily Hispanic community, Molina said.
Saul Gonzalez, a financial literacy advisor for the nonprofit Samaritan House, said he consistently sees clients whose families are devastated by the impacts of payday lending. Having entered businesses posing as a borrower, Gonzalez said payday lenders are predatory as they attempt to make one feel warm and fuzzy while not revealing the potential consequences of taking out short-term loans.
Councilman Joe Goethals said he’d like to see “us as a council, and as individuals, to sponsor community education events to get the message out there.”
Councilmembers also expressed an interest in following in the footsteps of the city of Sunnyvale by requiring payday lenders post signs outlining alternate financing options and relate the impacts of borrowing.
City Attorney Shawn Mason reiterated that the city could potentially face legal challenges should it try to regulate the operations of payday lenders that are already subject to the state’s Deferred Deposit Transaction Law.
Instead, Assistant City Attorney Gabrielle Whelan said the city can strive to regulate the impacts of payday lending and the council agreed staff should further investigate secondary effects such as graffiti, litter and higher crime rates.
The council and members of the public agreed to look toward San Mateo County’s ordinance, which was enacted in 2012 and applies to unincorporated areas by prohibiting lenders from being located within a 1,000 radius of one another and within 500 feet of residences, pawnshops, liquor stores and any bank or credit union.
Andres Connell, a representative with the East Palo Alto nonprofit Nuestra Casa, said his organization has worked tirelessly the last few years to raise awareness about the impacts of payday lending and alternatives such as going to a local credit union. Connell and Gonzalez urged San Mateo officials to continue their efforts to create an ordinance aimed at protecting residents from predatory payday lenders.
“At the end of the day, when payday storefronts operate, they affect lives,” Connell said. “It’s hard when we come across families that have been on that treadmill six, seven times. It’s just the despair on their faces.”
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