Stopping the cycle of debt

With compounded annual percentage rates of up to 459 percent, many times the loan itself is terribly costly and can lead to the need for more loans to simply stay above water.

Typically, borrowers get $255 of a $300 check, with the remainder being a fee that must be paid by the borrower’s next payday. The lenders tend to set up shop in low-income areas where many residents don’t have an alternative to either borrow money or cash a check. San Mateo County residents pay nearly $6.1 million in fees to the 24 payday lenders that operate here, according to Rose Jacobs Gibson, the San Mateo County supervisor who wrote a resolution committing the county to explore alternatives and find ways to eliminate the overconcentration of such businesses.

The San Mateo County Board of Supervisors approved the resolution 5-0 in what could be considered a good first step toward limiting such businesses and educating county residents of alternatives. The county should explore partnerships with local credit unions to establish a way for people to not only cash checks, but borrow small amounts of money at reasonable rates. Credit unions are not necessarily in business for charity, but surely some money can be set aside for a pilot program to see how it works. Doing so would not only greatly assist those with no other alternatives but could build a relationship with a potential customer who may need help getting back on their feet.

Payday lenders are legitimate businesses and set up in certain locations for a reason. However, it is sad to see so many taken advantage of. We are encouraged by the attitude of Fernando Peña, who spoke about payday lenders as a representative of California Financial Service Providers. While Peña expressed disappointment with the board’s resolution, he said his group is looking forward to working with the county as it crafts a resource guide for the public of what alternatives there are to payday lenders. Perhaps the payday lenders can help lead the charge by partnering with willing financial institutions to set up bank accounts and loan programs for those in need. It may seem like a risky proposal since many who require such services may not have steady work. But volume can be leveraged through a partnership between the lenders, the county, nonprofits and financial institutions to spread the risk and establish new opportunities for the community on a trial basis. Loans can be paid off over a longer period of time at a lower interest rate to help build credit for those who have no other way to do so.

The San Mateo Credit Union announced this week it will open a new branch in East Palo Alto this fall in the space formerly occupied by California Bank in Trust in the Ravenswood 101 shopping center. It will offer bank accounts, loans and other bank services including free workshops and seminars. That is a positive move to provide needed banking services to the city. If successful, such a move could be replicated elsewhere and replace services that focus too much on high interest rates rather than providing a community service and building a customer base.

The county Board of Supervisors has provided an opening for further exploration of alternatives to payday lenders. The San Mateo Credit Union has taken a step to provide a much-needed service. We look forward to seeing how both paths develop.