EDITORIAL: Legislature whiffs on reining in payday loans

In tough times, with many Californians living paycheck to paycheck, our state lawmakers still cannot manage to get a bill out of the banking committee to protect citizens from usurious lending.

California remains among the most lax states when it comes to payday lending. Take out a two-week loan of $300 and you pay a fee of $45, leaving you $255 in cash. That is equivalent to an annual percentage rate of 460%. In California, 82% of the fees -- $474 million -- come from borrowers taking out a new loan within two weeks of paying off their last loan.

Clearly, this is an industry that depends on strapped families continuously borrowing.

Unlike California, other states and the federal government are acting. For example, in 2007, Congress established a rate ceiling of 36% annually for payday loans for active military service members and their families. Fifteen states and the District of Columbia have similar caps for all payday loans.

Then there is the Consumer Protection Bureau. Its director, Richard Cordray, told the Washington Post on Sept. 11 that this new federal bureau would begin making rules "in the near future." This follows a yearlong study the bureau did of more than 15 million payday loans. It found that only 13% of payday borrowers took out only one or two loans over a year.

Some states get at the problem of repeat borrowing by setting an annual cap on the number of payday loans that lenders can give to any borrower. Washington, for example, has a limit of six loans per borrower.

Bank regulation appears on the horizon as six banks -- including Wells Fargo and U.S. Bank in California -- have gotten into payday lending with so-called "deposit advances." It works like this: If a customer gets a direct deposit paycheck of $500 every two weeks, the bank might give him or her an advance of $500 with a fee of $50. The bank takes the entire $500 paycheck, leaving no money to pay bills. At the next paycheck, the bank takes the remaining $50, leaving the customer $450.

The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, which oversees the nation's largest banks, have issued "guidance" to rein in bank payday lending before it expands.

Finally, there is online payday lending, a way to avoid the laws in states that restrict or ban storefront payday lending. New York and Maryland are going after the banks that allow online payday lenders to automatically withdraw loan payments from their customers' accounts. New York sent letters to 117 banks, and the FDIC also has told banks to monitor requests for withdrawals from customer accounts on behalf of payday lenders.

The California Legislature did pass Senate Bill 318, which would establish a pilot program for loans from $200 to $2,500, with an annual percentage rate capped at 36%. This is similar to a federal pilot program that proved that banks can profitably offer affordable small-dollar loans. But this is no substitute for reining in payday loans, a task for the next session.