A guest article from San Jose Council Member Ash Kalra on behalf of Silicon Valley Community Foundation.
On January 1st, hundreds of new laws went into effect in California, ranging from enacting stricter gun controls to legalizing driver licenses for undocumented immigrants. Unfortunately, none of these new laws will protect California consumers from the high-cost, predatory payday lenders proliferating throughout our state. While 17 other states and the District of Columbia have implemented laws that restrict payday loans, this is an area in which our state legislature has repeatedly failed to take action. Meanwhile, nearly two million Californians were saddled with payday loan debt in 2013.
California is currently home to upwards of 2,000 payday loan stores, most of which are located in low or moderate-income neighborhoods and communities of color. While proponents claim that these lenders provide emergency one-time credit for people struggling to make ends meet, data collected by state and federal regulators illustrate that most payday loan borrowers become caught in a long-term cycle of expensive debt as a result of their payday loan usage. For example, consumers with seven or more loans per year generated 76 percent of all payday loan fees. When borrowers get stuck in the payday loan debt trap, they end up paying over 450 percent in annualized interest over the course of several months or even years. These loans hurt California’s economy too, representing an estimated $135 million economic loss in 2011, according to 2013 analysis by the Insight Center for Community Economic Development that showed that consumer buying power was significantly decreased due to high interest payments and bankruptcies.
Over the last few years, city councils have taken the matter into their own hands, using their local land use authority to amend municipal codes to restrict the growth of payday lending and other high-cost products like auto title loans. While local jurisdictions are preempted by state law from enacting consumer protections such as an interest rate cap, cities like San Jose, the Capitol of Silicon Valley and the third largest city in the state (10th in the nation), have adopted “caps” on the number of payday loan locations allowable within their city.
The San Jose ordinance limits the maximum number of payday loan store locations to be sited in the city to no more than thirty-nine (the status quo), and prohibits new payday lenders from opening in very low-income census tracts. The ordinance also sets forth additional safeguards against over-proliferation of payday lenders, such as restricting them to certain designated zoning districts, requiring a quarter mile separation between new and existing payday storefronts, and applicants must obtain a zoning code verification certificate in order to operate. The surrounding cities of Gilroy and Sunnyvale have adopted similar “caps”. Other cities, like Long Beach and Fresno, have enacted conditional use permitting requirements and created “buffer zones” to prevent similar stores from locating next to each other and saturating neighborhoods with predatory lenders.
While these local ordinances do not immediately address the payday loan debt trap, they can mitigate some of the damage caused by these lenders in local communities. Moreover, the ordinances are creating a groundswell of support across the state for payday loan reforms. Given the state legislature’s lack of political will to regulate this industry beyond licensing and disclosure requirements, the continued spread of local efforts will build pressure for state legislators to enact tougher payday lending reforms.
To learn more about how cities are protecting families by restricting payday lenders in vulnerable neighborhoods, please join the webinar hosted by Silicon Valley Community Foundation on Wednesday, April 15, from 10:00 – 11:00 am PST. Register here.