The following open letter is a part of the Presidio Graduate School’s Capital Markets course. For one of the course assignments, students write a letter to an oversight body, government entity or other appropriate institution. The topic: changing the sector of capital markets that relates to their chosen topic so it reinforces principles of sustainability. Follow along here.
An Open Letter to the Payday Loan Industry, the California Department of Consumer Affairs, and California State Legislators
As MBA students and future business leaders in sustainability, we are writing to urge you to support tougher regulations around the practices of predatory lending in California, specifically payday loans. We are encouraged by our state’s history of supporting progressive causes and protecting those susceptible to predatory mainstream and corporate interests. We seek to enlist your help to create stronger financial protections for vulnerable Californians.
Recent studies from Harvard and the University of North Carolina estimate that each year more than 10 million poor and elderly Americans are the target of over $50 billion in exorbitant fees and high interest rates charged by unscrupulous lenders. This false tax on America’s working poor is unjustified. A detailed study from Colorado from as long ago as 1996-1997 showed that the charge-off rate for payday loans was 3%, while that for credit cards was 2.7% over the same period. Recent figures from the payday loan industry range from 2.5% to 5%, which in many years is lower than the charge off rate for credit cards. Industry claims that excessive rates are necessary to cover higher risks of default do not stand up. At the very least we urge more investigation into this shrouded industry.
Our research has shown that in California it is still legal for a payday lender to charge a maximum APR of 459% to the most financially vulnerable group of citizens, which we find outrageous. While California has attempted to regulate this industry, more must be done and we can’t deny the urgency of our message: There are now more payday loan stores in California than there are McDonald’s and Starbucks combined.
California is typically a leader in social justice, but in 2006, it was North Carolina that took an aggressive step to eliminate predatory lending by outlawing ‘payday lending’. This bold move proved to benefit low- income families by reducing the threat of debt traps. For example, a typical cash loan of $300 (the current maximum amount in California) carries with it interest rates and fees that often trap a borrower into debt, resulting in recurring loans. These recurring loans produce on average nine times as many loans from the original loan amount. In contrast, borrowers in North Carolina only get ‘rolled over’ in the same loan twice on average due to significantly lower APR’s. While California has eliminated direct rollovers of payday loans, the debt trap still occurs as borrowers are forced to transfer the principal from one debtor to another.
States like North Carolina have shown that it is possible to limit exploitation by these companies, and we hope that California will take similar steps toward improving the livelihood of many low-income families. We request your support and leadership in eliminating or curbing the worst abuses of this industry.