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As millions of Americans lose jobs, shifts and other sources of income during the coronavirus health crisis, financial experts worry that people will be preyed upon by loan sharks who stand to profit.
“We saw this during the foreclosure crisis, where people were in distress and scammers took advantage to promise to help people connect to relief for a fee they could not afford,” said Kevin Stein, deputy director of the California Reinvestment Coalition, a San Francisco-based nonprofit that advocates for protecting consumers.
In 2018, there were 133 payday lenders in the central San Joaquin Valley, according to California records. But there were nearly 198 of them ten years earlier, when the valley began feeling the effects of the 2008 recession and spiking unemployment.
Statewide, California has 1,645 licensed locations offering payday loans, according to the Department of Business Oversight, and the number has declined by a quarter over the past decade.
Payday lenders in California under state law can loan up to $300 and charge a maximum of $45 in fees, according to the Department of Business Oversight. The average annual percentage rate (APR) for payday loans in the state was 376% last year, which is exponentially greater than the APR for most credit cards.
The payday loan industry says its businesses provide a needed service at an affordable cost. But advocates argue they prey on financially vulnerable families. Most payday loan offices in California are located in zip codes with above-average poverty rates.
A weekly record number of Californians, almost 187,000, filed initial claims for unemployment insurance last week, according to the U.S. Department of Labor.
By June, private-sector job losses could climb to more than 55,000, or 11% to 12% of employment in the central San Joaquin Valley, according to a Sacramento Bee analysis of a recent Economic Policy Institute study.
“We’re facing one of the worst unemployment crises we’ve ever seen,” said Adam Briones, director of economic equity at the Greenlining Institute in Oakland. “I think it goes without saying that when families are in crisis, those payday lenders are some of the easiest ways to get money quickly. It’s really tough to get out of that debt though.”
A new law enacted last year caps interest rates at 36% for loans from $2,500 to $10,000, but it doesn’t apply to payday lenders, only larger lenders.
If you were recently laid off and need a loan, experts have advice on how to get help without falling into a debt trap.
Go to your bank or credit union first
If you’re struggling to make a payment, contact your lending institution first. Rosa Pereirra, branch manager of Self-Help Federal Credit Union in Fresno, said they have allowed all their members to skip their payments in April like they sometimes do during the holidays.
“I would beg the public to call the institution they already owe the payment to because a lot of them get frantic,” Pereirra said. “We’re telling them, take care of yourself, stay home. I can promise you 99% of lenders have a way they can help people skip their payment.”
Banks including Wells Fargo, Citi, Chase and Capital One are encouraging cash-strapped customers to contact them to see what they can work out. Many can offer hardship plans, which could mean lower interest rates or smaller fees.
Briones, from Greenlining, said banks may not offer hardship plans offhand, so clients should do their research first, and ask for what they need. For additional resources, seek out the Department of Housing and Urban Development approved housing counselors or credit counselors from nonprofit organizations.
Regulators are also responding to this pandemic by asking large banks and community development financial institutions to start offering small-dollar loans. Briones said clients should ask their banks for a small loan before resorting to a payday lender.
“Wherever we’ve seen payday lending it does lend itself to predatory lenders. But if it is large national banks making small-dollar loans, at the very least there is a regulatory aspect. There’s a structure there,” he said. “Where we worry the most is non-bank lenders that aren’t regulated at the federal level and have much less accountability than large national lenders.”
If lenders ask for a canceled check, that’s a red flag, according to Pereirra from Self-Help Federal Credit Union.
“Most banks and credit unions are able to make a direct deposit. A lot of predatory lenders go ahead and want to have access to your account. With a check, they have the routing number and account number so they can try to pull it several times.”
Pereirra said small loans typically should run between 2.5% to 10%. If a rate exceeds 20%, she encouraged consumers to reach out to a credit union for refinancing help.
“I just saw one at 480% APR,” Pereirra said. “A lot of times we’re able to pay their high rate loans off.”
The Consumer Financial Protection Bureau has also created multiple guides on navigating loans and debts.
Coronavirus aid available
Trump signed a $2 trillion coronavirus stimulus bill on Friday with significant relief for families and small businesses.
Individuals who filed their 2018 or 2019 taxes can receive a check of up to $1,200, plus $500 for each child. You can calculate how much you receive here.
For many, advocates argue, that won’t be enough to cover rent or other expenses.
“We’re really concerned because we feel that for an economic recovery package to make an impact, those funds need to be consistent. We think families are going to need 12 to 24 months of payments to make it out of this economic fallout,” Briones said.
For now, however, that payment is a one-time deal.
The stimulus also includes $10,000 loans for injury disaster relief through the Small Business Administration to provide paid sick leave to employees, maintain payroll and make rent or mortgage payments. You can apply through SBA.
“This is a historic move on the part of SBA,” said Tara Lynn Gray, Fresno Metro Black Chamber of Commerce president. “You can apply for the loan, not yet have an answer and within three days get $10,000. If you end up not qualifying, they don’t come after you for $10,000. That is unheard of for small businesses. And SBA loans are very difficult for us to get. Most people of color struggle greatly to get those loans.”
Manuela Tobias is a journalist at The Fresno Bee. This article is part of The California Divide, a collaboration among newsrooms examining income inequity and economic survival in California.