The Los Altos City Council approved a temporary ban April 10 that prohibits payday lenders and check-cashing establishments from setting up shop in the city – even though there are currently none within its borders.
The council unanimously adopted an ordinance that bars lending and check-cashing businesses from operating in the city for a 45-day period.
Councilman David Casas said the council passed the ordinance so that City Attorney Jolie Houston could investigate possible amendments to the city’s zoning code.
“This allows us to look at the best options for Los Altos in regulating these types of businesses,” Casas told the Town Crier.
A city staff report on the item stated that payday lenders typically offer loans carrying annual percentage rates of up to 460 percent for a 14-day loan. The report noted that the lending establishments “operate almost exclusively in low-income neighborhoods and prey upon the most financially vulnerable consumers.”
According to the California Department of Corporations, state law requires that all payday lenders obtain licenses through the department. State law limits borrowing to no more than $300 per loan, with a maximum fee of 15 percent per $100 borrowed.
In addition, borrowers must pay off an existing loan before securing a new one. Lenders are prohibited from compounding interest on a loan if it isn’t repaid within the 31 days allowed under state law.
Casas called the industry practice of charging triple-digit interest rates to disadvantaged residents “fundamentally unfair.” He added that other cities, such as East Palo Alto, are forced to take additional measures because state law provides inadequate protection for consumers.
“We have a moral obligation to address these types of business practices to ensure that our residents and those who visit our community have some level of protection,” he said.
Melissa Morris, a senior attorney with the Law Foundation of Silicon Valley, told the council that the moratorium was an “excellent first step in evaluating the impact of payday lenders on the Los Altos community.”
Morris said the average payday loan borrower in the state takes out 10 payday loans on an annual basis.
“These aren’t individualized instances or emergency loans,” she said. “Even if that borrower is only paying a $45 fee for one loan, they’re paying that fee over and over again. For families whose finances are already stretched very thin, that can be an incredible expense.”
Still, Natasha Fooman, representing payday lender Advance America, urged the council to consider its zoning and regulatory options without the moratorium, because no such lenders currently operate within the city.
“What exactly is the public health and safety concern for the moratorium?” she asked the council.
Reached by the Town Crier, California Financial Service Providers Association spokesman Greg Larsen said the 460 percent annual percentage rate figure is an inaccurate representation of the financial impact to payday loan borrowers.
Larsen called the 15 percent charge per $100 borrowed “a flat fee” and said all borrowers must show proof of an active bank account and employment.
“Payday lending is a legitimate, state-regulated and competitively priced option for short-term credit for consumers in the marketplace,” he said. “Consumers use the product because they find it easy to understand, and when they take out a short-term loan, they pay it back at their next pay period and they’re done.”
The city council is expected to revisit the matter after Houston concludes her study of zoning options in mid-May.