Lenders shift focus as payday loans reach 13-year low in California

Dive Brief:

Payday loans have fallen to a 13-year low in California, the state's Department of Business Oversight (DBO) said in a press release Thursday. Both the number of payday loans taken out by consumers in 2018 (10.2 million) and the aggregate amount of those loans ($2.8 billion) are the lowest figures since 2006, a continuation of a five-year decline, according to American Banker.
However, it appears lenders are migrating toward offering higher-dollar loans that are subject to less strict regulations. Payday loans, as defined by California, are limited to $300. Although the fee that accompanies it is capped at 15%, payday lenders charged an average annual interest rate of 376%. "On the one hand, it’s encouraging to see lenders adapt to their customers' needs and expectations," DBO Commissioner Manuel P. Alvarez said in the press release. "But by the same token, it underscores the need to focus on the availability and regulation of small-dollar credit products between $300 and $2,500, and especially credit products over $2,500 where there are largely no current rate caps under the [California Financing Law]."
The report also highlights the industry's reliance on repeat business from lower-income consumers. Repeat customers accounted for 80.7% of the total amount borrowed. More than three-quarters of subsequent loans to repeat customers were issued within a week of the previous loan coming due. Half of all payday loan customers had average annual incomes of $30,000 or less. And repeat customers who took out seven or more loans paid 70.7% of the $420.5 million in fees the industry collected, according to the press release.

Dive Insight:

California's state Assembly passed a bill in May that would cap interest rates at 36% plus the federal funds rate on installment loans between $2,500 and $9,999, according to American Banker. About 42% of the loans made in 2018 in that category last year carried annual percentage rates of 100% or more, state data showed. The measure is awaiting a state Senate vote after a key Senate panel passed it in June.

Such action may clamp down on some of the fastest-growing segments of the short-term loan industry. The number of unsecured consumer loans between $5,000 and $9,999 increased 26.2% in 2018 and the aggregate dollar amount loaned increased 30.5%, according to the press release.

Lenders anticipating a Consumer Financial Protection Bureau rule on short-term loans have started offering financing that lasts several months rather than a few weeks. Payday loans in California are limited to 31 days.

Both the number of customers and the number of lenders decreased, with the 1.62 million consumers representing a nine-year low, and the number of licensed locations dropping by 34%, according to state data.