Predatory loan shops become the prey

In an effort to combat what they see as predatory lending practices, Santa Clara County and San Jose are clamping down on the local payday loan industry.

Since the payday loan industry has the apparent blessing of the state, thanks largely to a powerful lobby, local governments are using zoning restrictions to control the proliferation of the short-term, expensive lenders.

Santa Clara County supervisor Dave Cortese explained:

“We’re just zoning them out of existence.  This isn’t spot-zoning or redlining certain areas.  We’re just saying we don’t want them anywhere.”

Though the number of payday loan storefronts has declined in California in the last few years, the number of loans increased from 10 million in 2006 to 12 million in 2010.  The number of customers, meanwhile, increased from 1.4 million to 1.6 million.  In 2010, $3.1 billion in payday loans were issued to people in the state.

In most payday loans, customers provide a postdated check, and in return receive up to $255 in cash.  The customer will have to repay the loan within two weeks, with a $45 fee added to the top.

While that seems reasonable, though expensive, it’s what often happens afterward that causes problems.  If a customer can’t pay off the loan on time, the interest rate skyrockets and compounds, putting him in an even more difficult position.

Research also shows the same people keep coming back to take out this type of loan, cutting into their already paltry incomes.

Several other cities around the Bay Area already have ordinances in place severely restricting the industry’s options.

Still, the payday loan industry, with the backing of the California Chamber of Commerce, argues that it provides a form of credit to groups that otherwise wouldn’t be able to access it.

While the businesses probably won’t go away entirely, efforts by counties and municipalities will likely lead to closures while making payday loan companies think twice about trying to set up shop.