San Jose Passes Ordinance Cracking Down On Payday Lenders

Not all residents of the wealthy Silicon Valley are flush with cash.

Turns out payday lending -- a type of short-term, high-interest loan that can imperil a borrower's bank account -- is thriving in San Jose, the third largest city in California and tenth largest city in the U.S. And that's caused city lawmakers to crack down on these money shops, according to the San Jose Mercury News.

"I don't think there is any argument that there is a need for more payday lending in our community," Councilman Ash Kalra said in the SJMN.

The new ordinance, which passed a city council vote on Tuesday, will cap the number of storefronts shilling loans at the current number, which is 39. With the new law, San Jose becomes the largest city in America to limit payday lenders -- joining the ranks of other cities that have taken steps to restrict the practice, including Ames, Iowa, Los Altos, California and Birmingham, Alabama. San Jose's law also requires a minimum distance between other payday lenders, and prohibits new stores from opening in a low-income census tract.

Critics of the law have said that creating these restrictive zoning rules won’t change the residents’ need for loan alternatives, and that the curb will only push more people to online payday lenders, which can charge even higher rates and present more risks for consumers.

Payday loans and similar high-cost short-term installment loans -- whether offered online or at a storefront shop -- typically have steep origination costs, high interest rates and fees for refinancing the loan if a borrower cannot pay it back under the original terms. Borrowers can often get a same-day loan with only a bank account number and basic employment information.

The industry has been criticized by consumer advocates who say the expensive loans can trap customers in a cycle of debt, forced to keep refinancing the loan at very high rates. Proponents of payday lending, on the other hand, say it provides a needed alternative for people who cannot get an emergency loan elsewhere.

But some in the payday industry appear to be trying to help it shed its reputation as a service used by people living paycheck to paycheck, and instead present itself as a resource for young people who don't have credit alternatives elsewhere. However, unlike credit, payday loans tend to have much higher interest rates and shorter payback periods.

Think Finance, a company that owns both a payday lender and a rent-to-own shop, released a survey on Thursday that said 22 percent of mid-income consumers between the ages of 18 and 34 had used a payday loan in the past year, and 15 percent of lower-income respondents had used one. The survey included 640 respondents.

"Millennials are under a lot more financial pressure" than their age group in past decades, Ken Rees, CEO of Think Finance told USA Today. "Even at higher levels of income, they may not have full access to traditional bank products."