City wages war on payday lenders

City of Gilroy

City Council is coming after check cashing and payday loan businesses with torches and pitchforks, following a disparaging critique of the industry that could potentially shut such operations down in Gilroy.

During Council’s regular meeting Monday, members of the public, representatives from local nonprofit organizations and even councilmembers took turns pummeling the ethics of businesses such as Check into Cash on Chestnut Street and Advance America on Church Street, which offer check cashing services and payday loans.

These businesses aren’t breaking any laws, but the exorbitant interest rates on the loans they offer – an annual percentage rate (APR) of around 460 percent is standard on a 14-day loan – and the fact such businesses proliferate around the poorest areas of Gilroy has pushed Council into action.

Gilroy, however, isn’t the first city to shine a spotlight onto these types of businesses. San Francisco prohibits payday lenders and check cashing businesses from operating within a quarter mile of each other, and has an absolute moratorium on these businesses in certain zoning districts. The City of Los Altos has completely banned them altogether.

On Monday, following the period for public comment – during which Community Solutions President/CEO Erin O’Brien denounced check cashing services and payday lenders for preying on the “most vulnerable with the lowest income” – Council voted 7-0 in favor of adopting an Urgency Interim Ordinance that establishes a temporary moratorium, or period of delay on the establishment, expansion or relocation of payday lending and check cashing businesses within the city.

As for Gilroy’s existing six payday loan and check cashing operations, they’re facing an uncertain future thanks to an additional 7-0 vote in favor of a proposed amendment to the City’s zoning code that will limit or prohibit the operation of such businesses in Gilroy.

City staff now has 45 days to put the proposed ordinance together, but that timeframe can be extended by nearly two years if the need arises.

The issue made its way to the dais after two local nonprofit organizations, Community Solutions and St. Joseph’s Family Center, brought their concerns to Mayor Don Gage’s attention. After hearing accounts of families trapped in a never-ending cycle of debt from O’Brien and Executive Director David Cox with St. Joseph’s Family Center, Gage said it became clear to him that Gilroy’s “most vulnerable population is being taken advantage of.”

Two representatives from Check into Cash and Advance America argued their case.

“A payday loan makes personal and economic sense,” said Vanessa Lugo, a corporate spokeswoman representing Check into Cash.

Offering consumers the choice, she explained, enables them to access credit while avoiding the potential for late charges on credit cards or incurring fees for bouncing checks.

Corporate spokeswoman Sophia Garcia with Advance America traded ideology and barbs with councilmembers.

“Demand for short-term credit will continue,” she promised.

In a series of stinging rebukes, councilmembers dismantled Lugo and Garcia’s arguments.

Councilman Dion Bracco offered up the bluntest appraisal of the night when he described payday loan and check cashing operators as “predators.”  

While some members of the community say they’re “thrilled” with Council’s crackdown, owner David Sohrabi of D&S Money Market at 281 First St. in Gilroy calls the decision “confusing and unfair.”

Even though Sohrabi doesn’t offer payday loans – his business does check cashing only – he now finds himself caught in the crosshairs of an ethical showdown between the Council and business owners.

But Gage says that doesn’t matter. Whether the business offers both types services, one or the other, there are issues with each, he maintains.

But Sohrabi refutes claims that the check cashing businesses pose the same types of ethical problems as payday loans.

“Years ago a company asked if we were interested in doing it,” said the 57-year-old Gilroy resident, referring to a proposal from a company called Money Mart in 2003 that tried to get him on board.

But after reading the literature that Money Mart sent him, Sohrabi decided he didn’t want to touch payday loans with a 10-foot pole.

“It’s a rip-off. It’s a crime. Their terms are disastrous,” remarked Sohrabi, pointing to a piece of Money Mart paperwork, which he saved from 2003. The paperwork lists an APR rate of 920 percent on a seven-day loan.

Typically, payday lending businesses offer 14-day loans that are capped by California law at a maximum of $300 per individual loan. Anyone taking out the maximum $300 amount will be charged $45 for that privilege. And because payday loan consumers tend to engage in cyclical borrowing, research demonstrates the typical borrower ultimately pays $800 for a $300 loan, according to City staff.

Still, Jeffery Salvatore, 38, a regular at D&S, doesn’t understand all the fuss.

“I’ve been a customer here for years. They’re really nice people,” he said.

The convenience of being able to walk in and pay a bill using the “Quick Pay” service at the last moment before your PG&E supply is to be cut off, Salvatore explained, “works out for a lot of people.”

Councilmembers and nonprofit representatives are cognizant of the need to educate community members who fall on hard financial times. As an alternative to opting for short-term loans, O’Brien wants people to know about the available local services that can help.

During Monday’s meeting, Councilman Peter Leroe-Muñoz spoke eloquently of “cycles of indebtedness” and dovetailed his views on the need for fiscal education with O’Brien’s.

However, establishing a temporary moratorium and amending the City zoning code is “not a panacea for all our problems, but it gets us talking,” Leroe-Muñoz observed.

Cox spoke of the negative impacts that can germinate from payday loan and check cashing businesses.

“Five to seven percent of our families have been using these,” he noted.

Cox said he wants disadvantaged families to understand there are more options on the table.

But to Salvatore, the issue doesn’t stem from payday lending and check cashing businesses in Gilroy. It’s the bigger picture behind it.

“Look at the economy,” he remarked. “People are broke.”