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Morgan Hill to regulate payday lending

Following the lead of surrounding cities, the Morgan Hill City Council voted to prohibit new payday lending establishments in the city limits.

The unanimous vote at the Oct. 1 council meeting directed city staff to draft an ordinance prohibiting new establishments that offer the short-term cash loan services. The ordinance will also prohibit the two existing payday lenders in Morgan Hill—Advance America and Check Into Cash—from expanding or relocating within the city limits.

Payday loans, also known as cash advances or deferred deposits, offer borrowers small cash loans of up to $300 for a period no longer than 30 days, according to a city staff report. The lenders charge fees that amount to an annual percentage rate of 460 percent for a two-week loan.

While financial and social advocates have called the payday lending industry a scourge which preys on low-income residents, proponents of the service say it’s better than forcing consumers to resort to costlier or even illegal sources of emergency funds.

At the Oct. 1 council meeting, which included a public hearing on the payday lending staff report, Advance America Government Affairs Director Sophia Garcia noted that payday loans are just one of a variety of finance options offering consumers a choice.

“Among other credit options, a payday loan may be the best choice when consumers consider the often higher costs of bouncing a check, paying overdraft fees or incurring late payment penalties,” Garcia said. If licensed storefront payday lending services are regulated in Morgan Hill, residents may turn to illegal, unregulated online lenders where they have no protection if a deal goes bad, she continued.

The action taken by the council Oct. 1 does not affect the two existing payday lenders in town unless they want to expand or move.

“We have two (payday lenders), we don’t need anymore,” Mayor Steve Tate said.

City officials have heard no specific complaints about these two businesses, but the council asked staff to look into local options for regulating payday lending as nearby cities have in recent months.

In January, the Gilroy City Council took such an action by amending its zoning ordinance to prohibit any business that offers payday lending. There are currently six payday loan establishments in Gilroy, and Mayor Don Gage said all of them are located on the east side of town where the city’s “most vulnerable populations” live.

“They were taking advantage of a vulnerable population by loaning them money at very high interest rates—often 10 times as high as if you borrowed from any other agency,” Gage said.

Gage added that borrowers who use the services often get caught in a cycle where they have to continue borrowing at exorbitant rates to pay off their previous loans.

Morgan Hill resident Brad Ledwith, who owns a local financial services firm, said the payday loan industry is equivalent to “loan sharking.” While he acknowledged the services can be useful as a rare source of emergency funds for desperate consumers, they should be considered a last resort for anyone in need of financial relief.

“They make so much interest off so little money,” Ledwith said. “It is the pond scum of the financial world.”

When asked for a comment, managers at the two businesses in town that offer payday loans—Cash to Credit and Advance America—referred the Times to media relations offices outside Morgan Hill.

Both businesses prominently display a schedule of fees and rates for different sized loans on their walls. The notice also includes a list of disclaimers and advisories, including that customers should not rely on payday loans as a long-term financial solution. The notices specify that any sized payday loan is subject to the equivalent of a 460 percent APR for 14 days, or 214 percent APR for 30 days.

The companies’ media relations offices did not return phone calls requesting comment.

The notices on the businesses’ walls are a requirement of the California Financial Code that regulates and sets licensing requirements for payday lending services, according to Morgan Hill Senior Planner John Baty.

The cities of San Jose and Sunnyvale have recently limited the total number of licensed payday lenders allowed in their cities, according to a city staff report. And Santa Clara County as well as the city of Los Altos have recently adopted zoning code changes that prohibit payday lending by definition, as Gilroy has.