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Community Foundation and Public Interest Law Firm Release Report on Payday Lending

Foundation also awards more than $400,000 in grants

MOUNTAIN VIEW — Silicon Valley Community Foundation today released a report documenting the negative impact of payday lending, which is disproportionately concentrated in low-income neighborhoods and communities of color.

The report, prepared by the Public Interest Law Firm of the Law Foundation of Silicon Valley, demonstrates that legislative efforts to reform predatory practices in the industry have largely failed. It recommends three approaches for policy makers, funders and others interested in curbing problems associated with payday lending: policy changes, consumer education and the creation of alternative credit and banking products.

"The corrosive effects of predatory lending are hurting working families and entire neighborhoods in our region," said Emmett D. Carson, Ph.D., CEO and president of the community foundation. "We hope this report will prompt interest in the kinds of local policy changes that will restrict excessive interest and service fees so that a low-wage worker does not have to pay $800 to get a $300 loan to ensure that there is enough to eat, that they can keep a roof over their heads or that they can fix the car to keep their employment."

A payday loan is a transaction in which borrowers use their paychecks as collateral for a short-term, high-interest loan. Many borrowers are low-wage workers who do not earn enough to cover basic monthly necessities, such as food, gas or child care, and take out loans to cover chronic shortfalls in living expenses, pay for an unexpected emergency, such as car repairs or medical care, or avoid bounced check fees and late penalties on bills that are due.

The report was released at the community foundation’s second annual Regional Meeting at the Fox Theater in Redwood City, where nearly 1,300 community leaders, elected officials, donors and nonprofit executives gathered to hear about the community foundation’s work in the past year and listen to a panel discussion about how the current economic climate is challenging the nonprofit sector.

In California, payday loans are capped at $300. Because payday lenders charge an average annual percentage rate of more than 400 percent, the typical customer pays $800 for a $300 loan that is often due within two weeks or at the time of the next paycheck. By that time, borrowers often experience another cash crisis and take out another loan to pay back the first debt.

"Despite the fact that the negative consequences of payday loans are well-documented, the payday lending industry is largely unregulated," said Kyra Kazantzis, directing attorney of the Public Interest Law Firm, a program of the Law Foundation of Silicon Valley. "Unfortunately, too many borrowers do not understand how easily payday loans can create a cycle of escalating debt."

Payday borrowers are more likely to be minorities and single women, and the greatest market for payday loans is customers who were unable to pay off their initial loan. Lenders are prevalent in low-income communities and communities of color, which have fewer affordable credit options than wealthier areas, according to the report.

To curb the problems associated with payday lending, more than a dozen states and the District of Columbia have adopted a cap of 36 percent on small loans. California is not among them and no significant changes to the state’s regulations on payday lending have been made since 2002.

With the expansion of payday lending to the Internet, where even fewer regulations exist to protect consumers, the report suggests three possible solutions: adopting local and state policy changes, creating alternative lending products and educating consumers about the pitfalls of payday lending.

The report was commissioned by the community foundation, which wanted additional factual information to inform its anti payday lending policy advocacy grantmaking. The community foundation has awarded $427,000 in grants.

The Center for Responsible Lending, a nonpartisan research and policy organization, will receive a $100,000 grant to conduct research on the impact of payday lending to raise awareness about predatory lending and support policy efforts. The Center anticipates polling borrowers and non-borrowers from communities of color in San Jose, East Palo Alto and a third city within San Mateo County.

CRL has helped pass a national interest rate cap on loans to military borrowers and worked with coalitions in more than 35 states to combat predatory lending.

The Law Foundation of Silicon Valley’s Public Interest Law Firm will receive a $255,000 grant to establish the Coalition Against Predatory Paydays!, a new group that would educate San Jose residents about the dangers of predatory lending, particularly in communities of color, and advocate for an ordinance that addresses the growth of payday lenders and check cashing businesses in low income neighborhoods.

The Insight Center for Community Economic Development received a grant of $72,000 to identify and work with local advocacy groups in San Mateo County, determine which cities have high concentrations of payday lenders, and research existing local ordinances and possible new approaches to combating predatory lending practices. The Oakland-based Center works to increase economic health, working with foundations, other nonprofits, educational institutions, government and businesses.

About Silicon Valley Community Foundation
Silicon Valley Community Foundation is a catalyst and leader for innovative solutions to our region’s most challenging problems. Serving all of San Mateo and Santa Clara counties, the community foundation has $1.5 billion in assets under management and 1,500 philanthropic funds. The community foundation provides grants through donor advised and corporate funds in addition to its own Community Endowment Fund. In addition, the community foundation serves as a regional center for philanthropy, providing donors simple and effective ways to give locally and around the world. Silicon Valley Community Foundation launched in January 2007 following the landmark merger of Community Foundation Silicon Valley and Peninsula Community Foundation and is now one of the largest community foundations in the nation. Find out more at www.siliconvalleycf.org.

About Public Interest Law Firm
Public Interest Law Firm seeks to protect the human rights of individuals and groups in the Silicon Valley area who face barriers to adequate representation in the civil justice system, using impact litigation and advocacy. PILF focuses on: Protecting the rights and interests of children and youth, individuals with AIDS and HIV, and individuals with mental health and developmental disabilities; addressing violations of civil rights by governmental entities, particularly on behalf of people who are in institutional settings; and preserving the rights and interests of people with low incomes or in protected classes (e.g., people of color, people with disabilities, elders, and those with limited English proficiency) to safe, fair and affordable housing, consumer transactions and health care. PILF is one of five programs of the Law Foundation of Silicon Valley, a nonprofit law firm and free legal services provider based in San Jose. Visit our website at www.lawfoundation.org/pilf.asp.