When East Palo Alto officials learned this summer that the city's only bank was closing, they feared payday lenders would swoop in to fill the void, Mayor Carlos Romero said.

As it turned out, another financial institution, the San Mateo Credit Union, opened its doors in October, less than two months after California Bank & Trust closed its. And while there still aren't any payday lending outlets in East Palo Alto, the city tonight will discuss whether to draft regulations in case some might eventually try to locate there.

"I would like to at least look at the possibility of preempting these usurious rates by predatory lenders," Romero said.

Payday loans, also called "cash advances" or "deferred deposits," are short-term transactions that allow a borrower to write a postdated check to a lender, who provides immediate cash. The check is deposited on the borrower's next payday, according to a memo to the city council from Interim City Attorney Valerie Armento.

Under California law, the maximum payday loan a consumer can borrow is $300 and the maximum fee a payday lender can charge is 15 percent of the face amount of the check. That fee is equal to an annual percentage rate of 460 percent for a two-week loan, Armento wrote.

Though the loans are advertised as an easy source of cash in the event of an emergency, the state Department of Corporations found that a significant number of customers get caught up in a cycle of
borrowing "in a repetitive fashion" to pay off the prior loan, Armento wrote.

State law does not allow cities to alter rates, but it lets them ban payday lenders, limit their number or restrict them to certain zoning districts, she wrote.

Greg Larsen, a spokesman for the California Financial Service Providers Association, which represents payday lenders, said the businesses provide a legitimate option for consumers that can be cheaper than other financial penalties such as utility shut-off fees.