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Reformers take aim at payday loan rates

February 28, 2006 - Eugene, Oregon

The Rev. Tom Dodd recalls the older parishioner who was living on Social Security and became mired in debt after taking out a couple of payday loans.

"I asked if I could come over and look at the paperwork, and I couldn't believe it," says Dodd, pastor at United Lutheran Church in Eugene. "She actually had one loan annualized over 1,000 percent. It took my breath away."

Would-be reformers are taking another shot at regulating Oregon's burgeoning payday loan industry - possibly via a citizen-referred ballot measure - and a growing number of them say they're coming at the issue from a religious perspective.

"We have a strong tradition against usury - the strong taking advantage of the weak," Dodd says. "To me, it's really a central example of how power is misused, and the faith community ought to stand with those on the short end."

But industry spokesmen say they're being unfairly demonized for providing a service that meets consumer demand. They point to the low number of consumer complaints - 17 last year amid nearly 750,000 loans processed in Oregon - as evidence of their value, especially to people who might otherwise have no access to quick cash.

Oregonians "have declared that they like the product, that there's a need for the product, and that they're happy with the product," says Thom Shauklas, president of the Community Financial Services Association of Oregon, an industry trade group.

One thing everyone agrees on: The payday loan industry is exploding. There are now more than 360 payday loan stores in the state, a number that has more than doubled since 2000.

The stores made nearly $250 million in loans in 2004, the last year for which complete figures are available. The average loan amount keeps climbing each year, reaching $334 in 2004.

To get a payday loan, the consumer writes a personal check in exchange for cash. The fee for the loan is typically $15 to $20 for every $100 loaned, which works out to an annual percentage rate - how much the loan costs on a yearly basis - of about 360 percent. The APR on many credit cards, by comparison, is 18 percent.

The lender cashes the check on the day the loan is due - typically after 15 days. If the consumer can't repay the loan, he can renew or "roll over" the loan up to three times - and pay a similar fee each time.

Oregon is one of only seven states with no caps on payday loan interest rates. In Salem, the Democratic-controlled Senate last year approved a bill that would have set a 15 percent interest cap, but the bill was shelved in the GOP-controlled House.

Dodd is among a group of local church, food bank and social service leaders who began meeting on the issue last month. One idea has been to work with two sympathetic Lane County legislators, Rep. Debi Farr, R-Eugene, and Sen. Floyd Prozanski, D-Eugene, who head interim consumer committees considering more rules.

Another idea is to ask cities to impose restrictions - as a city commissioner in Portland already has proposed.

"Getting rich off the poor"

But many advocates are putting their energy behind a proposed ballot measure, Initiative No. 135, that would cap interest rates and origination fees at 36 percent annual interest, and extend the loan payback time to 31 days from 15.

Backers are awaiting approval of ballot language from the state attorney general's office before seeking voter signatures. Among the measure's chief petitioners is the Rev. Dan Bryant, pastor of First Christian Church in Eugene and president of Ecumenical Ministries of Oregon.

Bryant believes that the initiative process is the way to go. Elected officials "had their chance in the last Legislature, and they opposed it," he says. "I'm ready to try a new strategy."

Bryant contends that opposition to exorbitant interest rates is scripturally based.

"Why are so many of these stores popping up on every corner? It's because people are making big bucks off of this, getting rich off the poor, and we think that's obscene," he says. "That's why so many church folks are involved in this; it violates our concept of what's just and fair."

The religious impulse crosses sectarian lines, with the Oregon Catholic Conference also taking a strong stand. Traditional Catholic social teaching warns against the impact of usury on economically vulnerable people, conference Director Bob Castagna says.

"When we're talking interest rates that exceed 500 percent, that constitutes predatory lending practices," Castagna said.

Terry McDonald, executive director of the Catholic-affiliated St. Vincent de Paul agency in Eugene maintains that payday loans rival methamphetamine and other drug use in the extent f community damage they wreak.

"One reason people are on our doorstep needing emergency services is because of these kinds of deals," he says.

But do-gooders with that perspective miss the point that short-term loans are often the only tool available to people with emergency financial needs, industry insiders say.

"I think they have good intentions," Mark Thomson, director of government relations for the Moneytree payday loan company, says of reformers. "But they don't understand the effect of their proposals."

"High customer satisfaction"

For example, if a consumer wants to roll over a loan but is legally prevented from doing so, he'll just go to another payday loan company, possibly a less reputable one, to pay off the first loan, Thomson says.

Thomson and other industry leaders say their stores fill a legitimate need brought on by economic realities: Most banks, credit unions and consumer finance companies no longer provide small, short-term loans; excessive bank fees for insufficient funds can actually cost more than payday loans; and people with bad or no credit have no other way to obtain cash in a pinch.

In a 2004 report, the state Department of Consumer and Business Services said that "a dispassionate review reveals a rational basis for the growth of payday lending, and good reasons for the relatively high degree of customer satisfaction."

Thomson says satisfaction is high because payday loans are straightforward and simple. He rejects the notion that payday loans are predatory, saying they reflect the fact that the loans are unsecured, with no collateral to claim should a consumer default. Critics, however, contend that the default rate for payday loans is no greater than those for other, more conventional loans.

A 2005 Federal Deposit Insurance Corp. report found that fixed operating costs and loan loss rates justify "a large part" of the high APRs charged on payday loans.

Interest caps and other reforms would effectively eliminate the industry, says Shauklas, the trade association president. The issue, he says, comes down to choice - with some shoppers opting for a payday loan with higher interest in the same way they might pay more for a preferred cup of coffee at Starbucks.

Many shop owners, Shauklas adds, promote consumer credit counseling and other ways to help guard against spiraling debt.

"As with any product, there are some who intentionally or unintentionally get over their heads," he says. "But it's in our best interest as well as theirs to work through it."

WHY DO YOU USE PAYDAY LOANS?
57 percent - It's easy
39 percent - Avoid high bank overdraw fees
37 percent - No family or friends to lend me money
25 percent - Bank or credit union would not lend me money
19 percent - Employer would not give an advance

WHAT DO YOU USE THEM FOR?
60 percent - To pay bills
30 percent - Groceries
25 percent - Car repairs
19 percent - Medical bills
10 percent - Pay off other loans
-- State Department of Consumer and Business Services, July 2004 survey of payday loan users

News Source

The Register-Guard, Jeff Wright, Staff Writer

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