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Loans that come easy can go bad fast

March 24, 2006 - Portland, Oregon

The newspaper classified ad seemed simple enough.

The Cash Store in Wood Village was looking for a store manager to process loans. With years of experience in the banking and mortgage lending industry, a 33-year-old east Multnomah County woman applied for and got the job.

Only after she accepted the position and began training did she realize she'd be granting short-term, high-interest payday loans, charging customers $20 per $100 they borrowed.

That equals an annual percentage rate of 521.43 percent.

"They tell us to say it really, really, really fast," the woman said. And they're taught to reveal the annual percentage rate only if the client asks about it.

After a month and a half on the job, she no longer works for the company. Due to her current job search, she asked that her name not be used.

But based on her experience as a payday-loan employee, the woman supports local efforts to regulate the industry. She and other critics say payday-loan businesses are part of a fringe economy, including check-cashing centers, pawnshops and title-loan lenders, that preys on the working poor who lack good credit, bank accounts or other financial options.

Industry officials defend the practice as providing a much-needed and convenient service to those not adequately served by banks or other financial institutions. In response to inquiries as to the employee's allegations, company spokesman Greg Taylor issued a news release titled "The Cash Store Values Its Customers."

"We believe our customers should make informed choices, which is why we prominently display the APR (Annual Percentage Rate) in our offices," Taylor wrote. "In addition, we disclose in writing the APR and the cost of the loan in real dollars (disclosed as the finance charge)."

Such arguments soon will be heard in court. Last month the City Council passed an ordinance regulating payday-loan companies. Among other things, the ordinance requires the companies to pay an annual $1,500 permit fee, give borrowers up to a day to opt out of a loan and offer borrowers a payment plan if they have problems paying off the loan. The companies also will be prevented from extending any loan before they collect at least 25 percent of its principal.

Four payday-loan companies filed a lawsuit in Multnomah County Circuit Court on Tuesday. According to the suit, the city ordinance conflicts with an existing state law adopted by the Oregon Legislature in 2001 that regulates the industry. In the suit, the companies claim the state law supersedes the city ordinance, and they ask the court to bar the ordinance from taking effect until the issue is resolved.

Commissioner Dan Saltzman, who sponsored the ordinance, says the city will vigorously defend the new regulations in court.

"These regulations offer hope to borrowers who frequently become trapped in a never-ending cycle of debt due to the predatory practices of payday lenders," he said.

The resolution of the case will affect more areas than Portland. The Gresham City Council approved a similar ordinance Tuesday. The Troutdale City Council could adopt similar restrictions March 28, and the Wood Village City Council also is considering such an ordinance.

Rollovers are common

Here's how payday loans work: Customers provide a postdated check equal to the amount of the loan, plus fees, which the business holds, usually for two weeks. The loan must be paid off in full. No partial payments are accepted. After the holding period, the company can deposit the check with the assumption there's enough money in the customer's account to cover it.

But there rarely is enough money in the account to cover the amount, the former payday-loan employee said.

Most of her clients couldn't repay the loan within the 14-day holding period, even with a three-day grace period. Part of her job was to call the clients and "get them to come in" to either pay off the loan or renew it.

"If we don't hear from them, we deposit the check," which results in more bank fees for clients when their checks bounce, she said.

Rolling over the loan for another 14 days costs 20 percent of the loan. If a client took out the maximum amount of $1,500, the fee amounts to $300 per rollover.

Most clients took out loans of between $200 and $500. The typical client already has an account with the company, making him or her a repeat customer.

Payday-loan employees ask only for a current paycheck stub, checking account statement, state identification or driver's license, and a postdated personal check for the loan, plus fees.

The biggest complaint the former employee has of the payday-loan industry is that it doesn't require credit checks.

When the Gresham City Council considered its proposed ordinance March 7, those who work in the payday-loan industry defended the practice as necessary for prompt service. After all, credit checks are time-consuming and costly. They also said companies base loan amounts on a person's income, which is indicated by their paycheck stub.

"Baloney," the former employee said. "How do they know these people can pay it back? . . . Even if you make $1,000 a week, that may not cover all the debts you have. A person could already be drowning in debt. . . . The only way to find out whether they can repay the loan is to check their credit."

Try to pitch a bigger loan

The woman also said she was taught how to get clients to take out a bigger loan than they requested.

For example, if borrowers came in needing $500, she was trained to tell them they'd been approved for $1,000. And she was told to remind them that they could only take out one loan at a time. If they ended up needing more money down the road, and hadn't paid off the first loan, they'd be out of luck.

"Can you imagine having desperate financial issues, going in and them saying, 'You're eligible for $1,000?' " she said. "You'd jump on it. You'd say, 'Yeah, that would take care of all my problems.' "

Payday-loan employees also pitch loans to clients who'd already achieved a zero balance. She was trained to send letters to previous customers telling them they'd been approved for a loan, in the hopes of creating a return customer.

Some clients have true emergency expenses -- things like car repairs or new tires. One elderly woman who came in wanted a loan to help her granddaughter make ends meet. She immediately paid it off.

Dollars go to gambling, booze

But most clients, the former payday lender said, need money for gambling or alcohol. Many customers come in reeking of booze, especially early on Saturdays.

One woman came in two or three times during the month-and-a-half period the employee worked there. Eventually, the customer's husband discovered the payday loans and came in with $1,800 to pay them off.

It turned out the client had a gambling addiction. She'd stopped paying on the couple's second mortgage and had taken out payday loans across the metro area. In total, the husband estimated that he'd have to spend $30,000 to clean up the financial mess.

"To me it's more like preying on these people; they're so vulnerable," the former lender said. "People would call and go, 'I only have $50. Can I come in and pay that toward what I owe?' And I'd have to tell them no."

Troutdale's Cash Store manager, as well as its district manager, referred calls for comment to the company's corporate headquarters in Texas.

Payday lender's got research

Taylor, the Cash Store's spokesman, cited studies conducted by Cyprus Research and Georgetown University that show that 96 percent of "convenient loan customers" can recall the finance charge, more than 87 percent of consumers are satisfied with the application process and 88 percent were satisfied with the level of service.

"Consumers want choices in financial products that meet their needs. We support consumer choice. We also support appropriate government regulation, which is why the Cash Store employs industry 'Best Practices' while supporting increased funding for government regulators," Taylor wrote.

The company also wants informed consumers who make the "best choices," Taylor added. That is why the company supports financial literacy workshops, works with Consumer Credit Counseling Services, lends "customers only what we have the good-faith belief they can repay" and assisted government regulators in publishing an educational brochure provided at Cash Store outlets.

The former employee doesn't buy that assertion, however, saying that customers don't notice the disclosures.

"People are not going to look at that -- all they want is their money," said the ex-employee, who urged anyone even considering a payday loan to know the loan's APR, fees per rollover and the maximum number of rollovers.

And don't take out more money than needed, she added.

"It's so easy to be enticed. Write us a check -- you walk out with cash," she said, quoting a company slogan. "It's easy money in the short term, but you pay the price long term."

News Source

Portland Tribune, Mara Stine, Pamplin Media Group

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