Payday lenders say they offer a way out
June 4, 2006 - Battle Creek, Michigan
On his first trip to a payday lender, Eric Tobin felt ashamed.
He carried a stack of personal documents -- pay stubs, bank statements, copies of paid-to-date utility bills -- concealed in a large envelope, parked in a neighboring lot and looked both ways upon entering and exiting the small office.
He was afraid someone would see him, afraid patronizing such a place would make him appear desperate.
But he was desperate.
Tobin, young and married, recently had lost a well-paying job as a senior regional analyst for a reputable financial services firm.
Along with the job went Tobin's insurance benefits, and following an illness, the young Athens couple quickly found themselves with a mountain of medical expenses they were unable to pay.
But it was an overdue electric bill that spurred a financial free-fall that would last two years.
"That was the last straw," Tobin, 31, said. "I didn't want to further damage my credit by not paying my bills, so I went to a payday lender."
To take out a payday loan, a borrower typically gives the store a postdated personal check that includes the fee and the principal. The lender holds the check for about two weeks or until a customer receives a paycheck or Social Security payment. At that point, a borrower can let the lender deposit the check, can repay the amount -- or take out another loan, which consumer advocates say many people do.
As of Thursday, however, the rules in Michigan changed to protect consumers from "predatory" lenders.
Increased competition in the industry has driven down fees and interest rates in recent years, but in November Michigan passed House Bill 4834. Implemented June 1, the legislation caps transaction fees, sets limits for individual loans and prohibits "rollover loans" or loans renewed for an additional fee.
Now payday lenders in Michigan will charge 12.6 percent for a maximum $600 loan. A sliding fee schedule also was put in place, capping fees at 15 percent and decreasing incrementally depending on the size of the loan.
For example, a person requesting a $100 loan would pay a 15 percent fee. A person requesting a $500 loan would be charged slightly less in fees, equaling 11 percent of the loan's total.
The new guidelines permit a maximum of two outstanding loans at once.
"Regulating payday lenders is key to preventing fraud, abuse and illegal activity," said Gov. Jennifer Granholm in a November statement touting the legislation.
While some opponents of the bill have voiced concern that it would be a blow to the industry, studies in states where similar laws have been enacted have shown no ill effect on payday lending institutions, regardless of size.
In Oklahoma, for example, the single largest growth rate occurred among smaller payday lending companies with two to five locations. Florida has a straight 10 percent fee, paired with a $5 verification fee and still has a thriving payday lending industry, according to reports.
Jamie Fulmer, investor relations director for Advance America, Cash Advance Centers Inc., said he was not concerned about the new legislation resulting in decreased revenues. Advance America is the nation's largest payday lender and has two stores in Battle Creek.
"We are supportive of the new law," he said. "We worked with industry partners in an attempt to see a legislative solution in Michigan that would offer consumers a viable alternative to what is currently available, such as credit card overage fees, returned checks, and so forth. We were pleased in November when the law passed."
Fulmer said regardless of what some critics might believe, payday lenders provide consumers with a valuable service.
"The bottom line is that it is a good, strong, viable alternative compared to other options," he said. "There is a need for our services . . . I can't speak to what effect this (legislation) will have on our revenues, but we will continue to operate in Michigan."
Virtually unheard of 15 years ago, the payday lending industry generated about $6 billion in fee revenue and $40 billion in loan volume at 23,000 stores in 2005, according to estimates from the investment firm Stephens Inc.
In the Battle Creek area alone, at least 10 short-term lenders have set up shop -- many of those local branches of national franchises such as Check 'N Go and Advance America.
Few would argue against the notion that an increase in payday lenders speaks directly to the economic conditions of the community in which they operate.
"You can't deny that payday lenders provide a service to people without other options, and if they're here, it's because there's a need," Tobin said. "It's an emergency situation, you need the money, and if you don't have adequate credit -- for any number of reasons -- there are no alternatives."
The payday industry says its loans aren't designed to serve consumers with long-term financial needs. Instead, the lenders say they fill a void in the small, unsecured loan market by extending credit to people in a short-term crunch, perhaps because of a major car repair or, like Tobin, a medical bill.
"If you look at our target customers, they are middle-class working Americans who for whatever reason get caught between paychecks without alternatives," Fulmer said.
Dozie Ononiwu, 39, of Battle Creek works for Stewart Industries in the Fort Custer Industrial Park and is a member of several area organizations and committees.
He has a good job.
He is active in his community.
And, until last fall, he was a frequent payday lender customer.
"When you first start working you make so little," he said. "When you're living paycheck to paycheck, you're not always able to make it to the next one . . . you need a bridge."
For a period of at least six months, Ononiwu said, he continually had a payday loan; a loan that had an annual interest rate greater than 400 percent.
"One of the reasons you go to them is no questions, no credit checks," he said. "But the interest is high, real high.
"Say you borrow $600, and your paycheck at the end of two weeks is $800," he explained. "Your interest is $120 . . . if you pay off your payday loan plus the interest, you have nothing to live with for the next two weeks.
"So what do you do?" he asked. "You roll it over. You pay the $120 interest and borrow $600 again."
According to research, Ononiwu's situation is not uncommon.
The nonprofit Center for Responsible Lending estimates more than 90 percent of the small, short-term and high-cost loans go to repeat borrowers -- much of that stemming from the relatively high interest rates and fees that often accompany such short-term loans.
Also falling into the repeat borrower trap was Tobin, who recently was hired to head up the local proposed Community Development Credit Union, a project meant to offer safe banking alternatives to low and middle-income residents with limited resources and credit. It is scheduled to open next year.
Tobin said he started with one payday loan, but that it quickly led to subsequent loans.
"There were times when my wife and I both had a loan at the same time," Tobin said. "I would go in one day, and she'd go in the next. It seemed like a never-ending cycle."
It wasn't until he took a better-paying job, Tobin said, that he was able to break the cycle and ease his financial woes.
"It was such a huge weight off my shoulders," he said. "It was so embarrassing to be in the position we were in. When you've got debt collectors calling, it's depressing -- especially with the kind of financial education I had."
Ononiwu said financial discipline was the key to becoming self-sufficient in his case.
"I cut out a lot of things . . . no pop, no eating out, a lot of things had to go," he said. "I gradually decreased the amount I was borrowing.
"It's hard, but that's my personal experience," Ononiwu said. "My life is back on course."
Battle Creek Enquirer, Stacy Hanna, Staff Writer
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