Payday lenders face calls for increased legislation
November 16, 2006 - Seattle, Washington
They're the last resort for thousands of people strapped for cash. A shocking number of people are turning to payday loans for a regular source of income -- at annual interest rates of more than 300 percent
State lawmakers are working on bills to lower the rates and give consumers more protection, but the concern is over much more than just high rates.
You see them on nearly every corner, in virtually every neighborhood. If you're short on cash, payday loan companies are there to help.
"When, you know, you don't have the money and you need it, and you can get it," said former payday loan user Mechelle Walsh of Lynnwood, who used payday loans to get by over a period several years. Over the course of three years she calculates her fees alone came to at least $10,000.
According to the State Department of Financial Institutions' newly released Payday Loan report for 2005, payday lenders in Washington issued $1.4 billion in loans last year. They collected more than $173 million in loan fees.
DFI regulates the payday loan industry. Its annual report is based on voluntary information from the payday lenders in the state. This year, 63 percent of the lenders responded to the state's request for information.
Here's how payday loans work: You pay 15 percent for every $100 up to the first $500, then 10 percent on every one hundred after that. On an annual basis that's 391 percent interest. And the loans are very easy to get.
You just go in with your pay check stubs and fill out their application. You can get $700 max from one company. That's state law.
So if you need $200 , for example, you'll have to write a post-dated check for $230. $500 will cost you $575. For $700 you pay back $795.
"You have doctor bills because you don't have medical insurance and you need to see a doctor, well you can go get a pay day loan and go see a doctor," said Mechelle.
On pay day, bring in the full amount, or the lender deposits your post-dated check.
But the ease of getting the loan often puts many borrowers in an endless cycle of borrowing. Elizabeth, who did not want her full name used, sees payday loans as a double-edge sword.
"Once you borrow that money, and owe that money back plus interest on your next pay day, that's money that you don't have to pay the other bills that are still coming in," she said.
Most borrowers I talked to told me they were embarrassed to go on camera.
"Yeah I think it is kind of embarrassing and there is a stigma about needing to borrow, because right off the bat, people think if you need to borrow money you must be irresponsible," Elizabeth said.
But consumer advocates who work helping clients get out from the payday loan avalanche, say with the growth of the payday loan industry they're seeing people from virtually every income level; university employees, realtors, upper-level government workers, even people who work at Microsoft.
Judy Poston, a predatory lending educator at Fremont Public Association in Seattle, says the most disturbing trend is senior citizens on fixed incomes who take out multiple loans to keep a roof over their heads.
"So we're seeing a lot of seniors going to the pay day lenders -- going to payday lender number one, two and three trying to borrow enough every month to make their mortgage payment," said Poston.
Elizabeth says her family fell in to the same trap when they were hit with medical bills.
"You have to borrow more money from the same place the next pay day and it just goes on and on," she said.
And while state law says you can only borrow $700 at one time from one company, there is no law to stop different companies from loaning money on the same pay check.
With just your earning statement, your ID and a checkbook, you can go from one pay day lender to another lender down the street. Then, swing by another lender. And within a matter of hours you'll have all the cash you need.
No uniform loan tracking
I got records showing how one client received loans from three branches of the same company -- Advance 'Til Payday -- on the same day. $700 in Lakewood. $700 more in Puyallup. Another $650 from the branch in Tacoma. All payable in full, plus $280 in fees, in 30 days. That's illegal, and the state is investigating.
But representatives of the payday loan industry strongly defend the service they provide, and their reputation.
"I believe the people who oppose us the most are people who have never used our product, people who have never had the need to use our product, and will never have the need to use our product," said Dennis Brassford, President of the industry trade group, Financial Service Centers of Washington.
"I think if you pose the question: does it seem reasonable that the fee be 15 dollars for a 100 dollar loan for two or three weeks, that sounds reasonable?" he said. "If you couch it in terms of the APR is 300 percent, that seems too high. The fact is they're both the same thing.
"We have the highest customer satisfaction rating of any industry that I've ever seen," he said.
Brassford also owns Money Tree, one of the biggest pay day lenders in the state. During the course of interviewing consumers and advocates for this report, Money Tree was consistently acknowledged for working with consumers to establish payment plans, and working with agencies trying to help consumers who'd amassed thousands in delinquent interest fees.
Brassford points to state law that also allows a longer-term payment plan after you take out four successive loans with the same company.
"I think we have consumer friendly legislation in this state that allows people to make their own choices," Brassford said.
Consumer advocates aren't buying it
"There are more payday lenders here in the state of Washington than there are McDonald's," said Poston. "There should be something set in place, so that client a cannot go to payday lender one through 10 and borrow 700 dollars from each one."
Renne Chamkunthod of Consumer Credit Northwest rejects the suggestion that a central database system would be cost prohibitive, as some lenders have argued.
"In this time of technology, these guys need a system to say 'hey, these people have 10 pay day loans," she said. "Red light! Red light! Red light!"
Brassford disagrees. "If what you're talking about is some kind of database? I don't think so," he said of the tracking idea. "I don't think there should be a database. I think the dat base that they have in a couple of other states is an intrusion into the privacy of customers."
But critics say it's past time to act.
"I don't think they should be closed down altogether, but I do think they should be regulated," said Mechelle.
"It's just too easy to get caught up in the revolving door. It's really easy to just pay the fee, you know to give 'em the 345 dollars or whatever, pay the fee and take the money back," she said. "It's time for someone to step in and say 'Hey. We've gotta look at this problem and, you know, try to do something about it. It's just not 'gonna get any better. It's 'gonna get worse."
The payday loan industry and the local banking lobby promise to fight legislation that drastically lowers their rates. Some lenders have already stopped lending to the military in other states because of the 36 percent cap Congress passed to protect borrowers in the military. And Brassford says the industry here will stop as well.
"A 36 percent APR is a flat-out prohibition of this industry," he said. "That means that this product will no longer be offered the way you see it being offered here in this store or other storefronts in the State of Washington. At 36 percent, the fee that you generate is 10 cents a day, on a hundred dollar loan. On a two-week loan you're 'gonnna make $1.40. No, this product cannot be delivered, this choice cannot remain in the marketplace, at that price."
Even regulators fear that without local payday loan options, consumers will simply fall pray to illegal, unregulated internet lenders who charge fees that are hundreds time higher.
In an effort to provide a safer, less costly alternative, several local credit unions are starting to offer short-term loans.
Washington State Employees Credit Union currently offers what are called Q-Cash payday loans for $10 per $100 dollars borrowed. Last year, according to spokeswoman Ann Flannigan, WSECU saved borrowers more than $2 million in fees compared to what they would have paid if they got their loans elsewhere.
In January, at least six bills will be introduced in the state legislature aimed at giving local consumers more protection.
Some key goals of draft legislation so far:
+ Extend the 36 percent interest cap Congress just approved for military borrowers. (That law takes effect late next year.)
+ Require assessment of a borrower's ability to repay and limit the loan amount to 45 percent of the borrower's gross income.
+ Mandatory repayment plans without having to wait until a borrower has four successive loans from one company.
+ Set a limit to only one outstanding loan over sixty days.
+ Allow a borrower to skip one pay check at no additional fee.
With strong opposition from the industry and some very influential legislators, many suggest the proposals won't have a snowball's chance -- unless consumers tell their legislators what they want.
KOMO, Connie Thompson, Reporter
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