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Payday loan profits may be limited

December 6, 2006 - Vancouver, Washington

Washington state Rep. Sherry Appleton expects a different outcome this legislative session when she introduces two bills that could drastically curtail profits for payday lenders.

The bills, which the Democrat from Poulsbo will file Dec. 18, ask for a 36 percent cap on the annual loan rates and more time for borrowers to pay off the loans and would force lenders to consider a person's ability to repay a loan.

The payday industry beat back similar proposals last year. Appleton said that since then, her colleagues have become better informed on the issue. It also has helped that Congress passed tough short-term lending laws to protect military personnel, and national and state studies on the topic are causing greater scrutiny of payday lenders.

"I think we have a righteous cause," Appleton said.

Industry growth

The legislation comes as the industry is experiencing explosive growth in Washington. Statewide payday loans in 2005 totaled $1.4 billion, a 141 percent increase from 2000. During the same five years, the number of payday loan outlets almost doubled to 716.

Debate on the issue has focused on the interest rate charged to borrowers. The payday industry argues those rates aren't accurate since the loans are paid off in two weeks.

Opponents argue the rate is relevant and note that many borrowers are forced to roll over the loans because they can't pay them off in the two-week period.

In Washington, a person is allowed a maximum two-week loan of $700 under state law. Lenders charge $15 per $100 of a loan for the first $500, a rate that amounts to 390 percent annual interest. The fee drops to $10 per $100 above the $500 threshold, or a 260 percent annual interest rate.

The average loan in Washington in 2005 was $385.

Second wave

Tougher restrictions on payday lenders aren't new. Oregon recently enacted the 36 percent interest rate cap, and 15 states ban such businesses. A second wave of attention is coming, spurred in part by stories of military personnel caught in financial trouble because of short-term loans. Lawmakers, hitting on the theme of the nation's soldiers being taken advantage of, are calling for action at the federal and state levels.

The Center for Responsible Lending released a report last week that concluded payday loans are anything but short-term financial transactions, despite the industry arguing otherwise. The study found that 90 percent of lending revenues come from people who roll over loans, and nationally these borrowers pay $4.2 billion in fees.

The Community Financial Services Association of America, a trade group for the payday loan industry, called the report misleading and said it lacked perspective.

"This rehash of flawed statistics is designed for publicity purposes, not a serious discussion of consumer lending needs," Darrin Andersen, president of the association, said in a press release. "In a state-regulated environment, payday advances can often be the best choice for consumers seeking low-denomination, short-term credit."

Michael Calhoun, president of the Center for Responsible Lending, refuted that argument. He said a credit card advance gives a person a lower interest rate and more time to repay the money than a payday loan.

Appleton said she doesn't want to put the industry out of business in Washington but fears that if tougher restrictions aren't enacted, people could soon call for an outright ban.

News Source

The Columbian, Jonathan Nelson, Columbian Staff Writer

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