Lawmakers advanced a bill yesterday that would cap interest rates at 36 percent per year for all consumer loans less than $50,000 in an effort to close loopholes in Oregon state law that supporters say is being exploited by quick payday loan shops.

The bill, sponsored by House Speaker Jeff Merkley and eight other legislators, would apply to payday and car title lenders, allowing them to charge a maximum fee of $10 per $100 of the loan amount or $30, whichever comes first.

“Predatory lenders have tried to find a way to get around the requirements,” said Rep. Suzanne Bonamici, D-Beaverton, a supporter of the bill. “This will make sure that all consumer lenders are within the 36 percent, which I think is very reasonable.”

The Consumer Protection committee approved the fast cash advance bill Monday and it should be voted on in the House sometime in the next few weeks.

Last year, lawmakers passed similar legislation that goes into effect on July 1, but that law applied only to a small segment of consumer lenders and didn’t stop car title and payday advance loan lenders who can charge annual interest rates of 300 to 500 percent interest a year.

“High-cost, payday and car title lenders are targeting the poor and people who are living paycheck to paycheck,” said Angela Martin, director of Economic Fairness Coalition of Oregon, who supports the bill. “Without a doubt, these lenders have a team of lawyers who have found a way through every conceivable loophole in states across the country.”

Martin said that payday lending is a huge industry. In Oregon she said there are more payday loan businesses than there are McDonald’s restaurants and about two-thirds of the businesses are owned by large, multistate companies.

Sixteen states including Oregon have no caps on the interest rates lenders can charge borrowers. Last year, the federal government passed a law capping interest rate loans for members of the armed forces after the Defense Department reported that one-fifth of active-duty service members use payday lenders.

However, payday and car title lenders say the Oregon bill will put them out of business. Other people say the legislation fails to address more fundamental problems.

“They are not providing an alternative, they are simply trying to wave a magic wand,” said John Charles, president of the Cascade Policy Institute, a conservative think-tank in Portland. “All the people they imagine themselves to be helping now have fewer options. If they have fewer options, how are they better off?”

But most of the lawmakers in the Consumer Protection committee supported the bill; some because of personal experience with faxless payday loans.

Rep. Donna Nelson said that she wanted to curb high-interest lending because she had “been there, done that.” The Republican from McMinnville said that the bill was critical to helping Oregonians down on their luck.

“Three kids, a destroyed leg, no job, no insurance, no house,” Nelson said she knew what it’s like to be wiped out by massive debt.

Hidden in a digital landscape of “ones” and “zeros” are stalkers.

Cheap payday loan lenders have expanded their operations from seedy stores outside military bases to increasingly sophisticated Internet-based solicitations that target servicemembers overseas.

And the unwary are the victims.

“In the past year, Navy-Marine Corps Relief Society Yokosuka has assisted 10 sailors with [online payday loans],” said Andrea Bowen, director for the society’s Yokosuka office. “Not only do they target servicemembers, but they prey on them.”

And once they hook someone, Bowen warned, that person will pay the price.

“No matter how good it looks, PDLs are never a good option,” she said. “Seventy-five percent of PDL customers are unable to repay their loans in two weeks and are forced to get roll-over loans totaling 400 percent APR (annual percentage rate) or higher.”

Bowen said it’s becoming a problem because no fax payday advance lenders are now able to reach servicemembers overseas with e-mail loan offers.

A simple Internet search of “payday loans” will produce a wide range of links to online lenders. But Bowen said it’s the e-mail offers that are snagging people who otherwise might not ever consider a payday loan.

“You can’t always tell what some of the e-mails are until you open them,” Bowen said. “I started getting them around Christmas. They were decorated as if from Santa. That’s just wrong. And once you provide your account and routing number, they just pull money from your account.”

According to a Consumer Federation of America report, cash loan online lenders bypass state and consumer protection laws by locating their businesses in lax states or off-shore locations such as Grenada or Costa Rica. They are able to make loans without regard for protections of the borrower’s home state. And when laws are created to protect consumers, the lender simply sets up shop in another location.

Many people think payday loans are a problem limited to junior enlisted servicemembers with little money to spend, but a recent relief society case shows that’s not necessarily true.

In a letter to the relief society, a sailor who asked not to be named told a story of desperation after borrowing from a payday lender to help cover living expenses resulting from hurricanes that hit the southeastern U.S.

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Payday advance loan lenders, already in the sights of the U.S. Department of Defense, have now been targeted by the Federal Deposit Insurance Corp.

Led by Chairman Sheila Bair, the agency charged with assuring bank security and deposit safety is considering a new program intended to help banks take on high-fee, high-interest lenders capturing low- and middle-income individuals who can least afford such credit but have nowhere else to turn.

Many of those fast cash loan borrowers are young military personnel who have little experience with credit and no relationship with a local financial institution. Last year, a Defense Department study warned that credit woes were hurting morale.

Congress responded by attaching an amendment to the Defense Authorization Bill that caps the interest rate on loans to armed forces personnel at 36 percent, compared with payday industry rates upwards of 390 percent. The law takes effect in October.

Passage of the amendment rallied consumer advocates who say interest rate caps or other restrictions should be imposed on all short-term payday loans. Bair, who took office in June, formed an Advisory Committee on Economic Inclusion to determine how the FDIC might help.

She said poor credit has driven too many with credit needs away from traditional financial institutions.

“It troubles me greatly that we have something of a two-tiered financial system in the United States,” Bair said during a Thursday teleconference sponsored by the FDIC and American Bankers Association.

Many of those borrowers, she noted, have checking accounts, but look to easy payday loan lenders for credit.

“It frustrates me they are not turning to their banks,” she said.

To help reintroduce the banks to their customers, the Inclusion Committee developed guidelines for a pilot program that would offer incentives to participating banks.

The FDIC could make $30 million of its overnight deposits available at below-market interest rates. Larger deposits would be collateralized.

Small, no fax cash advance activity could be rewarded with consideration under the Community Reinvestment Act.

Examiners could be more forgiving when reviewing the underwriting of some loans.

In return for FDIC help, the banks might offer loans as small as $300 with low rates, small fees, and amortization over as many as 18 months. Many payday borrowers greatly increase loan costs by repeatedly rolling over loans when they cannot repay at the end of 30 days.

Also, a 5 percent savings component would be added to the loan principal. When instant cash loans are repaid, borrowers will have small savings accounts and stronger relationships with their bank.

She mentioned – cautiously, because the topic is a sore one for bankers – programs launched by credit unions in North Carolina and Pennsylvania that already do many of the things the FDIC is suggesting.

The state of Pennsylvania backs the program there with a $20 million deposit with the credit union system. The funds must earn a market rate of interest. Returns in excess of that amount can be used to reimburse credit unions up to 50 percent of the loss on a defaulted pay day loan.

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The 2001 state law that reformed the Florida payday loan lending business in the state is being ignored by some of the companies it was designed to regulate.

In skirting the reforms, those companies still make paycheck-advance loans with annual percentage rates that exceed 400 percent to 700 percent. And financially strapped customers who can’t pay on time are repeatedly allowed to refinance their debt, in apparent violation of the law.

Some of these companies argue that they aren’t subject to the Florida rules because they peddle cash loans from outside the state via the Internet. Others operate from local storefronts but say they are exempt from the law and governed instead by other state statutes.

“The Florida law has been around long enough that many lenders have figured a way to get around it,” said Lynn Drysdale, a Jacksonville consumer-advocacy lawyer. “You have to have a law that prevents these kinds of disguises to circumvent consumer protections.”

The 2001 reforms, signed into law by then-Gov. Jeb Bush, limit fast payday loans to $500, with terms not to exceed 30 days. “Rollovers,” or refinancings of an unpaid loan, are banned, and borrowers can hold only one loan at a time. If a customer can’t pay off the debt when it comes due, the law mandates credit counseling and a repayment plan.

Most importantly, the law limits how much lenders can charge for a payday loan, though the rates are still high by conventional measures. A typical customer can’t be charged more than $55 for a two-week, $500 loan. That’s $10 for every $100 borrowed plus a $5 “verification fee.”

But take out a no fax payday loan from any Cash America or EZMoney store in Florida and you will be charged far more than that. And if you can’t pay it off, you may be allowed to refinance the balance again and again, with late fees and other charges added.

Consumer groups point out that even the legally allowed charges in Florida translate to an annual percentage rate of 260 percent for a $500 loan held for two weeks (the typical term for a paycheck advance).

The APRs for loans at Cash America, EZMoney and Sonic are even higher, ranging from 468 percent to 702 percent - or even more if the loan is renewed and the usual fees are added to the balance due.

Payday advance lenders argue that discussing triple-digit annual percentage rates is unfair, because their cash advances are short-term financial instruments, not yearlong loans. But consumer advocates counter that some customers, unable to make it to their next payday time and time again, become serial users of paycheck advances and fall into just such a “debt trap.”

‘Very regulated industry’
Florida’s 2001 law was a compromise measure designed to rein in annual percentage rates that, at the time, were topping 1,000 percent when all the various charges were figured in. The law’s supporters say it has done much to deter abusive lending practices and bring some order to a cash advance loan industry viewed by some at the time as out of control.

According to state Sen. Lee Constantine, the law’s lead author, the rate of payday-loan defaults has fallen from about 40 percent before the reforms to less than 5 percent now.

“It has worked incredibly well,” said Constantine, a Republican from Altamonte Springs. “Now we have a very regulated industry, where the vast majority of companies are responsible and compliant. What we have in Florida is far and away the toughest law in the nation.”

A majority of check cash advance lenders in Florida - including Advance America of Spartanburg, S.C., and Tampa-based Amscot Financial Inc. - comply with Florida’s law, according to state regulators who monitor a transactions database created by the 2001 law.

“Most of these lenders are conscientious about toeing the line,” said Mike Ramsden, an administrator with the state Office of Financial Regulation.

Certain lenders say they consider Florida’s law a model for the industry.

“We believe what Florida legislators have developed is good, strong, pro-consumer legislation that governs this industry,” said Ian MacKechnie, Amscot’s president. “We’re a highly regulated industry, and we are committed to what we consider industry ‘best practices’ that payday lenders in all states should follow.”

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The Navy and the California Reinvestment Coalition (CRC) are working with various banking institutions to provide low-cost consumer loans or “quick consumer loans” to Sailors as an alternative to using payday cash loan lenders.

The Navy has recently coordinated with California government officials and the CRC about providing a safer consumer loan to Sailors to aid in preventing them from getting into financial trouble.

Capt. Mark Patton, commanding officer of Naval Base Point Loma, has taken steps to help by approaching the state congress and also has had talks with California Gov. Arnold Schwarzenegger concerning payday loan issues.

“It is a challenge to offer Sailors accessible and affordable credit,” said Patton. “This will allow us to hold our base banks accountable to provide better products and to help us take care of our own.”

Some of the more serious problems with some faxless online payday loans include annual percentage rates (APR) of up to 400 to 500 percent and no provisions for borrowers to make partial payments.

The proposed basic consumer loan would give Sailors new options such as set interest rates at 30 percent APR and penalty-free partial payments. Not only would the personal loan not exceed 25 percent of the borrower’s income, but also would consist of a loan limit of $500.

“This new system proposal will provide Sailors with the money they need while keeping them from falling deep into debt,” said Keith Kaufman, personal financial management program manager for the Fleet and Family Support Center (FFSC) San Diego.

“USA Federal Credit Union and North Island Credit Union have already contacted the FFSC and informed Sailors that they have a product in the works with reasonable interest rates, realizing they are lending money to people with either low credit or no credit,” said Kaufman.

The new opportunities may negatively affect faxless payday advance lenders in the area. Kaufman has no objections. “Thank you. We never wanted you to do business with our Sailors to begin with.”

Payday casn advance lenders will come under tighter regulation by the state later this year under legislation signed into law Friday by Gov. Bill Richardson (pictured).

“This is a big deal, particularly for my home community of Gallup,” said Democratic Rep. Patricia Lundstrom. The community has a heavy concentration of payday lenders.

The instant cash loans are short-term advances of cash against a borrower’s future paycheck or when a lender agrees to hold a borrower’s personal check and cash it later to cover the borrower’s debt.

Critics contend payday lenders target the poor and the short-term, high-interest loans can trap consumers in a web of debt. The new law, which will take effect on Nov. 1, will cap fees, restrict total loans by a consumer and prohibit immediate loan rollovers, in which a consumer takes out a new loan to pay off a previous loan.

A borrower who is unable to repay a bad credit payday loan will automatically be offered a 130-day payment plan, with no fees or interest. Once a loan is repaid, under the new law, the borrower must wait 10 days before obtaining another payday loan.

The law will allow the term of a loan to run from 14 to 35 days, with the fees capped at $15.50 for each $100 borrowed. There also will be a 50-cent administrative fee to cover costs of lenders verifying whether a borrower qualifies for the loan, such as determining whether the consumer is still paying off a previous loan.

A borrower’s cumulative payday loans could not exceed 25 percent of the individual’s gross monthly income. Richardson said the regulatory measures were a “good solid compromise” between consumer protection interests and the cash advance online lending industry.

“But we have done the right thing to protect consumers, including our most vulnerable citizens, who have gone unprotected for too long,” the governor said.

Lt. Gov. Diane Denish said the legislation was a “hard-fought battle” and described it as among the most important measures approved during the Legislature’s 60-day session, which ended two weeks ago.

Providers of no faxing payday loans will be required to provide consumers with loan information in Spanish or English. State regulators also can direct lenders to prepare loan brochures in another language.

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The courts are swamped with lawsuits and one-third of all cases come from Nevada payday loan-type businesses. It’s a reflection of the loan industry and it is bogging down the courts.

The I-Team’s Adrienne Augustus explains why so many loan companies are filing lawsuits and how the courts are coping with it.

It’s a real problem for the county clerk’s office. About 60,000 civil cases are filed every year. Nearly 20,000 are lawsuits filed by loan companies against clients who didn’t repay their loan.

The court system is struggling to keep up. Everyday they show up by the box load - high interest, fast payday advance lenders and installment loan companies filing hundreds of lawsuits against their customers.

Kristina O’Conner, court civil division manager, said: “Five years ago, ten years ago you didn’t see this type of industry on the corners of the street. You saw more of the pawn shops, title loans, those types of items.”

O’Conner says the jump in payday loan online businesses directly affects the courts. They are a large reason court clerks are working mandatory overtime.

“The volume was so immense so quickly that it really has kind of bottlenecked with us in the court,” she explained.

The personal cash loan lending industry has steadily increased, despite a client default rate of more than 20-percent, which translates to loan companies and collection agencies suing thousands of people.

Those cases must be processed along with all of the lawsuits filed by everyone else. Many lawsuits filed by lenders end up in default judgment because the defendant doesn’t respond. That cycles more paperwork back to the clerks.

When a defendant does respond, the case ends up in front of a judge.

Chief Judge Douglas Smith, of the Las Vegas Justice Court, said, “The first one that I had was a bit of a shock when you had seven or 800-percent interest.”

Eight years ago Chief Judge Douglas Smith heard his first quick cash advance lending lawsuit. “I believe that I determined that it was a contract of adhesion, which means that it was a bad contract.”

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Ken Compton is the chief executive officer of Advance America, the nation’s largest provider of payday advances. The company, based in Spartanburg, S.C., operates approximately 2,800 payday lending centers in 36 states, including Arizona. This Guest Opinion appears online only and not in the Tucson Citizen’s print edition.

Critics of the payday advance industry would like you to believe that unsophisticated consumers are lining up for cash advances only to be trapped in a debt spiral that pulls them deeper into financial peril.

Not a pretty picture to be sure - but not an accurate one either.

The truth is that most of our customers use payday cash advances responsibly, allowing them to overcome unexpected financial circumstances.

These individuals appreciate having access to a product that, with its comparatively low one-time fee, makes more sense than the burdensome costs and other consequences related to bouncing a check, missing a credit card payment or neglecting an outstanding bill.

According to state regulator reports, more than 95 percent of payday loans are ultimately paid and more than 90 percent are paid when due.

And contrary to the misinformation spread by industry critics, a payday advance must be paid back within a specified time period (typically two weeks), and the fee does not compound interest.

Millions of consumers choose to avoid excessive credit card late fees and interest, record high nonsufficient funds fees and other punitive costs for missed payments by utilizing our service.
Consumers are well aware of their options and discerning enough to make financial decisions that best serve their interests.

And contrary to our opponents’s exaggerated rhetoric, it is not our intention to undermine the financial health of our customers by offering consecutive cash advance loans on which the amount increases so much that they are unable to resolve them.

A recent staff report from the Federal Reserve Bank of New York concluded that instant cash loans are not a form of predatory lending - as some of our critics contend - and instead can help consumers by increasing credit.

In addition, the report asserts that consumers appear to be sophisticated enough to seek lower prices for credit products and finds that some of those who use payday advances do so to avoid missing other payments. Read the rest of this entry »

A Senate panel voted Thursday to restrict South Carolina payday loan lending. The proposals would limit loans to five a year and decrease the loans’ limits to $400.

It would also require borrowers pay off one quick cash loan before getting another and set a seven-day wait between loans.

The Senate subcommittee did not change how much interest companies could charge; currently, the amount is $15 for every $100 borrowed. That’s an annualized interest rate of about 390 percent.

AARP in South Carolina says the number of cheap payday loan lenders in the state has more than doubled over the last five years. The group’s 2005 survey of credit counselors found that one in four clients had payday loans that were a major part of their credit problems.

Sarah Mattson is a staff attorney for New Hampshire Legal Assistance in Manchester. The following is from the New Hampshire Union Leader …

My client, “J,” took out a car title loan last July. She thought it would help her get through a short-term lack of income.

By January, she’d taken out 34 loans from five different payday and car title lenders. The annual interest rate on a typical payday loan in New Hampshire exceeds 500 percent, and J shelled out more than $2,000 in interest. That’s because there hasn’t been an interest rate cap on small loans in New Hampshire since 1999, when lenders were allowed to charge more than 2 percent per month.

Unregulated interest rates mean payday and car title lending has exploded. The industry is wildly profitable; the nonpartisan Center for Responsible Lending recently reported that the typical payday loan borrower pays back $793 for a $325 loan. American families pay $4.2 billion in excessive payday loan fees each year.

Last summer, the Pentagon reported that the effects of predatory lending had compromised the mission readiness of America’s military personnel.

Congress responded swiftly, enacting legislation to cap the annual interest rate on loans to service members at 36 percent. On March 20, the New Hampshire House Commerce Committee voted to retain proposed legislation that would have extended similar protection to New Hampshire borrowers.

Triple-digit interest rates aren’t the only problem with faxless payday advance lending. Consumers take out payday loans because they’re financially distressed. Many don’t have the resources to pay back their loans with enough left over for ordinary living expenses, so they borrow over and over again, falling into a never-ending debt trap. Statutory prohibition of payday loan rollovers does nothing to prevent this debt trap because lenders are permitted to extend a new loan immediately after a previous loan is paid in full.

That’s just what happened to J.

She turned to payday lending when she was in between jobs and couldn’t stretch her welfare check far enough to meet the needs of her two young children. Rather than helping J, bad credit cash loan lending further strained her already tight budget and quickly ensnared her in the debt trap. Lenders offered her money over and over again, often making new loans minutes after she repaid old ones.

J’s story is typical of payday loan borrowers.

Advance America, New Hampshire’s biggest payday lender, reported an average of eight loans per customer per year in its 2005 Securities and Exchange Commission filing. The Center for Responsible Lending estimates that 90 percent of fast payday advance lending revenues are generated by repeat borrowing. The debt trap exploits working families, senior citizens, people with disabilities, and anyone else who struggles to make ends meet once in awhile.

An interest rate cap is the only way to protect consumers from this vicious cycle. Well-intentioned reform measures in other states have floundered as the payday lending industry develops new and ingenious ways to continue marketing multiple loans to each customer.

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