An Expensive Solution

Daily News (Bowling Green, KY)

March 15, 2009

An expensive solution
Advocates: Payday lending a predatory industry, new state restrictions won’t be much help

JUSTIN STORY, The Daily News,

Two years ago, Jamie Lewis found herself a bit short of cash to pay her bills.

The 31-year-old Richardsville resident turned to a payday lender in Bowling Green for about $400 in quick cash, and while she was able to pay that one off, she got behind on a second payday loan of about $450 she took out soon afterward.

She then took out another loan to get out from under the previous one, fell further behind and was eventually taken to court by her lender. As a result, Lewis’ wages were garnished to repay the loans.

“I just send (my lender) what I can out of my paycheck, so at least they’re getting paid something,” says Lewis, a receptionist at a Bowling Green doctor’s office who is also studying history at Western Kentucky University.

For people with low credit scores and who need money quickly in a financial emergency, payday lenders are often seen as the best – if not only – option available. But the businesses are controversial, with consumer advocates charging that payday lenders exploit those making low incomes and trap them in a cycle of debt.

Generally, the process works like this: A borrower goes to a payday lender to secure a small, short-term cash loan, typically a few hundred dollars for a two-week period. On the day the loan is advanced, the borrower writes the lender a postdated check in the amount of the loan, plus any fees. That postdated check will then be cashed by the lender on the day of the borrower’s next paycheck.

In most cases, borrowers pay a steep price to begin with – $15 to $30 in fees per $100 borrowed. But if the borrower feels unable to repay the loan, he or she can then renew (or “flip”) the loan, incurring a new set of fees in the process.

That means borrowers who struggle to repay the loan often find themselves paying fees that are several times more than the amount of the original loan – an annual percentage rate of interest ranging anywhere from 300 percent to more than 1,000 percent.

“What we know currently is that Kentucky families pay over 400 percent in APR to payday lenders,” said Terry Brooks, executive director of Kentucky Youth Advocates. “We think that is egregious and in fact is usurious in nature.”

The KYA says Kentuckians lose an estimated $131 million annually in fees on payday loans; it’s one of several agencies in the state that have formed the Kentucky Coalition for Responsible Lending, which has advocated for a 36 percent cap in the interest rate charged by payday lenders.

“We talk with people across the state about people taking the loans out and the loans not turning out to be that short-term,” said Tara Grieshop-Goodwin, deputy director of Kentucky Youth Advocates. “It too often turns into an ongoing cycle of paying off the interest.”

During the recently completed legislative session of the General Assembly, coalition members pushed for on a bill that would impose tighter regulations on payday lenders.

One bill, HB 444, passed the Senate on Thursday after having passed the House earlier in the session. That bill establishes a state database to track the loans – making sure borrowers have no more than two such loans, and that they total no more than $500. In addition, an amendment inserted in committee establishes a 10-year moratorium, preventing new payday lendingbusinesses from opening in the state.

The bill must now be signed by Gov. Steve Beshear.

State Rep. Johnny Bell, D-Glasgow, who introduced the bill, has said it would act as a consumer protection measure and will eliminate some of the outstanding loans made by repeat borrowers.

Brooks and other advocates, however, argue that the bill does not go far enough in regulating the practice and would compromise future legislative efforts.

“I believe that while the (legislative) leadership may believe that this bill is a moderate step forward, we in fact think it’s a serious step backward,” Brooks said. “We don’t buy this notion that you’re going to curb this epidemic of predatory practices by slow, moderate, incremental steps.”

A different bill included such regulations as requiring lenders to be licensed through the Kentucky Department of Financial Institutions and imposing a 36 percent interest rate cap on all payday loans. It would have limited borrowers to one outstanding short-term loan at a time, of no more than $500; prohibited renewal of the loan for a fee; limited the term of a short-term loan to 30 days; and prohibited lenders from making a loan to a borrower who had taken out another in the previous 90 days.

Rep. Jody Richards, D-Bowling Green, was one of nine representatives to sponsor the bill, which died in the House Banking and Insurance committee.

Tres Watson – a spokesman for the Community Financial Services Association of America, which represents payday lenders – said his group doesn’t oppose the bill that passed, and that it provides a tool for the state Department of Financial Institutions to enforce existing regulations.

“We are pleased that a large bipartisan majority of the General Assembly understands that payday lenders offer a valuable service and that it would be disastrous if the industry were legislated out of business,” Watson said in an e-mail.

In a separate phone interview, Watson said consumer advocates urging a rate cap were operating on a false understanding of the product.

“Applying an APR to a payday loan is like measuring weight with a yardstick,” Watson said. “It’s not an accurate measure of a one-time, single-payment product.”

Mary O’Doherty, economic empowerment project director for the Kentucky Domestic Violence Association, helped create an Individual Development Account program last year for survivors of domestic violence. For each dollar a participant saves, it is matched with $2. The program also offers no-interest microloans and bankruptcy counseling to its participants.

“As the economy worsens, I think more people are going to have to use payday lenders and more middle-class people will understand what a problem they are,” said O’Doherty, who advocated for legislation capping the interest rates on payday loans at 36 percent.

Brooks said the 36 percent rate he and other advocates want to see in place is based on a law passed by the U.S. Congress, which imposes a 36 percent cap on payday loans made to military personnel. The law was made based in part upon recommendations from the Department of Defense.

“Unless you consider the Pentagon a radical consumer advocacy group, then that is apparently a … practical approach,” Brooks said.

In Ohio, legislation capping the APR on payday loans at 28 percent was passed by its lawmakers and upheld by 64 percent of voters in a 2008 ballot measure.

Lewis, meanwhile, says between court costs and fees, she has lost between $1,000 and $2,000 related to the loans.

The mother of a week-old son, Lewis says she’s still a few hundred dollars shy of getting out from under the loan and has to conserve her spending on other items to continue repaying her lender.

If she gets into another financial emergency, she says, she’ll probably ask her family to help.

“I just hated to ask them to try to help me the first time,” she says, “but I would think about it before I do something crazy like (a payday loan) again.”


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