Payday lenders may face caps
OLYMPIA – Aaron Medres is on a mission.
Four years years ago, the Chattaroy truck driver took out a $500 payday loan to cover some unexpected repairs to his car. Two weeks later, to pay back the $500 and the $75 fee, he took out another loan from a different lender. And then another.
All told, he says, it took him three years and thousands of dollars in fees to pay everything off.
“It was just stupid on our part,” he said.
Now Medres is one of a growing circle of people calling on state lawmakers to restrict the interest rates charged by Washington’s $1.4 billion payday lender industry. Proponents include anti-poverty activists, unions, military leaders and former payday-loan customers.
“Maybe we can get some justice for a lot of these borrowers,” Rep. Sherry Appleton, D-Poulsbo, told a Senate committee earlier this month.
This year, Congress passed a bill that caps the interest rate for such loans at 36 percent a year for military members and their families. Appleton wants to piggyback onto that, extending the cap to everyone. That’s what Oregon lawmakers did in May.
Payday lenders say such a cap would drive them out of business.
“I’m here to tell you that is not regulation. That is prohibition,” Darrell Wells, owner of Paycheck Financial Centers stores in Olympia and Aberdeen, told lawmakers.
Wells said the average payday lending shop in Washington makes 415 loans a month, grossing about $20,000 in fees. After paying employees, taxes, overhead and benefits, he said, the store nets about $2,000 a month.
“The average person in this business is not making a ton of money,” he said. “If I could offer this product at a lower price, I’d already be doing it. It would be a huge competitive advantage.”
The proposed cap, he said, would reduce the interest to about 10 cents a day on a $100 loan. That’s too little, he said, to keep the business alive.
Dennis Bassford, president of 55-store Money Tree, Inc., closed his one Oregon shop because of the 36 percent cap.
“Thirty six percent is a ban,” he said. “My company is proof of that.”
Bassford is a heavy political donor. State campaign finance reports show that since 1998, he and family members affiliated with Money Tree have contributed nearly $200,000 to politicians in Washington state. Among the recipients: Gov. Chris Gregoire, Attorney General Rob McKenna, Supreme Court Justice Jim Johnson and several current and former local lawmakers, including Senate Majority Leader Lisa Brown, Sen. Brad Benson, Rep. Bob Sump, Rep. Alex Wood and Sen. Brian Murray. Bassford and his wife have already donated $3,000 to Gov. Gregoire’s re-election campaign for 2008.
In Chattaroy, Medres hopes to counter that political clout with stories from people hurt by the high-interest loans. He set up a for-profit Web site where he charges a flat $20 to advise people how to deal with the debt. He refers them to their state’s regulators and attorneys general, encourages them to try to set up payment plans with the lenders, and helps them figure out if the lenders are even legally authorized to do business there. In most cases, he said, he waives the fee because the people are already buried in debt.
“Most of these people have been scared for so long,” he said. “But there’s laws that’ll protect you.”
Critics of payday loans point to a November national report by the Center for Responsible Lending, which found that a typical payday borrower ends up paying back $793 for a $325 loan. By getting one short-term loan after another, customers end up paying interest rates that amount to about 400 percent a year, the group said. Eleven states, the group said, have banned payday lending.
One thing that’s undisputed by both sides is the phenomenal growth in the industry since it was legalized in 1995. In the last five years alone, the number of payday loan shops in Washington has nearly doubled. In 2005, according to the state Department of Financial Institutions, the industry made $1.3 billion in loans here, charging nearly $174 million in fees.
The industry points out that few of its customers complain. From 2000 through 2005 – with millions of the loans made – state regulators received only 163 complaints. Of those, 61 were against one company. Another 38 were dismissed due to no violation or jurisdiction.
“Satisfaction is extraordinarily high among those who use our products,” Bassford told lawmakers.
“Typically the harshest critics are people who’ve never even used this product,” added Kevin McCarthy, owner of 22-shop Checkmasters.
Critics of the loans say many clients are embarrassed or don’t know where to complain.
Former Microsoft employee Patricia Davis told lawmakers earlier this month that she never expected to have to turn to a payday lender.
“I was a middle-class working person,” she said. “I had a good job at Microsoft, a mortgage, a car, a lot of credit cards.”
Then she got divorced, she said, and was left having to cover all the bills. And every month, she found herself coming up a little bit short. She was too embarrassed to turn to her company or family. So she got a $500 payday loan. And then another. And another.
She figures she spent $3,600 in fees over two years. She felt “a little tainted,” and would find herself making excuses to the lending clerks about why she needed yet another loan.
Even now – having paid off the loans – she keeps the thick file of loan paperwork to remind her of the humiliation she felt.
“I don’t ever want to be there again,” she said.