Payday lenders in Washington have ridden out limits on lending to military personnel, but industry officials and regulators say the pending implementation of new state restrictions will push consumers into other types of loans that may be as expensive, or worse.
A 2007 federal law capping interest rates on payday loans to members of the military has suppressed almost all such borrowing, according to a report released in October by the Washington Department of Financial Institutions.
Only 868 of the high-interest, short-term loans were made to military borrowers in 2008, down 92 percent from the 11,650 made in 2006.
In between, and in response to U.S. Department of Defense concerns that payday loans were compromising troop readiness, Congress imposed a 36 percent annual interest rate limit on loans made to airmen, soldiers, sailors, Marines and Coast Guard members.
Interest rates on payday loans can be as high as 460 percent, but among nonmilitary Washington residents they remain a popular way to get cash quickly.
The number of loans made and the total loaned peaked in 2005 at 3.6 million and $1.4 billion, respectively. In 2008, 3.2 million loans were made for $1.3 billion.
Borrowers write a post-dated check for the amount of the loan, plus fees, and walk out the door money in hand. If the check is good when payment is due, that’s the end of the transaction. But many borrowers roll their loans over, adding to the costs.
In 2003, a new law required lenders to offer payment plans that would extend the payback period and allow customers to break the cycle of repeated renewals.
In January, more safeguards will take effect.
Loans will be limited to $700, or 30 percent of a borrower’s gross monthly income, whichever is less.
Borrowers will be limited to eight loans in a 12-month period.
The 2003 law was amended to allow borrowers to request an installment payment plan before the loan is due, with no additional fees.
New loans are barred to anyone in default or still making payments on a prior loan.
To track compliance, Washington has contracted with a third party to develop a database that will collect loan information from all lenders.
Some locations closing
Deb Bortner, director of the Department of Financial Institutions’ Consumer Services, said the new law will probably winnow out payday lenders dependent on a relatively small customer base.
“They just don’t think it’s worth the hassle,” she said. “The eight loans, that’s what’s going to get them.”
Some consumers will balk at the requirement that they must reveal their incomes so loans do not exceed the 30 percent ceiling, Bortner said.
She predicted some consumers will turn to the Internet or pawn shops for money.
“We’re going to see consumers use unregulated sources of money,” she said.
The winnowing process predicted by Bortner has already begun in Spokane.
Two Check ’n Go locations recently closed, as has a Moneytree shop on South Regal Street.
Check ’n Go spokesman Jeff Kursman said the company, which has 1,100 loan shops nationally, will close all its Washington locations by Jan. 1.
The longer a customer has to repay a loan, he said, the fewer the loans that can be made with the same capital. And regular customers will not be able to use the company as frequently as they might like because they will be subject to the eight-loan limit.
“Our profit is based on the number of loans we can make,” Kursman said.
He predicted Washington consumers cut off from payday loans will write more checks on insufficient balances, exposing themselves to punitive overdraft fees. Or they will use credit cards bearing high interest rates, he said.
Moneytree Chief Executive Officer Dennis Bassford said more shops in his chain may close as the state restrictions take hold and leases come up for renewal.
“We have a number of them that we are evaluating,” he said. “It’s just impossible to predict what your business is going to be.”
Bassford said the recession has already taken a toll on Moneytree’s 140 stores, of which 60 are in Washington.
Contrary to what he said is a widely held misperception, payday lending shops tend to not flourish in hard times, for an obvious reason:
“You have to have a paycheck, or source of income,” he said. If would-be borrowers do not have a job, they do not get a loan.
“Our business, almost by definition, is down,” Bassford said.
He said consumers are already complaining about the limitations on payday credit. Like Bortner, he said he expects more customers will turn to the Internet for their short-term credit needs.
“The customers are not happy now, and they’re not going to be happy,” he said.
Steven Schlein, a Washington, D.C.-based industry spokesman, said the cap on military loan rates, and other restrictions imposed by various states, are forcing some lenders out of the business.
“I’m surprised anybody’s making loans,” he said.
The Center for Responsible Lending has been a strong supporter of interest rate caps for payday loans to all borrowers, not just those in the Armed Forces.
Uriah King, a senior policy associate for the North Carolina-based organization, said several states have passed their own laws limiting interest rates but haven’t stopped there.
To protect consumers from Internet lenders outside the United States, he said, states like North Carolina and Georgia bar those operations from using state courts to recover money loaned on terms that violate federal or state laws.
King said Washington has been “friendly” toward payday lenders, but the law taking effect in January addresses some of the Center for Responsible Lending’s concerns.
Still, while the eight-loan limit could be a circuit-breaker that stops endless loan roll-overs, the $700 maximum loan is too much for many borrowers to handle, he said.
“They’re going to be hooked.”