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Wed., Feb. 25, 2009

Our View: Payday loan measure would help the poor

Legislation has been introduced in Olympia to curb practices that trap desperate borrowers under crushing debt.

The measure would reduce the fees that could be charged by payday lenders. It would extend the repayment time and require that delinquent borrowers be able to set up repayment plans without having to wait until a fourth consecutive loan with the same company.

As it is, many consumers see payday loans as a way out of a financial jam. Customarily, the person writes a postdated check for up to $700, from which is deducted a fee of 15 percent on the first $500 and 10 percent thereafter. That’s $95 on a $700 loan that has to be repaid in as long as 45 days, but usually sooner.

If that were the end of it, the Legislature would have no reason to get involved. But in many cases there is no end to it. After paying off the first loan, the consumer on a meager budget then needs a second, beginning a spiraling dive into financial despair.

The state Department of Financial Institutions reports that nearly $1.5 billion in payday loans were made in Washington in 2007, generating $194.5 million in fees to the lenders. Not bad for a loan period of 45 days.

Who carries that load? Those least able to bear it. Those who need credit counseling before they get more credit.

There are 729 payday lending locations in Washington, and a disproportionate number of them are in Spokane County. Spokane’s 3rd Legislative District, reputedly the poorest in the state, accounted for 140,532 payday loans in 2007, and coughed up more than $6.7 million in fees.

“It’s the rich robbing the poor,” according to former Washington Secretary of State Ralph Munro.

Munro became outspoken about the issue after learning of the impact it had in Kitsap County which, like Spokane County, has a large number of military service members. Men and women in uniform and their families are common patrons of payday lending businesses – especially when emergencies arise during service members’ extended deployments.

The Department of Defense is so concerned about the business that Congress passed and President George W. Bush signed federal legislation setting a cap on interest charged on short-term loans. Payday lenders get around that by imposing fees up front instead of collecting interest. In extreme cases, where a borrower takes a new loan each time the old one is paid off (240 Washington borrowers in 2007 took out loans at least weekly), the effective annual interest rate approaches 400 percent.

These are troubled economic times, to which subprime mortgage lending was a major contributor. The nation should have learned about the consequences of making it too easy for people to incur debt they can’t afford.

Even if the pending legislation is passed, desperate people will resort to short-term, high-interest loans executed via postdated checks. The personal tragedies won’t end, but there should be fewer of them.

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