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Spokane, Washington  Est. May 19, 1883

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Editorial: Reforms restrict predatory lending

With the Little Loan Shoppe bankruptcy grabbing headlines, good news related to payday lending in Washington state might seem incongruous. But it’s true.

The Legislature’s reforms of these types of high-fee, short-term loans have proven to be successful, according to a report by the Department of Financial Institutions. The review doesn’t cover Ponzi schemes, but those are illegal no matter what type of business they’re associated with.

The Legislature interceded in 2009, when it became apparent that many Washingtonians were getting entangled in the vicious web spun by predatory lending practitioners. Back then, a customer could postdate a check for up to $700, from which the lender deducted a fee of 15 percent on the first $500 and 10 percent thereafter. That amounted to $95 in costs on a loan that had to be repaid within 45 days – and often sooner. The high fees often put people in the position of needing another loan.

Customers are usually people who can least afford such expensive terms. Spokane’s 3rd Legislative District, among the poorest in the state, accounted for 140,532 payday loans in 2007, and borrowers paid more than $6.7 million in fees. Sometimes members of the military get ensnared, which triggered a federal cap on interest rates for military personnel. But lenders got around that by charging upfront fees instead of exorbitant interest.

Nearly $1.5 billion in payday loans were made in Washington in 2007, generating $194.5 million in fees to the lenders. As former Secretary of State Ralph Munro said in 2009: “It’s the rich robbing the poor.”

Lawmakers agreed and passed much-needed reforms. The law limited the number of loans to eight per customer per year. Some desperate people had taken out hundreds of loans, starting a new one as soon as they had retired the old one. The law also automatically placed people who had reached the eight-loan limit into longer-term repayment plans. Before that change, customers had to default on several loans and then pay to qualify for lengthier terms.

As a result of these reforms, the number of payday lending businesses in the state has dropped by 30 percent, according to an article in the Vancouver Columbian. In addition, the number of loans dropped from 3 million in 2009 to 1 million in 2010.

Marcy Bowers, director of the Statewide Poverty Action Network, is celebrating these dramatically improved numbers, saying they are solid indicators that the new law is having the desired effect of breaking the lending cycle for poor people.

“The number of payday loans made in our state has been rising consistently for the past 10 years, and now the numbers are lower than they were in 2000,” Bowers told the Columbian.

Now that legislators have enacted reforms, the rest is up to consumers. There are no laws against foolish financial decisions, but there are still plenty of businesses hoping to capitalize on those desperate for credit.

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