Bills could limit ‘payday loans’

OLYMPIA – You see them on the outskirts of military bases and at strip malls across Washington: quick-money loan shops with names like Money Tree, Payday Plus, Money Depot, Advance America, Fast Cash Loans, Payday Plus and the Cash Store.

Short-term, high-interest loans – so-called payday loans – have grown to be a billion-dollar-a-year industry in the decade since Washington legalized them. Nearly 3 million such loans were made in Washington in 2003, the most recent year for which data is available.

But critics – some financial counselors, advocates for the poor, even one U.S. naval commander – say that payday lending is more like predatory lending, aimed at locking borrowers into an endless cycle of debt. One out of three payday loan borrowers, according to state regulators, takes out at least 10 such loans a year.

“It is insidious, it’s sophisticated, and it’s based on a business model that encourages chronic borrowing,” Capt. T.J. Dargan, the deputy commander of Naval Base Kitsap, told lawmakers last week.

Lawmakers are considering several proposals to restrict payday lending, including dramatically cutting the interest rate and shrinking the maximum loan. The goal, said Rep. Shay Schual-Berke, D-Normandy Park, is to make the loans available without letting people get trapped by debt.

Payday lending companies say the proposals would put them out of business, leaving people prey to loan sharks and illegal Internet lenders.

With a payday loan, a person writes the company a post-dated check – made out for, say, $575 – and gets handed $500. The customer can reclaim that check by paying back the loan and fees. If not, the lender simply keeps and cashes the check.

In Washington, maximum loan fees are $15 per $100 for loans up to $500. The fees on a maximum loan – $700 – can be up to $95. The loans last for up to 45 days.

One of the chief complaints of critics is that those fees add up to an extremely high interest rate, particularly considering that many people only need the money for a couple of weeks or less. The $45 fee on a $300 payday loan for two weeks is the equivalent of an annual interest rate of 391 percent.

“It is a financial spiral into disaster,” said Gene Forrester, with the Washington Senior Citizens Lobby, “and it’s done to the people who can least afford it.”

Some of those people work for Charlie Harris, who runs a couple of Seattle-area manufacturing plants employing 210 people. About 20 have gotten into debt problems with payday lenders in the past year, he said.

“The people who get these loans really don’t have the ability to pay them back,” Harris said. “They needed the tennis shoes or the food or the rent payment. They knew it was a lousy loan, but they were desperate.”

Lenders say practice is fair

The industry says that it’s being unfairly pilloried by little more than anecdotes and myths.

Dennis Bassford, president of Seattle-based Money Tree, said the terms of the loans are clearly disclosed and, under state law, a loan can be rescinded within the first 24 hours at no cost.

It’s preposterous to suggest – as critics do – that the industry targets particular segments of society, he said. In Olympia last week, Bassford complained that he was simultaneously being accused of targeting young male military members, elderly retired people and single mothers in rural areas. He said he locates his Money Tree branches based on traffic patterns and the proximity of shops, restaurants and banks, not on who lives there.

Ten years ago, it was illegal in Washington for a lender other than a bank or credit card company to charge more than 12 percent annual interest. But small lenders found loopholes to circumvent the rules. Some would take a post-dated check, give back some money and “pay” the rest in largely worthless trading stamps, purportedly for gifts in a catalog.

“It was just a sham,” said Chuck Cross, director of the consumer services division of the state Department of Financial Institutions.

So lawmakers legalized – and regulated – the payday loan industry in 1995. Two years ago, they changed the laws to give borrowers some additional protections, such as being able to rescind a loan free of charge within the first 24 hours. In exchange, the maximum loan was raised from $500 to $700.

Bassford testified in favor of those changes. And campaign finance records show that he’s also a prolific political donor. Over the past four years, he gave $3,250 to former Gov. Gary Locke, $2,750 to state Sen. Don Benton and $2,000 to Supreme Court Justice Jim Johnson. He’s donated a total of $30,025 to 17 political candidates since 2000.

Money Tree Vice President David Bassford and his wife contributed thousands more to a similar list of politicians.

State fields some complaints

In recent years, state regulators have slapped a few payday loan businesses. Cash USA and a Lacey firm called Expressit were doing unlicensed business, Cross said. Fast Cash Loans was licensed, but was charged late last year with overly aggressive collection methods from people whose checks bounced. According to a DFI report, the company’s “investigators” allegedly swore at borrowers, told them they’d lose custody of their children and told children their parents would go to jail. They allegedly routinely contacted a borrower’s family, landlord, neighbors and employers, called late at night, and sometimes called more than five times a day.

More than 53 people complained to DFI about Fast Cash Loans last year, Cross said. In response to the charges, the company told the Puget Sound Business Journal last year that its collectors had made errors, that it regretted any hurt feelings and that it was changing procedures.

Such cases are the exception in Washington. Most financial service complaints, Cross said, involve “sub-prime” mortgages for people with past credit problems. Payday lending, in fact, draws the second-fewest complaints of any financial service DFI regulates.

“The companies have been largely compliant,” he said.

The proposals lawmakers are considering would cut the maximum loan from $700 to $500. One would restrict interest to 10 percent or a maximum of $25. Another would cap interest at 3 percent a month, or 36 percent a year.

But at just 3 percent a month, Dennis Bassford said, he could charge just $1.70 for a $100 loan for 17 days. That’s a recipe for going out of business, he said.

In fact, John Bley, a financial consultant, said that the bills would cut payday lenders’ revenue by 30 percent to 80 percent.

“These bills are tantamount to prohibition,” he said.

Washington’s $15 per $100 rate is “at the lower end of the spectrum” among the 36 states that allow payday loans, according to Carol Stewart, with Community Financial Services Association of America, a payday lender trade group based in South Carolina.

At the hearing, lawmakers seemed to have mixed feelings about clamping down on payday lenders. Several agreed that the best solution is probably better financial education in school. Others worried about where people desperate for cash would go.

Rep. Dan Roach – who has received $2,250 in campaign contributions from the Bassfords over the past four years – said that the root of the problem is people spending more money than they make.

“Regulating or doing away with an industry, does that really solve the problem of overspending?” he said.