| Payday Lending Thrives in Washington State despite Consumer Risks By Peter Lewis, The Seattle Times Knight Ridder/Tribune Business News
Like a growing number of people, she turned to a payday lender. Virtually unheard of a decade ago, the payday-loan industry has gone bananas, with an estimated 22,000 shops nationwide, including more than 500 in Washington state. State law dictated the terms of Abernathy's loan: $15 per $100 borrowed, up to $500. She postdated a check to cover the loan, due in two weeks when she next got paid. But when that day rolled around, Abernathy had to borrow another $500 to make ends meet. She postdated a second check for $575. Now it was costing her $150 to borrow $1,000. Repeating the pattern, Abernathy realized, would become very costly. If she kept recycling the loan, which is legal, the math would work out to an annualized interest rate of 390 percent -- one of many exceptions to the state's usury-law limit, a figure that fluctuates but generally stands at 12 percent. It took her six months to erase the debt, and when another unexpected expense arose earlier this year, Abernathy, 39, of Mukilteo, was happy to have an alternative. Her credit union -- Washington State Employees Credit Union -- is one of three in the state now competing with payday lenders. WSECU's program is apparently the friendliest, offering payday loans at $10 per $100 borrowed, with up to 30 days to pay it back. Credit unions cautious Though state regulators welcome their arrival, credit unions have moved cautiously into the market, believed to be among the fastest-growing segments in the consumer financial-services industry. In part, some credit unions admit, it's because they don't want to be tarred for appearing to profit from what critics might call a modern-day version of loan sharking. Defenders of the payday-loan companies point out that their practices are legal, nothing is hidden and borrowers fully understand the terms of the loans. WSECU President Kevin Foster-Keddie said it's hard to argue that it's "anti-consumer" to provide a service that's so much in demand. "Consumer advocates have to understand," he said. "Convenience drives everything today. Everyone wants everything now." Count Abernathy among the grateful. "It was a huge difference," Abernathy said of the credit-union option. "And I can (pay it back) over two pay periods instead of one, which was very, very nice." A single parent with three kids, Abernathy's finances took a dive, she said, when her husband abandoned the family and she had to undergo a very expensive medical procedure that forced her into bankruptcy. She said she needed the second loan to cover her daughter's expenses to travel with her choir. "I didn't have to go and withdraw more to keep from going overdrawn like I had to with (the payday-loan shop)." Foster-Keddie said his credit union, the second largest in the state with over 123,000 members, decided to jump in after determining that its members have borrowed some $6 million from payday lenders and "paid an astounding $900,000 in collective interest payments." He said he hopes to help reform the industry. According to Stephens, Inc., an Arkansas-based investment-banking firm that has studied the industry, payday-loan volumes rose from $10 billion in 2000 to $40 billion in 2003. Last year, loan fees cost borrowers $6 billion. In a study published last year, Mike Stegman, a professor of public policy and business at the University of North Carolina at Chapel Hill, cited three factors as contributing to the rise in payday lending: -- With the increase in direct-deposit banking, established check-cashing companies (companies that cash checks and other negotiable instruments on the spot for a fee) were looking for new business. -- State legislatures that generally approve the fees the industry seeks. -- Strong demand fueled by a steady increase in the number of people with impaired credit. Stegman applauds the entry of credit unions. But he warns that they, too, must be on guard against luring consumers into a debt trap. In January 2001, the North Carolina State Employees Credit Union, the nation's second-largest credit union, with more than 1 million members, started a payday-lending program. It now offers $500 loans, due in 30 days, at an annualized interest rate of 11.75 percent. That works out to about $5, according to Bobby Gardner, the credit union's vice president for personal lending. "We wanted to provide a better alternative to what payday lenders were offering to our members," he said recently. He couldn't say how often the typical borrower returned for additional loans. Washington is among the 35 states that authorize payday lending. WSECU is not the first Washington-based credit union to get into payday lending, nor is it likely to be the last. Among others, the state's largest credit union, Boeing Employees Credit Union, says it is paying attention. Tacoma-based Harborstone Credit Union has been offering payday loans for more than two years. And Spokane-based Global Credit Union started last fall. Global President Jack Fallis, whose credit union started out as a military organization, is taking on payday lenders in a way others are not. Instead of operating out of established credit-union locations, Fallis is setting up retail outlets that go head-to-head with payday lenders, including a shop outside Fairchild Air Force base, "down the street from a Moneytree," Fallis said. In addition to undercutting their rates, he said he's making a special deal for active military members, offering them loans of up to $700 for a flat $5 fee, with the loan due with the next paycheck. "I was sick and tired of hearing horror stories of how members of our credit union were being taken advantage of," Fallis said. Lenders protest image Hold on, say industry defenders. Steve Schlein, spokesman for the Community Financial Services Association, a Washington, D.C.-based trade group that represents the industry, said he is "very annoyed" by media reports that consistently characterize payday lenders as black-hatted bad guys. "The truth of the matter is ... it's about competition," he said. He accused some credit unions of bad-mouthing payday lenders at the same time they are trying to steal their business. In a similar vein, Schlein and other supporters assert that there are no misunderstandings about the deal consumers cut with payday lenders -- something that cannot always be said when it comes to mainstream banks. Regulators concede there is some truth to that claim. Earlier this year, the state Department of Financial Institutions (DFI) issued a so-called "best practices" guide to Washington banks after a TV report told of a consumer who unknowingly was charged $28.50 each time she made a withdrawal from her ATM. This happened because the ATM showed a positive balance available, but in fact the funds appeared as a result of the bank's automatic "overdraft protection program." Such programs are usually automated -- a predetermined amount, usually between $100 to $1,000, is covered. The consumer does not obtain prior credit approval from the bank, nor do such programs use a credit card, line of credit or savings account to cover the overdraft, according to DFI. Among other things, the state's new guidelines call on banks to provide full disclosure and not to include the overdraft protection amount in the available balance. Chuck Cross, DFI's acting director of consumer-services division, says payday lenders succeed in part because they offer top-notch customer service, high-end security and more extensive and convenient hours than mainstream banks. Take the Moneytree store in Seattle's First Hill neighborhood. It's a spacious, carpeted room painted in warm butter yellow and royal blue trim, with pleasant pop music, potted plants and neatly dressed, smiling clerks. Brochures are in Spanish and English. New customers are in and out, cash in hand, in 15 minutes. Dennis Bassford, president and co-founder of Moneytree, the largest Seattle-based payday lender and, with 90 branches, one of the larger regional companies in the country, said he welcomes competition from credit unions. "This product is like any product," Bassford said. "Price is not the only way you compete. You also compete on location, on quality of service, on retail image." Mark Thomson, a former state regulator who now works for Moneytree, said today's payday lenders got their start in the 1980s when players in the consumer-finance industry quit the business in favor of more profitable endeavors, such as selling mortgages to people with bad credit. Some of the hardest public-policy questions -- and the source of some of the deepest hostility between consumer advocates and the payday lending industry -- relate to repeat borrowers. Industry defenders note that there are very few complaints on file with state regulators. A regulator who asked for anonymity conceded the point, noting: "Yes, but crack addicts don't complain about their dealers either." Among the repeat customers these days is Coral Nappo, 43, of Tacoma, who got hooked on a payday lender last fall, she said, when her ex-husband didn't come up with the $350 he promised to help with Christmas presents for their kids. Bills started piling up, including the rent, and Nappo took out a payday loan, first from one shop, then a second, and finally from WSECU, when it started offering its program. All told, she's into the lenders for "about $1,500." She said she was "really happy" to see the credit union come along with better terms. Getting reliable data on the number of chronic borrowers is not always possible; the Moneytree's Bassford, for example, said his company does not track that information. And experts disagree about the significance and reliability of available data. A 2001 study financed by the industry showed that the average customer took out 7.3 loans a year and that the typical loan was $230. Professor Stegman found that relative to all U.S. adults, payday-loan customers are three times as likely to be seriously debt burdened. They are also about four times more likely than all adults to have filed for bankruptcy. He favors an educational component to help borrowers get on the right financial track -- something credit unions routinely make available to their members. But Rick Schmidtke, president of Harborstone, the credit union that's been offering an alternative longer than any other in Washington, says counseling is an option that turns off some consumers. "Candidly, they don't want to get counseled," he said. "Such a small amount of people ever want help. I'm sorry to say that. That's the way life is. They don't want somebody else telling them how to live their lives." OPTIONS AND TIPS Consider your options before taking out a payday loan: -- Find out if you can delay paying a noninterest bill such as a utility bill and make payment arrangements. -- Ask your creditors for more time to pay your bills and compare late-fee charges. -- Ask your employer for an advance on your paycheck. -- Ask to borrow money from a friend or family member. -- Consider a short-term loan from a financial institution; compare fees to find the most economical loan that best suits your financial needs. -- Consider a cash advance on a credit card and compare the fees. If you decide to get a payday loan: -- Comparison shop for the lowest fees and penalties. -- Borrow only as much as you can afford to pay with your next paycheck. -- Know when your payment is due and be sure to repay the loan on time and in full. -- Plan for the future by making a realistic budget to help avoid borrowing for emergencies and unexpected scenarios. -- Avoid purchasing loans from more than one lender at a time. -- Contact the state Department of Financial Institutions to verify that you are dealing with a licensed lender or to report consumer fraud. DFI may be contacted on the Web at: www.dfi.wa.gov/consumer.htm or by phone: (360) 902-8710 toll-free 800-372-8303 WHAT TO EXPECT IN WASHINGTON STATE Maximum loan term: 45 days Maximum loan amount: $700 Maximum fee: 15 percent on the first $500, 10 percent from $500 to $700 Maximum cost per $100 up to $500: $15.00. So a $500 loan would cost $575, including a $75 fee. Maximum cost per $500 up to $700: $10.00. So a $700 loan would cost $795, including a $95 fee. Under the federal Truth in Lending Act, the cost of credit must be disclosed. Among other information, you must receive information outlining the finance charge and the annual percentage rate (APR). The APR informs you of the cost of your loan. For example, a 15-day, $500 payday loan would have an APR of 365 percent. SOURCE: State Department of Financial Institutions STATE LAW Here are some highlights of Washington state law (RCW 31.35.073) that controls the payday-lending industry: -- Allows small loans by postdated check up to $700, with fees of up to $15 per $100 up to $500; and then $10 per $100. -- Allows consumers who have taken four successive loans, prior to default on the last, to request a payment plan in writing. The law requires a period of at least 60 days to pay off the balance with at least three payments. -- Allows consumers to rescind a loan within one business day, at the location where the loan was originated, at no cost. -- Prohibits the lender or a collection agency from using the state's bad-check laws to get treble damages, interest or attorneys fees in case of default. Lenders can recover their court costs. -- Prohibits loan "rollovers," meaning a loan must be paid off before the same lender can issue a new one. (Regulators say they believe this provision is routinely violated but cannot prove it unless someone complains or they are present to witness the violation). -- Requires lenders to maintain the necessary technology to allow the state Department of Financial Institutions to examine business records. Recent amendments also expand the state's investigative powers. ----- From: http://www.miami.com/mld/miamiherald/business/national/8340104.htm |