Billings conference aimed at stopping predatory lending

By JAN FALSTAD
Of The Gazette Staff

After a bankruptcy and a divorce last year, 50-year-old "Tonya" needed some cash for a long weekend trip to Wyoming.

Unwelcome at the banks, the Billings woman decided to go to a payday lender because she'd heard it was easy to borrow money.

Tonya said her $200 loan against her next paycheck turned into a year of horror. She couldn't repay the debt and didn't understand the risks.

At first she made her payments of $37.50 every two weeks on time, but she wasn't able to pay off the entire note, so the fees and interest rates kept mounting.

Eventually she borrowed from another payday place to make the payment on her first loan. That second loan of $300 cost $60 in fees and interest and was due in cash at the end of the month.

"Back then I couldn't let them keep the $360 in cash. With my small wage, which was at that time $8 an hour, I couldn't do it," said Tonya, who doesn't want her real name used.

Within six months, Tonya had racked up 13 payday and title loans. She kept borrowing to try to keep up with payments on loans running 261 percent annual interest.

She lost her apartment, moved in with a friend and finally turned for help to the Consumer Credit Counseling Service of Montana.

It'll be another 10 months before Tonya can pay off the debts and start thinking of renting her own apartment again.

"I made a mistake. I want to do the right thing and pay them off. But I'll never step into another one of those places again because it hurt me," she said. "This has just been devastating."

While subprime loans have a legitimate role to play in extending credit to people with less than perfect credit, stories like Tonya's have prompted states like Montana to pass laws regulating subprime mortgage and personal loans.

Consumer education efforts also are popular. A predatory-lending conference to educate consumers is being held April 6 at Montana State University-Billings.

The lending industry

For 14 years Bernie Harrington has made these kinds of loans and he, naturally, sees the world differently.

The Billings businessman owns E Z Money Check Cashing, which has five locations, three in Billings and stores in Great Falls and Missoula.

As president of the Montana Financial Service Centers Association, which represents more than 100 Montana lenders, Harrington has supported state regulation of his industry.

But he doesn't like the bad reputation his business has gotten for extending credit to people who may not qualify otherwise.

"Nobody gets angry when another car lot or a bank opens up," Harrington said. "It's commerce. It's a competitive environment."

Subprime lenders get blamed for their customer's borrowing habits instead of the borrower taking responsibility, he said.

He also argued that the interest rates and fees are reasonable, compared to other lenders, if the loans are paid on time.

If a customer has written a couple checks too many before payday, they have to cover them. Otherwise the bank will sock them with non-sufficient funds fees ranging between $17 to $30 per check.

They also can pay another $30 per bounced check to a retail store or a check recovery company.

So, who is the smarter consumer?

"The one who bounces a couple of checks and has to pay several NSF fees? Or the consumer who comes here, borrows a $100 and is out of that trouble?," he asked.

He said a $100 payday loan paid on time costs $15 in interest and fees.

Bouncing a similar bank check, he said, can cost $155. The original amount, a $25 NSF fee plus another $30 to the vendor.

Of course, those stiff fees apply as well to borrowers who fall behind on payday or title loans.

Predatory practices

Charles Pinnick of the Consumer Credit Counseling Service of Montana works to educate and counsel people, including Tonya, who have gotten too deep in debt.

Sometimes their credit is weak and they can't borrow from a bank.

Sometimes people need cash for a family medical emergency, especially if they already have an outstanding hospital bill.

Sometimes they just don't want to talk to someone in a suit.

"They don't have to sit across the desk from a bank president or lending office and explain to them why they need money," Pinnick said. "So, it's really an easy way to get money."

Pinnick agreed with Harrington that subprime lenders have a valid place in society by lending to people with imperfect credit. He just wishes people would be more educated about the pitfalls of this kind of borrowing.

Tonya's a believer now.

"If I had any indication where this was going, I wouldn't have walked into that first place," she said.

Explosion of growth

Ten years ago, the state of Montana had no laws on subprime lending and employed one part-time person to handle consumer complaints.

Predatory mortgage loans - Higher interest mortgages, home equity or secondary mortgage loans made to people with less than perfect credit.

Sales people for unscrupulous companies disproportionately target the elderly, African-Americans and Hispanics, according to the Fair Housing Alliance.

The key danger is losing your home to foreclosure.

Deferred-deposit loans - Known as "payday" loans or "same day" loans, customers can borrow up to $300 in cash for a short period, generally two weeks.

They must prove they have a job and can borrow up to 25 percent of their net income for the period. That means to borrow the maximum of $300, they must produce proof of net income of $1,200.

Interest rates are generally 25 percent of the amount borrowed. As with bank fees, these borrowers also can be hit with nonsufficient-funds fees of up to $30 if the loan becomes delinquent.

No Montana law prevents the borrower from going for another loan from another company. However, lenders generally check to make sure the borrower has no outstanding bad checks.

Title loans - These loans on cars and trucks generally range from $250 to $1,500 and usually last 30 days.

However, the loan can be extended for another 30 days or longer and can exceed $5,000 or more.

Interest rates vary, starting at 25 percent for the first $2,000 borrowed and declining after that for additional amounts.

Source: The Montana Commission of Banking and Financial Institutions.

Since then, the growth in the number of lenders has been "explosive," said Annie Goodwin, Montana Commissioner of Banking and Financial Institutions.

In 1996, her agency regulated 298 state-chartered banks, credit unions and other financial institutions.

By 2003 that number had doubled to 673. Most of the increase was due to businesses offering deferred-deposit loans, car title loans and consumer loans.

In 2003, deferred-deposit lenders made 159,301 loans in Montana. Title loan companies made another 15,898 loans. Consumer loan companies, making loans of at least $1,000, processed 74,450 loans.

Now the Helena agency employees seven full-time people to monitor subprime loans, and Goodwin said she needs more help.

"I am approaching the Legislature for additional staffing because of the explosion of the industry in order to handle consumer complaints," she said.

The stereotype is that it's only low-income and less-educated people using these services isn't true, Goodwin said.

One lender, who asked not to be named, said the Billings hospital corridor generates a lot of business.

Montana had no regulations of these loans until five years ago.

In 1999, Montana passed a law regulating payday lenders. Two years later, a law affecting title loans was approved by the legislature.

The 2004 Yellow Pages lists at least two dozen such lenders in Billings.

Statewide, Goodwin said, Montana has 93 deferred-deposit lenders and 45 title lenders.

Goodwin, who will be the first speaker at the MSU-B conference, will explain Montana laws on consumer loans and subprime mortgages.

Predatory mortgage lenders can hook borrowers on high interest rates, balloon payments or even refinance home loans without authorization.

The Fair Housing Alliance based in Washington, D.C., is launching a $1 million public service advertisement campaign to educate people about some of the high-pressure tactics used by some mortgage companies.

Bob Liston, executive director of Montana Fair Housing in Missoula, said predatory mortgage lenders are most active on the coasts. They like to target the elderly and the poor and they are getting increasingly sophisticated, he said.

"I've seen training memos saying, 'You don't go after Catholics or Jews, you go after African-Americans and Hispanics,' " Liston said. "It's a very intricate, educated kind of fraud. Some of the stories are really horrifying."

From: http://www.billingsgazette.com/index.php?id=1&display=rednews/2004/04/04/build/business/20-interest.inc