Officials take aim at payday-lending practices

By Andy Giegerich

As Oregon's so-called "payday loan" industry mushrooms, so grows the across-the-board scrutiny it faces.

For instance:

Portland City Commissioner Randy Leonard wants the city to require more educational programs directed at potential payday borrowers.
State Rep. Jeff Merkley, D-Portland, a past proponent of lending interest caps, said he'll encourage traditional banks to offer viable lending solutions to low-income families.
And consumer advocates continue to target what they call "abusive practices" that allegedly send consumers into debt spirals.
"It's an increasing priority for us, something we're looking at very closely," said Steve Dixon, consumer advocate for the Oregon State Public Interest Research Group. "Something needs to be done about the abuses of the payday lending industry."

In the meantime, Mary Ellen Glynn, spokeswoman for Gov. Ted Kulongoski, said her office has identified payday lending as a concern. And officials from the state's Division of Finance and Corporate Securities, are performing a "program review" to examine, among other things, how well the division regulates payday loan outlets.

It's not to say the division is necessarily targeting the industry. Floyd Lanter, the department's administrator, said he believes payday lending serves a market segment -- poor people who often cannot do business with traditional banks -- that needs it. And the industry also counts qualified support from other bankers, especially when it comes to proposals that would cap interest rates.

Still, the industry faces much scrutiny because Oregon continues to go payday-loan crazy. Numbers of short-term loans, including 15- to 30-day payday loans and "title loans," or loans made using on a borrower's car title as collateral, have exploded over the last five years.

In Oregon, the number of short-term loans totaled 284,746 in 1999. That spiked to 700,128 in 2002, a 146 percent increase. From 2001 to 2002, the number of such loans in the state jumped by 41 percent.

To that end, consumers used the short-term loans to borrow $224.7 million in 2002, compared to $63.8 million in 1999, according to the state's Division of Finance and Corporate Securities.

And whereas Lanter said no figures for 2003 are available, he predicts that payday lending numbers will multiply.

"Everywhere you look, it seems like there's another [outlet] opening," he said. "And we're continuing to license more and more of these folks."

The frenzy, Leonard and others say, stems in part from Oregon's lack of "usury laws," or rules limiting how much interest lenders can charge. Merkley, last session, had unsuccessfully sought to cap payday lending rates at 60 percent.

Payday loans are typically offered after the borrower postdates a check for the amount of the loan. At the end of the term, the borrower either repays it with the interest, or extends it, often called a "roll-over."

Payday loans made in Oregon average about $300, said Lanter.

Many of those loans, noted Dixon, arrive via out-of-state licensees. Of the 157 Oregon-based outlets devoted specifically to making payday loans, more than half are owned by out-of-state firms, Dixon said.

As it grows, payday lending has become a polarizing banking subset. Detractors, including Leonard and Portland City Council candidate Nick Fish, have put payday lending on their political platforms in their ongoing election bids. They say it preys on poor customers who cannot obtain loans or money-management programs from traditional banks.

Supporters, though, say it fills a recession-friendly niche because the interest rates often cost borrowers less than they'd pay in late fees or charges for insufficient funds.

And, lenders say, the programs hardly discriminate against the poorest borrowers because the borrowers must prove that they have a steady income.

"The people who say we prey on the poor don't know anything about our business because the poor can't qualify for our loans," said Steve Hanson, president of Oak Brook Financial Corp., which owns 35 payday lending branches in the state. "We'll only lend 25 percent of a person's take-home pay, and we have to show on our audits that the person has the ability to repay us."

What's more, payday lenders, courtesy of a measure passed last year by Oregon legislators, can only roll over a loan three times, Hanson noted.

Lanter said even while payday lenders are taking political heat, the practice has generated "very few complaints" from state consumers.

"They're meeting a credit need," he said, echoing an argument that banks, which levy penalties on bounced checks and various late fees, have driven the payday lenders' Oregon surge. "It's a growth industry: They're filling a gap. A lot of folks don't want to go to their local bank and pay that service charge."

Leonard and Fish don't buy that argument, maintaining that such lenders are "opportunistic" (Fish) and "indefensible" (Leonard). As such, they want to require payday lenders to provide extensive documentation on how their interest rates contrast with comparable money sources, such as credit cards.

Calculated annually, payday loans nationally hover near the 500 percent range, according to the U.S. Public Interest Research Group. The highest-rate credit cards charge around 20 percent.

Merkley, though, said he won't pursue any usury laws in next year's state Legislature. Instead, he'll seek ways for low-income families to obtain small loans through traditional credit sources. He'll also try to impose more high school-level financial education programs that, he said, could deter graduates from accepting high-interest loans.

While Merkley eschews a push for usury laws, Charles Donald, the state's acting nondepository and credit union departments' manager, predicted some sort of tighter rules could emerge when the state's program review is completed. Donald's department could submit payday-lending legislative ideas to the governor's office by April 15.

Donald hopes the review indicates why so many payday lending outlets have popped up in Oregon.

"They are meeting a need in this state, but why, I'm not so sure," he said. "There's a tremendous growth in people using payday lenders, not only throughout the state, but in the country."

Usury laws would not only stunt such growth, it would destroy the industry, said Oak Brook's Hanson.

Oregon employed such laws until 1980 when the Oregon Bankers Association, among others, lobbied to eliminate them.

"These proposals come up in every session," Hanson said. "A lot of states have considered placing fee caps or interest rates that are below what we can operate on . . . There's certain overhead, rent and salaries that any business has to incur that, given the volume of business we have, it just wouldn't work."

Tom Perrick, the Oregon Bankers Association president, said his group still opposes usury laws. Bankers, he explained, are wary of payday lending outfits, yet fear that setting caps on one lender would bring further caps on all lenders.

"It's a can of worms for us," he said. "And while we know it happens across the country, we know there's really no evidence that payday loan outlets practice predatory lending in Oregon."

From: http://msnbc.msn.com/id/4610434/