Monday, May 22, 2006

Elizabeth Lawson's troubles began with an $800 heating bill, but it was her next move that sent her finances spinning out of control, according to a comprehensive MSNBC report.

Lawson, of Shawsville, Va., went to a store in nearby Christiansburg that offers payday loans to buyers in need of quick cash. She borrowed $200, agreeing to pay a $36 charge once she received her next Social Security check. Then Lawson, 49, began juggling, taking out a new loan repeatedly to pay off existing payday loans. In 2004 and 2005, she and her husband took out more than five loans with various lenders.

With all the fees and interest, she expects her financial problems to result in bankruptcy.

"We'd pay them off and immediately reborrow to just have money to make the house payment. It got to where it was just impossible to keep up," Lawson said.

Revolving-door loans like Lawson's have become quite commonplace in the growing payday loan industry, which is permitted to charge interest at triple-digit annual average rates in about 38 states.

To take out a payday cash loan, a borrower typically gives the store a postdated check that includes the fee and the principal. The lender holds the check for about two weeks or until a customer receives a paycheck or Social Security payment.

At that point, a borrower can let the lender deposit the check, can repay the amount — or take out other payday cash advances, which many do. The Center for Responsible Lending estimates more than 90 percent of these small, short-term and high-cost loans go to repeat borrowers.

In Virginia, 85 percent of payday loan customers return to the same store in the same calendar year — some more than a dozen times.

"They set it up so you have to pay the whole thing off in two weeks, and they know you can't," said Jay Speer, Executive Director of the Virginia Poverty Law Center. "It's bad enough that the interest rates are 380 percent (on an annual basis), but the worst part is that they trap you."

The payday industry says that no fax payday loan businesses aren't designed to serve consumers with long-term financial needs. Instead, they fill a void in the small, unsecured loan market by extending credit to people in a short-term emergency situation, perhaps due to major car repairs or medical bills.

"If you look at our target customers, they are middle-class working Americans who for whatever reason get caught between paychecks without alternatives," said Jamie Fulmer, Investor Relations Director for Advance America, Inc., the nation's largest payday lender.

Last year, the industry generated about $6 billion in fee revenue and $40 billion in loan volume at 23,000 stores, according to estimates from the investment firm Stephens Inc. At the six public companies alone, the loan volume rose 24 percent to approximately $7.4 billion in 2005.

In states like Virginia, known for its business-friendly environment, the industry is clearly booming. Surrounding states such as Maryland, North Carolina and West Virginia don't permit payday lending, but Virginia has opened the doors to the industry with the Payday Loan Act of 2002, which specifically authorizes the lenders' high-cost loans.

There are more than 750 payday loan stores in Virginia — or nearly two for every McDonald's. Last year, the industry made $1.2 billion in loans in Virginia, a 21 percent increase over 2004. The number of consumers receiving 2-12 loans during the year rose 23 percent to about 288,700. Those receiving more than 12 loans rose 19 percent to about 90,900.

The numbers of repeat borrowers are likely higher, too, because it is hard for agencies to track people who go to more than one quick payday advance provider during the same year. Consumer groups have accused cash advance firms of targeting low-income and military consumers.

Jabo Covert, V.P. of Government Relations for Check Into Cash Inc., disputes those claims, saying that his company targets mostly well-trafficked, suburban locations. Only 5 percent of Virginia Check Into Cash borrowers are military, and a typical customer has an annual salary in the $30,000-40,000 range but is often in a two-income household.

Customers do not stick around forever, either, Covert said. They might take out several loans in a year, but most are gone for good after 18 months, while loan defaults are in the single digits. But critics say lenders attract customers by asking no questions and not running credit checks — a fast process, the results of which can be disastrous.

"The argument I often hear is that [the industry] is serving an underserved community," said Rusty Boleman, whose Richmond law firm represents debtors. "No, it isn't. They're taking advantage of poor people. They're taking advantage of people who are desperate."

Most states have enacted legislation allowing no faxing payday loan institutions to charge fees that amount to triple-digit annual average interest rates, and that can become unmanageable if borrowers take out repeated loans.

Virginia payday loan firms are authorized by state law to lend as much as $500 and charge $15 per $100, with a minimum maturity of a week. They bill an average APR of 386 percent. Before the state passed the Payday Loan Act, they would have been subject to a 36 percent small-loan cap, although some lenders circumvented that rule by working with out-of-state banks.

There have been similar problems in some states with usury caps or other regulations that prohibit payday loans online (and in person) at triple-digit interest rates. The industry has taken advantage of a loophole in federal banking rules allowing them to seek partners in less strictly regulated states.

State and federal regulators are starting to crack down, however. North Carolina, for instance, just finished kicking out payday loans and the companies it says have been illegally operating in the state through the so-called "rent-a-charter" relationships. U.S. banking officials are taking action against several banks working with payday lenders as well.

In Virginia, consumer advocates have unsuccessfully lobbied against payday lending. This year, a state legislator, Delegate G. Glenn Oder, proposed increasing the minimum length of loans to 15 days and prohibiting loans to consumers with outstanding payday loans, but the measure never left the statehouse floor.

This entry was posted on Monday, May 22nd, 2006 at 4:02 pm and is filed under National, Virginia.