Tuesday, June 6, 2006

Eric Tobin, 31, felt ashamed during his first trip to a payday loan establishment.

In an interview with the Battle Creek Enquirer, he describes carrying a stack of personal documents (pay stubs, bank statements, copies of past utility bills) in a large envelope, parking in a neighboring lot and looking both ways upon entering and exiting the small office.

He was afraid someone would see him, and worried that patronizing such a place would make him appear desperate.

But he was.

Tobin recently lost his job as a senior analyst for a reputable financial services firm, and along with the job went benefits. Following an illness, the young Athens, Mich., man and his wife quickly found themselves unable to pay a pile of medical bills. Then, an overdue electric bill spurred a two-year financial free-fall.

"That was the last straw. I didn't want to further damage my credit by not paying my bills, so I went to a payday lender," Tobin said.

As of Thursday, Michigan's laws changed to better consumers from so-called "predatory" lenders. Increased payday loan competition has driven down fees and interest, but in November Michigan passed House Bill 4834, which caps payday advance loan fees, sets limits on individual loans and prohibits rollovers.

Michigan payday loan outlets now charge 12.6 percent for a maximum $600 loan. A sliding fee schedule also was put enacted, capping fees at a 15 percent rate and decreasing incrementally depending on the loan size. The new guidelines also permit a maximum of two outstanding loans at once.

"Regulating payday lenders is key to preventing fraud, abuse and illegal activity," Gov. Jennifer Granholm said in a November.

While opponents of the bill have voiced concern that it would be a blow to the future of payday loans in the state, studies show no ill effects on the short-term lending institutions, regardless of size.

In Oklahoma, the single largest growth rate occurred among smaller payday loan company chains with 2-5 locations. Florida has a straight 10 percent fee, along with with a $5 verification fee, and still is home to a thriving payday loan community.

Jamie Fulmer, Investor Relations Director for Advance America, the biggest payday loan firm in the U.S., is not concerned about the new legislation resulting in decreased revenues. Advance America has two stores in Battle Creek, Mich.

"We are supportive of the new law… we worked with industry partners in an attempt to see a legislative solution in Michigan that would offer consumers a viable alternative to what is currently available, such as credit card overage fees, returned checks, and so forth. We were pleased in November when the law passed," Fulmer said.

Fulmer said regardless of what some critics believe, short term payday loans provide consumers with valuable, emergency financial assistance.

"The bottom line is that it is a good, strong, viable alternative compared to other options," he said. "There is a need for our services… I can't speak to what effect [this legislation] will have on our revenues, but we will continue to operate in Michigan."

Virtually unheard of 15 years ago, the payday loan industry churned out about $6 billion in revenue and $40 billion in volume at 23,000 stores over the course of 2005. In the Battle Creek area alone, at least 10 payday cash advance lenders have set up shop, many of them local branches of big franchises such as Advance America and Check N' Go.

Few would argue that an increase in payday lenders speaks directly to the economic conditions of a particular community.

"You can't deny that payday lenders provide a service to people without other options, and if they're here, it's because there's a need," Tobin said. "It's an emergency situation, you need the money, and if you don't have adequate credit, for any number of reasons, there's no alternative."

Industry proponents say that no fax needed payday loans are not designed to serve long-term financial needs, but to fill a small, unsecured loan market by extending credit to people in a short-term crunch, perhaps because of a major car repair or a medical bill.

Dozie Ononiwu of Battle Creek, is active in the community and has a good job at Stewart Industries in the Fort Custer Industrial Park. Until last fall, he was a frequent faxless payday loan customer.

"When you first start working you make so little. When you're living paycheck to paycheck, you're not always able to make it to the next one… you need a bridge," Ononiwu said. "One of the reasons you go to them is no questions, no credit checks. But the interest is high, real high."

For a period of at least six months he says he continually had bad credit payday loans with annual interest rates greater than 400 percent.

"Say you borrow $600, and your paycheck at the end of two weeks is $800. Your interest is $120. If you pay off your payday loan plus the interest, you have nothing to live with for the next two weeks. So what do you do? You roll it over. You pay the $120 interest and borrow $600 again."

According to research, Ononiwu's situation is not uncommon. The Center for Responsible Lending estimates that upwards of more than 90 percent of the small loan borrowers — fit his description and fall into a repeat borrower trap. Tobin himself started with one payday loan, but it quickly led to subsequent loans.

"There were times when my wife and I both had a loan at the same time," Tobin said. "I would go in one day, and she'd go in the next. It seemed like a never-ending cycle."

It wasn't until he took a better-paying job, Tobin said, that he was able to break the cycle and ease his financial woes.

"It was such a huge weight off my shoulders. It was so embarrassing to be in the position we were in. When you've got debt collectors calling, it's depressing — especially with the kind of financial education I had."

This entry was posted on Tuesday, June 6th, 2006 at 2:15 pm and is filed under Michigan.