Payday loans are not necessarily predatory, says a surprising new report from the Federal Reserve Bank of New York.

Payday lenders are touting the report while consumer groups note that the report is still preliminary and does not reflect what they see in the real world of low-income borrowers.

The report comes out at a time of growing concern about fast payday advance lenders. New Kansas Attorney General Paul Morrison has called for a round-table discussion on whether payday loans trap borrowers in long-term debt.

However, the report by Federal Reserve Bank of New York research officer Donald P. Morgan argues that contrary to arguments that payday loans are predatory, payday lenders may actually enhance the welfare of households by increasing the supply of available credit in a state.

The report agrees that bad credit cash loans can be expensive, but it found “credit delinquency rates are not higher for households in states with higher payday loan limits.”

Moreover, it said payday loans may provide a “preferable” alternative to pawn shops. “Despite their alleged naiveté, payday borrowers appear sophisticated enough to shop for lower prices.”

“This report gives clear and objective scholarly evidence that payday loans are not predatory,” said Darrin Andersen, president of QC Holdings in Overland Park and also president of the Community Financial Services Association of America, which represents many easy payday loan lenders nationally.

But consumer groups and credit counselors disagreed with the findings of the report, which they note is still preliminary. The report seeks comment from consumer groups and the public.

“It depends on how you define predatory,” said Tim Hagan, director of education for Consumer Credit Counseling Service in Kansas. “It appears the Federal Reserve report is an academic discussion,” he said. But, he said, in the real world, counselors are seeing more people trapped in payday loans with high fees.

The trap, he said, is that people don’t fully understand how payday cash advances, which can carry 390 percent annual interest rates, can be sucked into revolving debt with fees costing three times the amount of the debt.

“We’ve seen people in counseling who are just trying to maintain the fees on the debt.”

Both sides say the report will help spark more debate nationally.

When you are looking at the difference between legislation that would ban your industry or merely reform it, reform starts to look pretty good.

That’s the position providers of bad credit cash loans find themselves in as nearly a dozen measures wend their way through the General Assembly that range from an outright ban of the ubiquitous storefront lenders to serious reform.

Payday cash advance lenders have flourished in Virginia since 2002 when the state uncapped regulations on the industry allowing it to charge interest rates of as much as 400 percent on an annual basis.

There is a need for such lenders, as figures provided by The Washington Post show. According to the Post, more than 445,000 Virginians took out more than 3.3 million payday loans in 2005, totaling nearly $1.2 billion. The average customer takes out about seven loans a year, state figures show. Loans cannot exceed $500.Figures also show that those seven - or more - no faxing payday loans a year can often end up creating a financial trap for the borrower. The only way out of that trap is to arrange for another loan. And the borrower - often people who live from paycheck to paycheck - becomes entwined in a cycle of debt from which he cannot escape.

You know there’s something wrong with a state law when the sponsor of the bill that created it asks for it to be repealed.

Del. Harvey Morgan, R-Gloucester, opened the door for easy payday loan lenders in Virginia with legislation in 2002 that exempted them from the 36 percent cap on interest rates. He says now he didn’t think it was a good idea.

Repealing the law would not shut the payday lenders down. But they would face the same 36 percent cap as banks and other financial institutions.

Del. John O’Bannon III, R-Henrico, joined Morgan and others at a news conference the other day on fast payday advance lending, saying:

“It’s time for us to go ahead and accept the fact that this was a failed experiment and that there are more alternatives for this set of folks. At the end of the day I think the time has come, the experiment has been done, it has failed and it is time to act.”

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Here is a recent, paraphrased letter to the editor of The Olympian:

I agree with condemning payday lenders who violate state laws governing that industry. The Department of Financial Institutions vigorously enforces those fast payday advance laws, as a Jan. 12 editorial describes.

That editorial goes astray, though, with its blanket assertion that all “payday loans prey on the poor.” It confuses fixed fees with annual percentage rates by referring to 391.07 percent interest rates.

That sounds terrible, until you realize lenders offer, at considerable risk of default, and with full terms’ disclosure, unsecured loans with fees of $15 or less per $100 borrowed. I may never take out such quick cash loans, but would also never want to be in the risky business of offering them.

Although The Olympian calls upon banks and credit unions to offer more access to short-term loans, consider market realities: These are risky, entirely unsecured loans, and credit unions testified in December that if the Legislature lowers fees, it would be impractical to offer such loans.

So, a regulated financial option that generates very few borrower complaints to DFI, and provides Washingtonians access to over

$1 billion in loans annually, would be eliminated by proposed legislation. What then for the poor? Resort to unregulated online payday loan lenders or loan sharks?

The Olympian’s compassion is commendable, but I would refocus it upon root causes of poverty, including Wal-Mart - which does more than any other company to exploit poor people - or a Bush administration that devalues military service by paying military enlistees as little as $14,446.80 a year, putting them into desperate economic hardship.

Brendan Williams, state representative, 22nd District.

Steve Doherty of Montana is the former minority leader of the Montana Senate and co-chair of the Progressive States Network. Dan Geldon of Massachussetts is a former staff member for the U.S. Senate Judiciary Committee who has written extensively on bankruptcy and credit issues.

They wrote the following, paraphrased guest piece for The Billings Gazette:

The Pentagon has a lot on its hands these days - keeping the peace in Iraq and Afghanistan, destroying al-Qaida and other terrorist infrastructure, and so on. But last year, it found itself preoccupied by another problem. Predatory, faxless online payday loans, our military leaders suggested, threatened our military readiness by reducing the quality of life of our fighting men and women.

Anyone with a checking account can obtain a payday loan by giving a postdated check for one amount in exchange for a smaller amount of cash.

These type of cash advance loans can be convenient, but lenders charge astronomically high interest rates if the borrower misses a payment. The average interest on payday loans in Montana, for example, is 521 percent (the sixth highest in the nation). In contrast, credit card companies generally charge about 30 percent interest for cash advances.

Stuck in a debt trap
The result of high interest is that if a check bounces for any number of reasons - like a health emergency or layoff in the family - the borrower gets stuck in a debt trap almost impossible to climb out of. Too often, our neighbors enter a transaction for some quick cash and leave it in financial ruin. The only way out for many borrowers is to declare bankruptcy.

No wonder the military was concerned when it discovered that 20 percent of our servicemen and women use this type of bad credit payday loan.

Last fall, Chief Master Sgt. Robert Moore at Malmstrom Air Force Base explained the problem to the Great Falls Tribune:

“We expend a lot of time and energy helping them get their debts under control so they are more ready and capable to perform the mission.”

Congress responded to this issue by imposing a 36-percent interest rate cap on military payday loans. Lending companies argued that the law would ultimately hurt soldiers by interfering with supply and demand and taking away a form of credit. The Pentagon didn’t buy it:

Soldiers would still have plenty of access to credit through credit card cash advances, small consumer loans, credit union loans, emergency assistance programs, and so on.

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Republican lawmakers filed a measure Wednesday that would repeal the landmark state law banning easy payday loan lending and replace it with a new system that regulates short-term lenders.

The state’s crackdown on payday lending, which threatens lenders with stiff penalties for marketing the high-interest loans, has left a void among needy Georgians with poor credit, said state Rep. Bobby Franklin.

“If you don’t have the best credit, and you need some money, and you don’t have money to fix your car, and a bank’s not going to lend you money, what are you going to do?” asked Franklin, a Republican from Marietta who co-sponsored the bill.

The new proposal would create a system of “cash advances” that are two-week loans prohibited by law from accruing interest. Instead, operators would take a service fee of $15 per every $100 borrowed. It also limits customers to borrow only 25 percent of their monthly income and bans lenders from rolling over loans from month to month.

“There’s nothing like that in the country. Nothing. It’s not a payday loan. It’s an entirely different product,” said Jabo Covert, a lobbyist for Check into Cash, a Cleveland, Tenn.-based lender.

Consumer advocacy groups are crying foul.

“It’s an effort by predatory lenders to regain their foothold in Georgia,” said Allie Wall, the director of consumer group Georgia Watch. “They’re making millions of dollars off of triple-digit interest. And here we are having a debate about whether these lenders could come back in.”

The no fax payday advance law, which took effect in 2005, was passed at the urging of military commanders who claimed that young soldiers and their families were being victimized by the short-term, high-interest loans. The law also added stiffer penalties for financiers who make the loans, carrying hefty fines and up to 20 years in prison.

But Covert said it had an unintended consequence.

“The only people we got rid of were the national companies that were willing to follow the law,” he said. “The publicly-traded, professionally run companies left. The bad guys didn’t go away.”

The new proposal, Franklin said, is a way to stamp out the criminal elements that have taken over the cash advance payday loan market.

“You’ve created the need for racketeers, and the organized crime element, to prey on our people,” he said.

The proposal, sponsored by Republican state Rep. Steve “Thunder” Tumlin, has attracted some bipartisan support. Among the legislation’s co-sponsors are Democratic state Rep. Al Williams, the chair of the Georgia Legislative Black Caucus, and Republican state Rep. Earl Ehrhart, who chairs the powerful Rules Committee.

The proposal comes as Georgia’s faxless payday loan law faces a stiff challenge before the state’s highest court.

A pair of south Georgia financiers facing 49 violations of the law have asked the state’s highest court to strike it down. They argue it unfairly targets businesses in Georgia while leaving others headquartered outside state lines untouched.

A state Senate committee advanced a payday lending bill this week that does little to protect borrowers from being sucked into a riptide of red ink. So begins an opinion piece in The Roanoke Times, paraphrased more below:

Of particular disappointment is Roanoke Sen. John Edwards’ refusal to recognize that legislation that slightly reshapes the fins of legalized loan sharks does nothing to lessen the unrelenting grip of jaws locked onto prey.

Edwards and his colleagues appeared unmoved by the stirring testimony of trapped no fax payday advance victims and of former predators who couldn’t look themselves in the mirror. Maybe the cold, hard facts found in the annual reports compiled by the Virginian Bureau of Financial Institutions could convince them.

The latest report, covering 2005, shows that 446,000 Virginians took out 3.3 million loans totaling $1.2 billion. That’s an average of seven regular or online cash loans per customer.

This number alone blows the cover that payday lenders fill a genuine need by helping people who have no place to turn to cover the one-time cost of an emergency.

Perhaps some people do use it once, pay the loan off on time at an average annual percentage rate of 386 percent and move on. But the bureau’s report indicates that isn’t so for the vast majority.

More than 288,000 borrowers received between two and 12 cash advances. Incredibly, 91,000 borrowers received 13 loans or more.

Senators might at this point say that’s exactly what their bill would prevent. Customers couldn’t carry more than three no fax payday loans at a time. True, but if those loans (with an average term of 15 days) are continually rolled over with the payday lender exacting a heavy fee each time, the bill would have little effect.

Far-fetched? Consider Marlena Hardy. She told a Roanoke Times reporter that she initially borrowed $300 with a $45 fee, and when she couldn’t afford to pay it back, she rolled it over - 24 times - before she could pay it off.

Senators, do the math. Still think limiting the number of faxless payday advance loans will help?

If so, look again at the bureau’s report that blows away the other justification for payday loans: The fees are no worse than those banks charge for bad checks.

The bureau reported that 145,000 checks (written to pay day loan lenders to cover loans) were returned unpaid by the borrowers’ banks, which allowed the payday lenders to collect another $251,000 in returned check fees. Surely the borrowers were also hit with insufficient fund fees from their banks.

The numbers speak for themselves. Payday lending isn’t filling a need; it’s exploiting one.

Payday Loans Not Predatory.

Such is the name of the release issued earlier today by Community Financial Services Association of America. We’re printed it below, as it outlines why a bad credit cash loan is not as dangerous as many have been led to believe.

WASHINGTON, Jan. 24 /PRNewswire/ - Payday loans are not predatory and may actually enhance the welfare of households, according to a new report issued by staff of the Federal Reserve Bank of New York concluding that payday lending “does not fit our definition of predatory.”

“This report gives clear and objective scholarly evidence that [instant cash loans] are not predatory,” Darrin Andersen, president, Community Financial Services Association of America (CFSA), said of the groundbreaking report, Defining and Detecting Predatory Lending, which was authored by Federal Reserve Bank of New York Research Officer Donald P. Morgan.

“To the contrary, the report concludes that payday lenders may actually enhance the welfare of households by increasing the supply of credit.”

“By demonstrating that payday loans are not predatory, this report refutes the key criticism leveled against [fast payday advance] lenders,” Andersen said. “The media and critics of the industry should consider the conclusions made in this important study.”

Payday advances have helped countless people pay their utility bills, make auto and household repairs and take care of other immediate family needs.

“Our industry exists solely because we offer our customers a product that is more desirable than the alternatives,” said Andersen.

“Higher prices are neither necessary nor sufficient to conclude that a certain class of credit is predatory,” Andersen continued. “As shown in this report, our customers are capable of looking at their financial options and making educated decisions as to how they can meet unexpected or unbudgeted expenses.”

Defining and Detecting Predatory Lending examined differences in household debt and delinquency across states that allow payday cash loan lending and those that do not and compared the change in those differences before and after the advent of payday lending.

Particular attention was paid to those households that are generally perceived as more vulnerable to predation (those with income uncertainty or less education).

To read the report, click here.

The Independent Mail puts it simply: the payday loan industry is evil, and South Carolina needs to ban it, just as neighbors have in North Carolina and Georgia.

We don’t deserve to call ourselves a civil society if we’re not prepared to outlaw activities that are offensive to human decency. I can’t think of any better example than the bad credit payday loan industry that preys on the weak, the ignorant and the helpless.

The industry’s maximum 391-percent annualized interest rate in South Carolina is obscene. This isn’t “emergency” lending. It’s exploiting the chronic financial insecurity of growing swath of our working families.

Why else would fast payday advance lending double in just the past five years?

Responsible lenders consider someone’s ability to pay. In this despicable industry, you need only a checking account and pay stub. Lenders bank on borrowers who can’t repay loans by payday, so they generate successive “new” loans and fees.

The typical payday borrower pays back $793 for a typical $325 loan, a study by The Center For Responsible Lending found.

Regulating the cash loan industry, as 37 states have done, isn’t enough.

So-called borrower protections, such as limiting the number of loans per borrower, leads to a “cat and mouse” game with the industry and borrowers themselves. Capping the annual interest rate to the still-high usury threshold of 36 percent is not a solution if loans are outstanding for months.

Gov. Mark Sanford’s disdain for industry regulation — under the guise of concern about driving the industry underground — tells you just how morally bankrupt his Libertarian ideology is.

As a society, we don’t think a “market” for sex means we should have legalized prostitution, so why should we say that a market for easy money should allow legalized extortion in the form of faxless payday loans?

Call your lawmakers and tell them to face down the well-oiled and well-financed payday lending lobbying machine.

On Monday, a Senate panel endorsed new regulations on the fast payday advance industry aimed at reducing the number of borrowers who get trapped in debt.

Critics said the measure will do nothing to help these consumers. They will continue to push for an outright ban of payday loan lending in Virginia.

Sen. Richard Saslaw, D-Fairfax, said his bill would help prevent people from falling into debt by limiting the number of outstanding loans to three per person and requiring a one-day cooling-off period between loans from the same lender.

It forbids a payday lender from starting legal proceedings to collect a loan until 60 days after the date of default. During that time, the no fax payday advance lender and borrower can work out a repayment schedule. It also requires the creation of a database to track borrowing activity.

“The bill doesn’t solve all of the issues that have been raised,” said Saslaw, “but it solves quite a few.”

The Senate Commerce and Labor Committee did not vote on two other bills that would have effectively banned the industry by capping interest rates at 36 percent, including one from Sen. Mamie Locke, D-Hampton.

Meanwhile, more than 445,000 Virginians took out supposedly cheap payday loans in 2005, statistics show.

“You wouldn’t have this kind of activity if there wasn’t a demand for the product,” Saslaw said.

The industry says these low-dollar, short-term cash advance loans help people deal with financial emergencies. Critics say they provide deceptively easy money at high interest - 391 percent when expressed as an annual percentage rate over two weeks. It then forces consumers to take out a second loan to pay off the first, hence the “demand” for additional loans.

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Five years ago, Overland Park had two payday loan stores. Now there are 11, and city leaders don’t want more.

The Kansas City area’s biggest suburb is looking at imposing distance requirements between stores as a way of making it difficult for payday loan stores to locate there, according to The Kansas City Star.

“I don’t want them at all,” said City Council President Terry Goodman.

After saturating low-income areas, quick cash advance operations are proliferating in moderate-income communities where families are piling up debt. And Overland Park isn’t the only government trying to rein them in.

A Kansas lawmaker plans to push a law limiting the number of payday loans per person.

And Friday, newly elected Kansas Attorney General Paul Morrison announced the creation of a task force to investigate predatory lending at payday lenders. The group’s work could lead to legislation, possibly including a ceiling on the interest rates charged — which some say could put the clamps on these cash loan online and in person businesses.

Kansas City and Gladstone also are dealing with the issue. Both cities have placed moratoriums on new payday- and title-loan businesses while they examine industry practices. The moratoriums will end June 30.

Goodman and others believe the short-term lenders prey on financially vulnerable residents with exorbitant fees and cast an image of a community in decline.

The regulatory pressure is nothing new to the industry, said Tom Linafelt, spokesman for Overland Park-based QC Holdings, one of the country’s biggest payday advance lenders.

“It’s an easy industry for politicians to bash because of the lack of understanding,” Linafelt said. “Lawyers and politicians typically have never had to take out a payday loan.”

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