Characterizing payday lending as a form of “economic servitude,” Georgia Insurance Commissioner John Oxendine vowed Monday to fight legislation that would legalize the high-interest loans.

“As it is now, I would encourage every legislator to vote against it,” he said to The Atlanta Journal-Constitution. “It is bad for consumers. It is a step backward.”

Under the bill (HB 163) introduced at the General Assembly last week, Oxendine would regulate the state’s payday lenders. The responsibility would fall under Oxendine in his role as the state’s industrial loan commissioner, a title that gives him the authority to license and regulate finance companies across the state that make loans of $3,000 or less under the Georgia Industrial Loan Act.

Oxendine, who called the legislation “a very beautiful sounding and looking bill,” said the legislation lacked regulatory teeth and sufficient penalties to protect consumers.

“It’s window dressing,” he said.

Payday lending has been illegal in Georgia for a century. But payday outlets operated openly across the state until 2004, when the General Assembly shut the industry down by passing a bill that made payday lending a felony, allowed for racketeering charges and permitted potentially costly class-action lawsuits.

Payday loans are an advance on a worker’s next paycheck. Most customers write a post-dated check for the loan and a fee, in exchange for cash.

Under the bill, payday lenders could charge a fee of $15 for every $100 loaned. For a typical $300 loan extended for two weeks, the $45 finance charge would compute to an annual percentage rate of 391 percent. Georgia law prohibits annual interest charges above 60 percent for most loans.

Payday lending is legal in 37 states. In Georgia and 12 other states, it is either illegal or not feasible, given the laws on the books.

Proponents of the bill said last week that it offered consumers more protections than any other state where payday lending is regulated. They said the bill would prevent loans from being repeatedly renewed, or “rolled over.”

It would offer also offer a payment plan option, for those who couldn’t cover the debt on their next payday. And, the loans would be prohibited for members of the military. Commanders at Georgia’s military bases pushed for the 2004 law, saying too many enlisted men and women who took out payday loans ended up saddled with an endless cycle of debt.

The proposed legislation, whose sponsors include Reps. Steve “Thunder” Tumlin (R-Marietta) and Earl Ehrhart (R-Powder Springs), does not include the tough penalties enacted in 2004.

“I think (HB 163) does not give appropriate protections,” Oxendine said. “It creates a situation that I think is prone to more consumer debt — debt in perpetuity.”

Oxendine said he met with the big payday lenders in December and had offered to work with them on legislation that his office would find acceptable.

“I’m willing to approach that with an open mind,” he said. “They wouldn’t discuss it.”

Jabo Covert, an executive with a Tennessee payday lender who represented an industry trade association at the Capitol last week, said Monday he was not aware of Oxendine’s stance against the bill and did not immediately have a comment.

Characterizing payday lending as a form of “economic servitude,” Georgia Insurance Commissioner John Oxendine vowed Monday to fight legislation that would legalize the high-interest loans.

“As it is now, I would encourage every legislator to vote against it,” he said to The Atlanta Journal-Constitution. “It is bad for consumers. It is a step backward.”

Under the bill (HB 163) introduced at the General Assembly last week, Oxendine would regulate the state’s no fax payday advance lenders. The responsibility would fall under Oxendine in his role as the state’s industrial loan commissioner, a title that gives him the authority to license and regulate finance companies across the state that make loans of $3,000 or less under the Georgia Industrial Loan Act.

Oxendine, who called the legislation “a very beautiful sounding and looking bill,” said the legislation lacked regulatory teeth and sufficient penalties to protect consumers.

“It’s window dressing,” he said.

Faxless payday loan lending has been illegal in Georgia for a century. But payday outlets operated openly across the state until 2004, when the General Assembly shut the industry down by passing a bill that made payday lending a felony, allowed for racketeering charges and permitted potentially costly class-action lawsuits.

Under the bill, payday advance loan could charge a fee of $15 for every $100 loaned. For a typical $300 loan extended for two weeks, the $45 finance charge would compute to an annual percentage rate of 391 percent. Georgia law prohibits annual interest charges above 60 percent for most loans.

Payday lending is legal in 37 states. In Georgia and 12 other states, it is either illegal or not feasible, given the laws on the books.

Proponents of the bill said last week that it offered consumers more protections than any other state where bad credit cash loan lending is regulated. They said the bill would prevent loans from being repeatedly renewed, or “rolled over.”

It would offer also offer a payment plan option, for those who couldn’t cover the debt on their next payday. Moreover, the check cash advance loans would be prohibited for members of the military. Commanders at Georgia’s military bases pushed for the 2004 law, saying too many enlisted men and women who took out payday loans ended up saddled with an endless cycle of debt.

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Proposals to close loopholes in tough new restrictions on easy payday loan lenders are headed for the House floor, after winning approval from members of the House Consumer Protection Committee Wednesday.

Among other measures, the new rules would limit the maximum rate of interest on car title loans to 36%, a big change on rates that can run more than 300%.

Proposals under consideration would also prohibit providers of no faxing payday loans from avoiding the state’s caps on interest rate charges by applying instead for a different type of license that applies to longer-term installment loans, which hadn’t been subject to interest rate caps.

The new legislation follows action in last year’s single-day special session, when lawmakers approved restricting charges on short-term loans and a 36% interest cap on loans that are renewed.

The payday loan industry, which makes small loans as advances on paychecks, has been growing exponentially in Oregon; there are now at least 350 such outlets.

A report from the state Department of Consumer and Business Services said payday lenders made more than 840,000 loans in 2005, a 15% increase over the previous year. More than 100,000 Oregonians had problems repaying such loans in 2006, according to state estimates.

Critics have argued that interest rates on such loans need to be tightly regulated, or else borrowers can be trapped in an endless spiral of debt. But those in the no credit check payday loan industry have said they fill an important niche for the thousands of Oregonians who don’t have a checking account and a bank, and the new rules could drive them out of business, as well as lead to a rash of bounced checks.

Other proposed rules that won the endorsement of the Consumer Protection committee Wednesday included:

- Development of a state database lenders can tap into to track whether potential borrowers have outstanding loans, and if so, how many.

- Limit fast cash loans against car titles to terms of less than 31 days.

- Extending the interest rate caps to Internet-based and out-of-state lenders.

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Consumer advocates don’t plan to lobby lawmakers this session for a bill targeting personal cash loan lenders. They say they don’t need to, thanks to a recent decision by federal regulators.

Payday lending foes are heralding a standard adopted by the Federal Deposit Insurance Corporation, discouraging such lending to anyone who has had such a loan outstanding in three out of the 12 previous months.

“When that happened, they left West Virginia,” Dave McMahon, a lobbyist and lawyer for low-income consumers told The Herald-Dispatch.

A lobbyist for payday lenders discounted the FDIC standard cited by McMahon, but agreed that the topic would not arise this session.

“The industry is devoting more attention and effort to other jurisdictions,” lobbyist Phil Reale said.

But McMahon said the death of the issue, at least for now, suggests the industry had relied on repeat customers as consumer advocates have alleged. He cited national statistics estimating that these borrowers provide 60 percent of online payday advance lending revenue, though they account for only 40 percent of all customers.

“It really was not about short-term, occasional loans,” McMahon said. “What they really make their money on is when people get trapped into a cycle of debt to these people and they can’t get out.”

Payday lenders offer cash advances to people who surrender postdated checks. The lender holds the check until the borrower’s next payday, when the loan is either paid off or the lender cashes the check.

The fees charged for this short-term loan exceed the 38 percent interest rate cap set by West Virginia law. Payday lenders had lobbied the Legislature in recent years to license and regulate these kinds of loans. But one lender, First American Cash Advance, operated in the state by aligning itself with federally chartered, out-of-state banks.

McMahon and such groups as AARP had opposed instant payday loan lending legislation, and proposed measures targeting companies like First American. The FDIC standard has changed the playing field, McMahon said Wednesday.

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Courtesy of The Seattle Post-Inteligencer Editorial Board …

Washington has been a leader in bad credit payday loans, which is not necessarily a blessing. The state’s mid-1990s allowance for writing postdated checks to pay off short-term loans approved a dubious, otherwise illegal practice.

The Legislature should return some rationality to the lending practice with a cap of 36 percent interest on loans that target hard-working, financially squeezed segments of the population. The personal cash loan industry says it can’t operate on such a tight margin; if so, perhaps it will be just as well for the public.

There is a need for short-term, relatively small payday advances in the hundreds of dollars.

Credit unions ought to be pushed into filling more of the demand, and doing so in a way that educates borrowers often caught in desperate cycles of debt, high-interest loans and impossible repayment obligations. The coalition of labor unions, churches and anti-poverty groups proposing the interest cap in HB 1020 also could organize better lending and credit education.

Effective annual interest rates on the cash advance payday loan resources today can run around 390 percent.

There’s nothing magic about the 36 percent limit sought by Poulsbo Democratic Rep. Sherry Appleton. But given the choice between that and 390 percent, lawmakers should insist on overcoming any roadblocks set up by Ways and Means Committee Chairwoman Sen. Margarita Prentice and returning some sanity to lending.

The Center for Responsible Lending has published a critique of major analytical flaws in a new working paper Defining and Detecting Predatory Lending on payday loans by Federal Reserve economist Donald P. Morgan of the Federal Reserve Bank of New York.

The Fed paper comes to the preposterous conclusion that while no fax payday advance lending is “expensive,” it is not “welfare-reducing” and therefore not “predatory.” The Center for Responsible Lending had a premonition that this paper would contain such out-of-step findings when the first reference it saw to it was a laudatory pre-publication tease, with excerpts, on a rent-to-own industry website.

From the Center for Responsible Lending critique:
Morgan’s findings are flawed for three key reasons:

1. The analysis contains fundamental errors in its characterization of which states allowed faxless cash advance lending. Example: Morgan identifies North Carolina - which had at least 500 stores during the analysis period - as a non-payday lending state.
2. Key definitions utilized by the research are overly narrow or are contradicted by available data. Example: Morgan, in part, defines vulnerable households as those with unpredictable future income. However, an industry survey notes that households are nearly three times likely to borrow cheap payday loans because of unexpected expenses.
3. Morgan’s finding that unlimited payday lending leads to lower prices is flatly contradicted by other research. Example: Researchers from the FDIC, using a national, random sample, found that most quick cash advance companies charge the maximum rate permitted by state law.

Mitzi Rivers stood before a crowd of about 20 bankers and credit union leaders - people who lead boards in Wichita and make headlines in The Wichita Eagle - and told them her personal story of payday loans.

How she had so many that it would take her five hours on payday to go around to all the shops where she had taken out loans to pay them off.

How one day, tired and worn out, the mother of six - who was paying $660 a month in fees to no fax payday loan lenders - decided she needed a better way.

How Communities United Credit Union helped her by developing a budget and giving her a new loan at a lower interest rate that saved her $300 a month.

Rivers spoke Tuesday at a meeting organized by Sunflower Community Action, a grassroots group active in low-income neighborhoods, to encourage banks and credit unions to consider offering small-dollar loans to people trapped by supposedly low fee payday loans.

These small loans would be made available to people such as Rivers - people who live paycheck to paycheck - when a water heater breaks or a tire blows.

Angie Franklin, manager of the Communities United Credit Union, said she’s trying to help as many people like Rivers as she can, but her credit union is small.

The goal of the community development credit union is to help underserved residents in certain neighborhoods by focusing on education.

Franklin told her peers how hard it is to listen to stories such as Rivers’.

“They cry,” Franklin said, “I’m emotional, too, and I cry with them.”

One possible solution has been developed by a credit union in Arkansas, which offers customers a personal loan that is part loan, part savings account. A consumer takes out a $1,000 loan, for example, but only gets $500 back in cash. The other $500 is put in a savings account. The consumer pays back the $1,000, and when he does, he has money in the bank that is gaining interest.

Kevin Shields from the Federal Deposit Insurance Corp.’ s Kansas City office told the group that the chairman of the FDIC, Sheila Bair, is supportive of more traditional financial institutions reaching out to underserved people in their communities.

And there may be an incentive for it: the Community Reinvestment Act. That federal law encourages depository institutions to help meet the credit needs of the communities they serve.

Rob Allison, Bank of America’s Kansas president, said it’s too early to tell whether his bank would be interested in offering alternative products. But he said reinvestment act credit could definitely be an incentive.

“It’s very important to banks to get high ratings in community reinvestment,” Allison said.

He said he plans to take what he learned Tuesday back to others at his bank.

“It’s just too early,” he said. “But I think it was certainly an informative meeting.”

Lyndon Wells, executive vice president at Intrust Bank, said demand for small-dollar loans seems to exist. Many quick cash loan customers say they go to such lenders because banks don’t offer small-dollar loans. Such loans aren’t lucrative to banks.

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The Motley Fool presents a business/stock market look at recent payday advance ruling …

We’re only one month into 2007, and already, 19 states have introduced more than 50 separate pieces of legislation regulating the payday loan industry. While some of the current bills are holdovers from last year, state legislators are well on their way toward matching the 65 separate bills introduced last year in 25 states.

You can perhaps understand the animosity towards alcohol and tobacco companies. Yet fast payday advance lenders provide a much-needed service to a large swath of the public that has been completely abandoned by traditional financial institutions.

A short-term bridge over troubled water
Credit counselors charge that the interest on payday loans is usurious. For example, Advance America charges $15 on a 14-day $100 loan; extended out to a year, that’s an annual percentage rate of 391%.

The typical annual percentage rate for a guaranteed payday loan from a Dollar Financial Money Mart store is 456%, while Cash America’s $25 fee per $100 borrowed would be equivalent to a 651% APR. To fiscally prudent people, this is not only outrageous, but predatory.

Yet such arguments distort the nature of these personal loans.

Many of the people who use these services are considered a credit risk by banks, credit unions, and other financial institutions. Those businesses wouldn’t even give these people a bridge loan, let alone charge a rate that wouldn’t be considered usurious. These consumers have become what is known as the “unbanked” or “underbanked.” In fact, they may not even have poor credit histories - they simply don’t have any at all.

Serving the underserved
For a variety of reasons, many of the consumers lack checking or savings accounts, and cannot obtain credit card cash advances. Many cash loan customers are recent immigrants. EZCORP, for example, is based primarily in and around Texas, and has found that many of its customers are Mexican immigrants.

Because the use of payday services in Mexico is not as stigmatized as it is here, it’s even more of a growing business south of the border, and EZCORP has expansion plans there.

While no faxing payday loans are the bread-and-butter of these businesses, they’re often not the sole source of revenue. These lenders often cater to the full range of the underbanked consumer’s needs, and many also operate pawn shops, where merchandise is put up as collateral for a small, short term loan. Some also provide low-limit credit cards and buy-here/pay-here auto dealers.

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Fred Waddell is an associate professor emeritus at Auburn University. He recently wrote an opinion piece for The Roanoke Times …

Do you remember the stories about coal miners and sharecroppers who were slaves to company-owned stores? These impoverished workers labored from sunup to sundown. When it came time to feed their families, the only place they could buy food and other necessities was the company-owned store, which charged prices so high people had nothing left over.

Company stores were also the only ones that would let the workers buy on credit. So, each payday, after paying what they already owed and buying food on credit till the next payday, they remained penniless. They were truly chained, like slaves, to the company store.

We see this today, desperate Virginians chained, like slaves, to predatory easy payday loan lenders.

Consumer protection groups such as the Center for Responsible Lending in Durham, N.C., and the Consumer Federation of America in Washington, D.C., refer to payday loan practices as predatory lending - and payday cash advance lenders are indeed predators.

The Center for Responsible Lending estimates that payday loan fees cost U.S. families at least $3.4 billion a year, with the average borrower paying $800 for a $325 loan.

Research from the University of North Carolina’s Kenan Institute, Ohio State University’s law school and various state agencies and consumer groups across the nation show that these businesses purposely structure their contracts so consumers have a hard time repaying their initial debts, with outrageous interest rates, loan periods restricted to two weeks and refusal to accept partial payments on the principal.

Consumers who can’t pay off the entire debt at once must keep refinancing their faxless payday loans until they can.

State regulators in Illinois, Indiana, Washington and Wisconsin looked at data between 1999 and 2003 and concluded that the average payday loan customer takes out 10 or more loans each year.

Payday lenders take advantage of people who can least afford it.

The Colorado attorney general’s office reports that 7.4 percent of fast cash loan customers in that state are older than 55. Jean Fox of the Consumer Federation of America says that figure underestimates the secondary effect of payday loans on older Americans, because they bail out their adult children and grandchildren when they become victims.

The only way that the poor coal miners and sharecroppers could ever break their chains of slavery was to break free of the company store, just as the only way that Virginians will ever break free from money worries and have a little extra money for things they need is to break free of these company stores now calling themselves payday lenders.

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There’s a new mail campaign urging state lawmakers to leave the check cash advance lending business alone.

The industry has come under attack for how much it charges and now, some lawmakers are questioning how genuine the postcard campaign really is.

We’ve all been told that writing your lawmakers is one of the most powerful things you can do to be heard and enjoy some influence. But some lawmakers are suspicious of this campaign because many of the postcards were addressed in the same handwriting - and there are accusations flying about what savings account payday loan customers were told:

When Anthony Vicari applied a couple weeks ago for a payday loan, he says the workers gave him and other customers in the store the hard sell, telling them to fill out postcards to their state lawmakers.

“They were saying, the Legislature is going to make payday lending illegal, you won’t be able to pay rent or your bills, essentially, you’re going to be dead in a ditch if you don’t do something about it,” he said.

At the state capitol, legislators are getting flooded with the cards. They’re considering a bill that would limit the interest rates on no fax needed payday loans to 36 percent. Right now, the stores charge roughly $15 for every $100 borrowed; that works out to an annual percentage rate closer to 400 percent.

Representative Sherry Appleton is leading the fight to crack down and says the postcard campaign will not persuade her to give up.

“These are desperate people, they are going into get a loan, because they need it. I believe it’s indirect coercion, because I think a lot of people feel, whether it’s true or not, that they’re not going to get their payday loan unless they fill these out,” said Rep. Sherry Appleton, D-Kitsap County.

“It’s like false public comments to your state legislators, saying I love payday lenders, they’re my best friend, when that’s not the case,” said Vicari.

Vicari acknowledges, he did get his bad credit cash loan even though he refused to sign the postcard.

In a letter to lawmakers, Moneytree CEO Dennis Bassford says his company is not coercing anyone to sign the cards, but he is trying to get across his view that the annual interest rate is not relevant because these are short-term loans, typically paid off in two weeks.

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