When the General Assembly first tackled the payday loan industry, setting the ground rules for its entry into Virginia, it unwittingly invited in a greedy and destructive predator.

“Greedy,” The Daily Press labels it, because payday lenders, exempt from the usual ceilings on how much interest can be charged, heavy up with interest rates that run as high as 782 percent, calculated as the annual percentage rate, or APR.

“Destructive” because too many borrowers end up drowning in interest charges, unable to crawl their way out of a morass of debt.

Already in financial difficulty - or they wouldn’t have had to turn to a payday cash loan lender for a short-term, high-interest loan - many find they can’t pay back the debt, which has grown as hefty interest is added to the initial amount. So they get another loan, and another.

The typical customer for this business falls into the trap and takes out more than one low cost payday loan (seven a year, on average, for Virginia borrowers).

And “predator” because the industry preys on a vulnerable population: people who are in financial distress, people with low incomes, people without other resources.

Now, legislators have a chance to push that predator back out the door. They can do that with legislation that fixes the basic problem: rapacious interest rates.

Among many bills before the General Assembly, it should choose one that reins in the industry of payday cash advances by holding it to the same interest rate ceiling that applies to other small consumer loans: 36 percent.

Newport News Del. Glenn Oder and Del. John Cosgrove of Chesapeake have introduced a bill to do just that.

There’s another precedent to draw on: 36 percent is the maximum rate that Congress recently decided can be charged on military payday loans. Congress did that after it found that the mounting debt was creating so much stress that many men and women in uniform couldn’t be deployed overseas, where their nation needs them. That should tell you something.

The General Assembly should not choose a less effective path. It should not try to fix the problem by setting up a database to keep track of borrowers, or by setting limits on how many loans they can get or how long they must wait between payday advance loans.

It should not piddle around with measures that cut the fees by one-third or one-half, because that still leaves them in stratospheric territory. It should get to the heart of the problem and impose an interest rate ceiling that does something government is supposed to do: protect the public.

Call it an emergency faxless cash advance. Call it “proactive” overdraft protection. Just don’t call it a payday loan.

At least that’s how U.S. Bancorp and Wells Fargo & Co. prefer it.

The two companies offer direct-deposit checking customers cash advances on future paychecks. The two banks charge a 10 percent fee for loans up to $500, which is automatically repaid when the customer’s next paycheck is deposited in the account.

Payday loan lenders, by contrast, have an upfront charge of anywhere from 15 to 25 percent per loan.

Trent Spurgeon, vice president of product and segment management for Minneapolis-based U.S. Bancorp, justified the company’s 10 percent fee, noting that it is less than half of what traditional payday advance lenders charge, which includes “hidden costs” such as late penalties and renewal fees.

Moreover, he said, U.S. Bancorp offers the service to all direct-deposit customers, regardless of their credit histories.

Nevertheless, the direct-deposit loans are very lucrative for the banks, experts say. U.S. Bancorp and Wells Fargo earn an annual interest rate of about 120 percent on each loan. Plus there is little risk to the banks because they automatically deduct the money from the consumer’s direct-deposit account, said Bart Narter, a banking analyst with Celent, a management and consulting firm in Boston.

“I think they will make a bundle out of it,” Narter said.

Neither U.S. Bancorp nor Wells Fargo will disclose specific numbers related to the programs, calling such data proprietary.

Bank officials say the cash loans, dubbed direct-deposit advances, are strictly meant for emergency needs, such as car repairs or medical expenses.

The service is “a quick and simple solution to people who have no immediate access to other forms of credit,” Spurgeon said.

Cash-strapped consumers can also use the loans to prevent overdraft fees from bounced checks, he said.

“Payday loans carry certain [negative] connotations,” Spurgeon said. “We serve the same needs, but the products are different.”

For one thing, U.S. Bancorp, which rolled out the product about a year ago, is very clear about the terms and conditions of the loans, he said.

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Saying their industry takes advantage of the poor and the vulnerable, Attorney General Paul Morrison promised Friday to push for new restrictions on payday loan companies.

Morrison announced that he’ll convene a daylong “round-table discussion” on payday loans and check-cashing businesses, with an eye toward lower limits on what they’re allowed to charge consumers who take out small, short-term cash advances.

To lead the discussion, he appointed Holly Petraeus, the wife of Fort Leavenworth’s commanding lieutenant general, who led a push for restrictions on payday lending to soldiers. Morrison said he hopes to have proposals for the Legislature to consider before it adjourns in late April or early May.

“We think we know the direction that we need to head, and we’re just going to get these heads together, people who know about a lot about this issue, to make some recommendations,” Morrison said during a news conference.

Whitney Damron, lobbyist for the Kansas Payday Loan Association, said he wasn’t aware of any problems within the state and that no fax cash loan rates charged by its companies typically are lower than those in surrounding states.

“A payday loan is a straightforward loan that the consumer understands,” Damron said. “You find few complaints to the state banking board.”

State law limits payday loan companies to charging a 15 percent fee. However, typical payday advances - between $100 and $500 - last only two weeks, making the actual annual percentage rate charged up to 400 percent.

Morrison said borrowers often have trouble paying back their loans quickly, and they keep rolling them over - and often take out new loans.

“Kansas is literally becoming a mecca for a lot of these businesses, because it’s easy money,” Morrison said. “They’re popping up everywhere.”

Enough with the sob stories about suckers supposedly ripped off by the high-interest instant-loan industry. This is a peculiar business, a fact not fully grasped by those deciding its future, but focused on recently by The Richmond Times-Dispatch:

Lawmakers swayed by fat contributions from payday lenders.

It seems there should be room in a capitalist economy for a business that lends to cash strapped people $150, $250 but no more than $500 at a time.

But the business of payday cash loans is not businesslike. The market isn’t exacting efficiencies.

There’s little competition, even as this infant industry grows quickly. Don’t like Advance America’s rates? You probably won’t do better at CheckSmart or Check into Cash, bad credit payday loan industry lobbyists say.

Were this gaggle of companies a clutch of foreign oil states, it might be a cartel.

Banks, disdainful of small borrowers, angle for your business on, say, a construction loan by playing the percentage. So do credit card companies. No wonder people flip plastic.

Even consumer-credit firms, jealous that payday lenders operate interest-cap-free, loosen up. Their 36 percent rates are generous compared with triple-digit interest that cash loan online lenders can legally smack on their best customers. By best, one means worst - those who roll over loans by failing to pay on time.

They’re the focus of endlessly weepy news reports.

When Wal-Mart wants to beat its competition, it cuts its prices. There’s no impetus to do so in the high-interest instant loan game. Unlike Wal-Mart, lenders don’t need to cut rates to increase volume and lard profits. The industry operates with government protections, defined in this case as limiting them for consumers.

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How does The State feel about South Carolina’s payday advance law? Let’s paraphrase a recent editorial from the paper below and find out …

“Rewrite!”

To journalists, that term means it’s time to make changes - sometimes drastic ones - on a finished piece.

But when visitors to the paper’ office last week kept using the word to describe their dealings with multiple payday cash advance lenders, it meant something altogether different.

In the payday lending world, “rewrite” essentially means to renew a loan over and over again. According to these visitors, who didn’t want their names used - let’s call them Diane and Donna - it works like this:

• If they take out a $300 loan, they would give the lender a $345 check, which includes a $45 fee, to hold. When they return to pay the no credit check payday loan off, they present the cash, their existing loan would be closed, a new one is immediately opened, and they leave with another $300.

“Rewrite!”

That’s a big reason payday lenders are raking in fees of $186 million a year in South Carolina and $4.2 billion a year nationwide. They lure people in by offering short-term cash advance loans, only to take advantage of the fact that people can’t repay them.

Borrowers find themselves in a cycle of debt they can’t escape.

A study released in 2004 by the Center for Responsible Lending, in Durham, N.C., found repeat borrowers account for 91 percent of payday lenders’ revenue. The study found those who borrow from payday lenders receive, on average, eight to 13 loans a year from a single source.

Diane and Donna, both on fixed incomes, said they routinely get rewrites. Most times, they use money from one rewrite to - you guessed it - pay off yet another cash advance payday loan.

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The Canadian Payday Loan Association is calling on provincial governments to set the maximum allowable charges and fees for regular and online payday loans at $20 per $100, or an equivalent maximum.

The association says the move is expected to divide and more clearly differentiate the 23 association members from the 60 perecent of payday advance lenders who refuse to abide by a strict code of best-business practices.

The federal government has proposed a new law that would allow provinces to regulate the industry if they introduce specific consumer protection legislation and set caps on fees and charges attached to payday loans.

Association president Stan Keyes says the move should serve as a wake up call for supposedly low cost payday loan lenders that are not serious about providing services at reasonable prices and “only care about lining their pockets by gouging consumers.”

Keyes says any payday lender claiming they cannot operate with a $20-per-$100 cap in place is not serious about protecting consumers and should be shut down.

He added that most providers of payday advances have quit or not joined the industry group because they are not prepared to abide by its strict code of conduct.

A bill to restrict the practice of short-term payday cash loans and title loans, sponsored by Rep. John Parker, D-Great Falls, was voted down, 11-5, in committee Wednesday.

Parker’s bill would have capped interest rates on such personal loans at 36 percent, and would have curbed the practice of “rollover” lending, in which people take out new loans to pay off their earlier ones.

At a House Business and Labor Committee hearing on the measure earlier this week, Parker said that the annual percentage rate on title loans in Montana can reach 300 percent, and it can go as high as 650 percent on payday loans, and that such loans catch people in a “debt trap.”

Faxless cash advance lending industry representatives, though, said the bill would put hundreds of people out of work in Montana because the bill would shut down their businesses.

State Rep. Mike Milburn, R-Cascade, said Wednesday that competition sets the rates on such businesses, and that they wouldn’t exist if no one patronized them.

Robert H. Frank, an economist at the Johnson School of Cornell University, is the author of “The Economic Naturalist,” which will be published this spring. He wrote the following piece on instant payday loans for the New York Times:

When a lion achieves alpha male status, one of his first acts is to kill all unrelated cubs in the pride. Is that a bad thing?

As biologists have long realized, the question makes little sense. In the bitterly competitive environments in which lions evolved, the dominant male’s behavior was favored by natural selection because it brought females into heat more quickly, thus accelerating the transmission of his genes into the next generation.

His behavior appears brutal to human onlookers and surely makes life less palatable for lions as a group. In the Darwinian framework, however, it is a simple fact of existence, neither good nor bad. In any event, such judgments have little practical significance, since moral outrage alone cannot prevent a dominant lion from killing cubs.

In contrast, when humans prey on weaker members of the community, others are quick to condemn them. More important, such denunciations often matter. Because complex networks of voluntary association underlie almost every human transaction, the bad opinion of others can threaten the survival of even the most powerful individuals and organizations.

But the supply of moral outrage is limited.

To maximize its usefulness, it must be employed sparingly. The essential first step is to identify those who are responsible for bad outcomes. This is often harder than it appears. Failure at this stage steers anger toward people or groups whose behavior is, like the alpha lion’s, an unavoidable consequence of environmental forces. In such instances, moral outrage would be better directed at those who enact the rules under which ostensibly bad actors operate.

A case in point is the outrage currently directed at lenders who extend credit at extremely high rates of interest to economically disadvantaged groups. Among these lenders, so-called payday loan shops have come under particularly heavy fire of late.

This industry, which didn’t exist in the early 1990s, now has approximately 10,000 retail outlets nationwide (more in some states than either McDonald’s or Burger King). Industry revenue, less than $1 billion in 1998, reached $28 billion last year.

Concentrated in low-income neighborhoods, [quick payday advance] lenders typically offer short-duration loans of several hundred dollars secured only by a post-dated personal check from the borrower. Fees on a two-week loan often exceed $20 per $100 borrowed, which translates into an annual interest rate of more than 500 percent.

Occasional borrowing on such terms can make sense, because it sidesteps the cumbersome process of taking out a traditional bank loan. Many borrowers, however, quickly get into financial trouble once they begin to roll over their no faxing payday loans. A recent report by the Center for Responsible Lending, for example, estimated that a typical payday borrower ends up paying back $793 for a $325 loan.

Payday lenders have been condemned as ruthless predators whose greed drives hapless borrowers into financial ruin. Without question, the proliferation of payday lending has harmed many families. And since lenders surely know that, the moral outrage directed at them is understandable.

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The commander of all West Coast Marine Corps bases told the Oceanside City Council on Wednesday that many troops are falling into serious financial trouble due to payday loans with annual interest rates as much as 2,000 percent.

After hearing the presentation, the council voted unanimously to direct its staffers to study how Oceanside could limit the number of such lending businesses, reported The North County Times.

“We have to work to take some immediate action on this issue,” said Mayor Jim Wood.

The council members said they want city staffers to consider requiring such businesses to have a special permit or creating a temporary moratorium on the lenders.

Twenty-one fast cash loan lenders operate in Oceanside, said Maj. Gen. Michael R. Lehnert, whose command includes Camp Pendleton, just north of Oceanside.

“Oceanside has the highest density of payday lending institutes in the state of California and possibly the country,” said Lehnert, who noted that Pendleton is one of the more populated bases with more than 40,000 troops. “But this is not just in Oceanside, this is a national problem.

“We’re not trying to shut down the payday lenders, we’re trying to stop predatory lending practices,” he said.

He said local no fax payday loan lenders charge annual interest rates of between 450 percent and 2,000 percent.

Payday loan offices are usually located in poorer neighborhoods and near military bases. The businesses allow residents without savings to get access to cash that can be used for emergencies such as a doctor’s visit, car trouble or an electricity bill.

The maximum check a customer can give a faxless cash advance lender in California is $300, said Karl Higgins, a Vista lobbyist who said he was representing the payday lending industry. Higgins didn’t address the council because he arrived after Lehnert concluded his presentation.

“The industry is not targeting military borrowing,” Higgins said. “We have met with the Marine Corps and Navy twice explaining our position and offering to provide financial education and classes to customers.

“We are working with other local governments in San Diego (County) such as Chula Vista and National City. We look forward to working cooperatively with the military and city of Oceanside.”

The military has seen more and more servicemen run into problems with payday advance loan lenders as regulations for such businesses have been loosened in the last several years, said Lehnert.

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Motley Fool offers readers stock and financial tips. Here’s what it has to say about the future of one pawn shop/payday loan company:

What management says:
Cash loans are going to continue to become a much larger part of EZCORP’s future as 100 new EZ Money stores will be opened this year. In 2006, that expansion of the payday loan concept - EZCORP’s “signature loans” - caused revenues to nearly double to $7.7 million, while pawn shops, which haven’t had a single new store added since 2000, grew 17% last year.

President and CEO Joe Rotunda noted that the company opened 46 new cash advance loan shops in the fourth quarter alone, marking it as the third consecutive year of 100 or more new store openings.

He plans to open a few more stores in Mexico, a market that was already heavily using the Texas border stores. The company was forecasting per share earnings of $0.58 to $0.60 for the first quarter, but that was before the three-for-one stock split the board authorized in November, so analysts are on board for EZCORP to hit the high end of their range.

What management does:
As EZCORP continues to expand into payday cash advance lending, the costs associated with running those shops continue to drop in comparison to its pawn shops, which require half the personnel the latter does.

Moreover, with pawn shops largely dependent upon the price of gold to determine both its profits and its costs, the easy money might be over there for awhile. Profits have been fat - gross margins on pawn sales grew from 38.5% in 2004 to 39.8% in 2006 - but if inflationary pressures subside as oil prices stabilize, we may see precious metals like gold come down as well.

Advice:
Better returns at higher rates with fewer expenses make it easy to see why EZCORP is turning to faxless payday loan lending, even if it has to comply with the full set of federal and state regulations that have been imposed on the industry in the past few years.

With most of its operations centered in and around Texas, EZCORP is largely dependent upon the local economy, though it is branching out in the U.S. and now Mexico.

The easy money may already have been made in this stock. However, if the subprime lending market is in as much trouble as analysts contend, then short-term cash advance lenders may see some opportunities for good growth yet.