Short-term cash, long-term issues

Sunday, March 20, 2005 | 12:00 a.m. CST; updated 6:22 p.m. CDT, Saturday, July 19, 2008

Deanna Eubanks had been working hard to make ends meet. She used the paychecks she earned as a patient service representative at a Columbia hospital to support her family and pay bills, but she often would find herself in need of extra money.

Four or five years ago, she saw the large signs on storefronts along some Columbia streets offering instant cash. She decided to give it a try.

“They’re convenient but a burden,” she said of short-term loans, also known as payday loans.

Eubanks, like tens of thousands of other Missourians, would borrow between $100 and $500 for two weeks to a month. Fees vary, but are generally between $15 and $25 per $100 borrowed. To borrow $300, for example, she would write a check for $345. The payday lender would hold the check until Eubanks’ next payday, and then cash it, making a profit of $15 per $100, at a startling annual interest rate of 390 percent. All a borrower needs to get the loan is a pay stub and proof of a checking account.

Eubanks found the system convenient when she needed money in a hurry, and she borrowed from payday lenders for four or five years. If she found herself unable to repay the loan, she would renew it — paying another $15 per $100 borrowed to extend the loan for two weeks. While expedient, renewals can be expensive.

“At one point I had five out at the same time,” she said. “It got to be so that I was getting a paycheck just to pay for the renewals.”

Eubanks would often renew loans as many times as she could but didn’t like the idea of the interest exceeding the original amount of the loan, which often happens after multiple renewals. After paying off her most recent loan in January, she said she doesn’t ever want to take out a payday loan again.

There are many Missourians in situations similar to Eubanks’. For better or for worse, payday lending is on the rise in Missouri. According to statistics the Missouri Division of Finance is required to produce every two years, Missourians took out more than 2.6 million payday loans during the 2003-04 reporting period — an increase of 30 percent from the previous period. The number of lender licenses granted also increased by 37.5 percent to 1,198. The average loan was $241.11, an increase of nearly $20, with the most common amount being $300, up from $200 two years ago. By 2204, the average loan was $276.18.

The sheer numbers indicate short-term loans are a popular service, but some believe the industry is taking advantage of its clients.

The Division of Finance reports have been required since 2002, when the General Assembly passed legislation regulating payday lenders. The law also caps at six the number of renewals a borrower can get on a single loan.

Rep. John Burnett, D-Kansas City, feels the 2002 laws don’t go far enough and this year is sponsoring House Bill 164, which takes aim at the high interest rate that payday lenders can charge. He said the Division of Finance report confirms what he has observed about payday lending among members of his constituency.

“It’s a tremendous problem that needs to be fixed,” he said.

Burnett noted there is nothing to keep lenders from offering loans under other legal designations. After the success of the 2002 laws, legislators in 2004 tried, but failed, to enact further restrictions. Burnett’s bill has been introduced but has yet to be scheduled for a committee hearing. It would limit the interest and other fees lenders can charge to $15 for every $100 borrowed and 3 percent monthly afterward. The bill would also prohibit loan renewals that circumvent rate restrictions.

Lending in Columbia

Payday lenders have been operating in Missouri since the early 1990s. According to the Division of Finance, Columbia issued 19 licenses in 2004, including three for new lenders. Those businesses made 115,446 loans during the two-year reporting period. The average annual interest rate was 405.07 percent. Geary, supervisor of consumer credit for the Missouri Division of Finance, said payday lenders are mostly “people-friendly” institutions, and customers come from all walks of life. He said the typical user is a working-class single mother in her 30s.

Geary said lenders can be found in communities of all sizes. Lending businesses can be independently owned, single locations or parts of large chains such as Check Into Cash, which has more than 700 locations nationwide.

“There is a need for these places, but there should be more restrictive rates,” said Ed Berg, executive director of Mid-Missouri Legal Services.

Berg’s agency has seen many clients with payday loan problems. Before 2002, customers could renew a loan as many as 13 times, and Berg said his group had sued lenders, contesting high levels of interest. In the time since, however, he has almost exclusively defended borrowers who are sued by lenders for failing to make payments.

Regina Crews is one borrower who has run into legal trouble. In November, after separating from her husband and enduring an expensive move, she took out a $500 payday loan. She had done it before with no problem. This time, however, when the loan came due, her account lacked sufficient money to cover the check. She was told by the lenders, Payroll Advance, that she would need to pay back the loan in full or renew.

Unlike Eubanks, Crews decided against paying the $160 to renew the loan. Her check bounced, and the lender eventually sued her. The whole process eventually cost her more than $800 — including interest, fines and court costs.

Jeff Shirley, a musical engineer who has a disability and relies on Supplemental Security Income, had another kind of problem. He took out a loan last year from Quik Cash in Columbia. Clerical errors on his paperwork caused him to be late on his payment, he said.

“They had me paying too soon and miscalculated the interest,” Shirley said his paperwork misreported the date of his loan and the amount borrowed.

Because paying a lawyer wasn’t an option, Shirley’s situation was resolved only when the owner of another payday loan contacted Quik Cash on his behalf.

This was Shirley’s first payday loan. He said he knows lots of people who use them, and the potential for problems exists. He said lenders can make mistakes, and borrowers often are not knowledgeable enough about loans and fail to read the fine print.

Paula DeBates, a financial educator with the Central Missouri Counties Human Development Corporation in Columbia, said her clients’ financial problems frequently feature payday debt. She said most people borrow with good intentions, but the problem comes when lenders encourage renewals.

“I’ve heard both sides of the situation,” she said.

How to regulate the industry

Burnett called Missouri “one of the worst states in the nation” at protecting payday borrowers. Jean Ann Fox, director of consumer protection at the Consumer Federation of America, agreed.

Fox said model states are those such as Maryland and Massachusetts that prohibit payday lending. Many states that allow it offer more protections than Missouri. Florida law, for example, allows only one loan at a time, prohibits renewals and requires a “cooling off” period of 24 hours after repaying a loan, during which no other loans can be taken out. The state maintains a database to enforce these laws.

The Missouri Division of Finance report shows this state has more licenses than each of the eight states that border it. The report also shows Missouri received more complaints than other states. Almost all neighboring states allow fewer renewals than Missouri; six forbid them entirely. All the contiguous states except Oklahoma have caps on interest that are lower or equal to Missouri’s.

Missouri Attorney General Jay Nixon said the report shows a need to reform laws regulating the industry.

“The payday loan industry in Missouri is thriving, but it is doing so at the expense of cash-strapped Missourians who have run out of options to pay their rent, utilities, or purchase food,” he said in a statement supporting HB 164.

Nixon spokesman Jim Gardner said the bill would help streamline the process for dealing with complaints and delinquent practices. In addition to providing safeguards for borrowers that other states have in place, he said, the office could act on matters presented to it before waiting for an official referral from the Division of Finance.

Geary said the Division of Finance has no official position on HB 164 or whether the report indicates a need for legislative reform.

Church groups and other aid organizations have been among the major proponents of legislative reform to the payday lending industry.

Jerry Young of the Kansas City Church Community Organization said his group has noticed increasing trouble with payday loans.

“It’s financial crack to a lot of people,” Young said, referring to the ease with which people get trapped in a cycle of debt by repeatedly renewing loans. He added that his group has noticed an increase in the demand for area utility aid programs. Many of those unable to pay their utility bills owed payday lenders. Although the 2002 legislation made it no longer a crime to get behind on payments, lenders still can obtain wage garnishments.

HB 164

House Bill 164 would limit the interest and other fees that lenders can charge to $15 per $100 of principal for the first 30 days of the loan and not more than 3 percent per month thereafter. That would amount to an annual interest rate of 36 percent. It would also prohibit repeated renewals of loans designed to circumvent interest-rate restrictions.

The bill would also give the attorney general jurisdiction to issue cease-and-desist orders against violators. It would allow the attorney general to sue for injunctions, recession of loan contracts and restitution and civil penalties for violations. Currently, the attorney general must receive a referral from the Division of Finance before acting.

— Source: Missouri House of Representatives

Young pointed out that those who make payments for an extended period of time before stopping can still be called for default. He said it would be ideal to have no renewals and a mandatory “cooling off” period like Florida’s. The borrower databases in those states also benefit lenders, he added, because they make delinquents easy to track.

Young argued that if renewals were forbidden, lenders would be more selective, taking in a borrower’s ability to repay. “There’s a need for small loans,” he said. “But the product must be more responsible.”

Larry Weber of the Missouri Catholic Conference said his group supports the legislation.

“Last time (in 2002) there were some good changes,” he said. “Burnett’s bill is right on target — it prohibits high interest.”

Lenders, however, say that high interest is necessary for high-risk loans and that their service hurts no one who uses it responsibly.

Randy Scherr, executive director of the United Payday Lenders of Missouri, calls the proposed legislation unclear and excessive. The five-year-old organization was created to respond to legislation and other attacks on the industry. He said the group works closely with the Division of Finance on regulations and compliance.

Scherr said no other industry is regulated like payday lenders. As loans go, only payday loans have limits on fees and interest, and no others have fees included in calculations of the annual percentage of their interest rates.

“If people didn’t like them, then we wouldn’t have 2.6 million loans out there,” he said, noting that there are lots of customers who without payday loans would have been unable to pay bills on time or to make it through school.

Commenting on the loans’ high-risk nature, Scherr said the industry’s loss rate is greater than most people believe. Most calculations treat renewals as separate loans. In this way, a loan renewed three times and never paid back is treated as a loss of only one in four loans. However, because the lenders lose the entire amount borrowed, the loss for them is really 100 percent.

Scherr said payday lenders generally have loss rates between 15 percent and 25 percent. Capping renewals, he said, will only hurt consumers, whose choice it is to renew.

“Why is the state telling the consumer they can’t take out a loan?”

Scherr said many lenders will be unable to operate under the proposed interest caps. While the United Payday Lenders of Missouri includes both large and small operators, he was particularly concerned about small lenders.

Columbia’s Pocket Money, the first payday lender in Columbia and probably one of the first in Missouri, is one of those lenders. Owner Jana Baxter said she has developed personal relationships with those who borrow regularly. She worries that her business won’t survive under the proposed restrictions. She said lending — whether in payday loans, bank loans, credit cards or overdraft protections — is about responsibility.

“This legislation is trying to put all the responsibility back on the business owner,” she said. Unlike most lenders who will lend to anyone with a checking account, Baxter chose last year to reduce her risk by being selective about her customers. She feels payday lenders have been unfairly singled out while others — such as credit card companies — aggressively seek customers whose debt will be profitable.

Scherr worries that if Missouri makes it difficult for storefront lenders to operate, Internet providers could flourish. He said they can essentially import rates from other states.

“The state needs to understand this,” he said. “They won’t be able to regulate operators importing rates by Internet. It’s starting to happen now.”

Alternatives to Payday Loans

Geary, of the Division of Finance, said borrowers might prefer paying $15 interest per $100 borrowed for a payday loan rather than risk bouncing a check or doing something else that might hurt their credit record. Fox, of the Consumer Federation, recommends that anyone with a bank account get traditional overdraft protection, which includes payment plans and reasonable interest rates. While she acknowledged such plans can be expensive, she said they offer security that payday lending can’t. Credit unions are another alternative.

“Small loans are credit unions’ forte,” said Rick Nichols, president of River Region Credit Union in Columbia and Jefferson City. “It’s why we were started.”

River Region offers “signature loans” that allow people to borrow small amounts, from $100 to several thousand dollars, for up to 36 months. Annual percentage rates on signature loans range from 8 percent to 18 percent.

Nichols said many payday borrowers could have saved money at a credit union. However, unlike payday lenders who require only a paycheck and a checking account, his credit union will look at an individual’s credit history.

“Everyone is judged on an individual basis,” he said, adding that those who have not used credit responsibly could have difficulty getting such a loan. Also, approved borrowers can have their overall financial situations evaluated by the staff, which looks at restructuring and other options. That’s something a payday lender won’t do.

Nichols said a borrower with good credit can walk into River Region and have a loan in five minutes. Mizzou Credit Union offers small loans similar to River Region’s.

Fox said the most important thing is to be responsible and save whenever possible.

“The best thing to do is start an emergency fund,” she said. “It can be difficult to save, but they could start with a small amount — what they end up paying lenders in fees and interest anyway when they use their money.”

She recommends waiting to buy non-essential items and using credit counseling if they should find themselves in trouble.

Eubanks is one person who has turned to credit counseling to straighten up her finances. She began working with DeBates and the Human Development Corporation in 2001 to better manage her finances. Eubanks has an individual development account, with which she’s saving to buy a home.

DeBates has 15 people with IDAs and said 13 have or have used some type of payday loan. A lot have fallen into the renewal cycle.

“It’s a pleasant thing to them when someone says they don’t have to pay it off today, let’s just renew it for $15,” she said. “If they roll it over four times, the fees are almost as much as what they borrowed.”

DeBates tries to teach them about the high-interest nature of payday loans and encourages them to make a plan to pay them off.

“We’re an instant gratification generation. We want it now,” DeBates said. Payday loans, rapid tax refunds and rent-to-own appliance centers are the types of things that can get people into problems they could have avoided if they had been more patient.

As for savings strategies, Eubanks is starting small. “I try to eat out less and stick with spending money on the necessities.”

“I just wish they’d never come around,” Eubanks said of payday lenders. “It’s amazing what we used to do when they weren’t here. We just muddled through. People would borrow from a friend, or they just did without.”

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