Legislators Review Payday Lending Practices.

A customer needing quick cash goes to a payday lender, usually located in a check-cashing outlet. The customer writes a check for a few hundred dollars dated a week or two in the future (generally the next payday), which the lender holds after giving the customer the needed cash minus a fee.

On the day the check comes due, the customer can redeem it in cash by paying back the "loan" or can simply let the lender cash it.

That's the payday loan business (sometimes called "deferred-deposit transactions"), and an increasing number of states are reviewing the regulations for this particular industry.

The problem can be: If the customer can't afford to pay, he or she may extend, or "roll over," the loan by paying another fee. Calculated on an annual percentage rate (APR) basis, the fee represents an interest charge typically totaling several hundred percent.

As a result, these loans often create enormous debt for those who can least afford it, and, to make matters worse, lawyers and consumer activists allege that some lenders use unfair or illegal collection practices.

Lenders counter that the loans, which have grown explosively in recent years, fill a need for working people who lack access to credit cards or other sources of emergency cash. The lenders say they should not bear responsibility for a small minority who get into financial trouble. Opponents say payday lenders exploit their customers, offering money to people with nowhere else to go.

Robert E. Rochford, deputy general counsel to the National Check Cashers Association, a trade group comprising more than half the nation's 6,000 check-cashing centers, says that the industry's growth reflects an underlying need for the service and that the industry has supported bills prohibiting excessive rollovers and shady collection practices, But he insists that it is unfair to focus on annual percentage rates for loans that are intended for only a week or two.

"Using an APR analysis on deferred-deposit transactions is like going to a cabdriver in New York City and asking the fare to San Francisco," Rochford said. "The service is not designed for that purpose."

Nevertheless, state legislators around the country are reviewing their payday lending laws. Nineteen states, Puerto Rico and the Virgin Islands effectively prohibit payday loans by capping loan interest rates, or passing laws against usury or regulating check cashers. Twenty-three states and the District of Columbia currently have payday loan laws or regulations that permit payday loans. The remaining eight states--Delaware, Idaho, Illinois, Indiana, New Mexico, Oregon, South Dakota and Wisconsin--permit payday loans without interest rate caps.