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Do payday lenders offer a way out or just enough rope to. Hang yourself?

Sixty-four-year-old Patricia Bailey is a self-described addict, but not of drugs or alcohol; she's addicted to payday loans--easy money for a woman who has oft times been desperate to make ends meet. Despite being hounded by collection agencies and creditors for 10 years, enduring wage garnishments, losing her home and filing for bankruptcy, Bailey says she still feels the urge to take out another payday loan.

"I do still think about them when I am on a temp assignment. I have no meds for my diabetes right now and my car needs a new steering column" she explains, "but I am clean at this point in my life."

Recognizing her dependence on payday loans, Bailey is today an advocate for greater regulation of the industry, especially online lenders. She has testified thrice before state legislators and wants to help prevent others from being swept into the "cycle of debt" she has experienced.

Of course not everyone is a critic of the payday lending industry. You might call Rachel Lopez the industry's poster woman. As a 19-year-old college student, she needed some quick cash to pay for her books and school supplies. She knew her single mom couldn't afford to help, so, despite the fact that she had a credit card and says she could have used it to pay for her books, she opted instead to take out a payday loan from CheckCity.

That was nine and a half years ago. Today, Lopez is manager of CheckCity's Orem store. After engaging in several payday loans through the company, Lopez says she wanted to work there. She's been a store manager for six years now and says she loves helping customers who visit the store for their short-term credit needs.

"The loans helped me out and I know we help people. We really do," she says.

Market Forces

While some 14 other states have banned payday lenders (also called "short-term lenders" or "deposit lenders"), the industry has found fertile soil in Utah with more than 500 payday lenders. The payday loan industry estimates there were more than one million cash advance transactions in Utah in 2010, but the actual number may be significantly higher. For example, a 2006 study by the Center for Responsible Lending estimated that Utah's payday lenders had loan volume of nearly 453 million in 2005--with $69 million in costs to Utah families.

One primary reason payday lenders are sprouting all over the Beehive State is the friendly regulatory environment and, most assuredly, the lack of a usury cap. Interest rates that range from 390 to 1,000 percent have brought condemnation from Utah consumer advocate groups.

"In the depression, the mafia's interest rate was 250 percent," says Linda Hilton, director of the Coalition of Religious Communities, a group that works on economic social justice. "One effort tried to cap the state's states usury rate at 500 percent, but no one [in the legislature] would touch it. We have tried several times to cap it over the last 12 years."

Hilton not only criticizes the usurious interest rates, but also complains that borrowers should not be allowed to take out multiple loans on one paycheck. Further, she asserts that the payday loan industry targets low-income people, students and minorities, and says payday lenders deliberately locate their stores in low-income areas, or where students and minorities live. Bailey believes payday lenders target the elderly as well.

Jerry Jaramillo, supervisor of savings and loans and trusts for the Utah Department of Financial Institutions, says the state has been regulating payday lenders since 1999, but "the legislature's position is that it is up to the individual to decide if that loan, at that interest rate, is in the best judgment of the borrower." He adds that usury rates in Utah are market driven and based upon "whatever people are willing to pay."

Ordinary People

Utah's payday lenders describe their customers as ordinary people with middle incomes, usually earning $25,000-$50,000 per year. Wendy Gibson, another CheckCity store manager, says her borrowers are working class people, under the age of 45, with families. "Thirty-two percent are homeowners; 54 percent have major credit cards; 100 percent have steady incomes; 100 percent have checking accounts; more than 90 percent have high school diplomas or better, and over 50 percent have attended some college or have a degree."

But that's not how Hilton and others describe payday loan customers. Hilton says they are generally "desperate people in desperate times that will take desperate measures if they are available. It's not stupid people being stupid. It's desperate people trying to survive," she says.

Bailey is a prime example of the desperate measures Hilton describes. At one point Bailey had seven payday loans tied to one paystub. "Was I desperate?" she asks. "Absolutely! In fact for the second time in my life, I felt ending my life would be far better than what I was living."

Paula Carr, Ogden City Justice Court administrator, says payday loan customers are "endemic of the demographic--any time you have a military base or colleges, you have a lot of payday loans. In Ogden we have a lot more people that are living at or below the poverty line than other cities." Consequently, Carr says her justice court has a high percentage of payday lenders filing small claims cases. "I would imagine the other justice courts are similar," she adds.

Earlier this year, the Coalition of Religious Communities produced a report showing that in Utah County, 62.5 percent of the small claims cases seen were brought to court by payday lenders. But Gibson argues that the actual number of small claims filings is small compared to all of the payday loan transactions that do not end up in court.

"Small claims court is a last resor [for any lender]. At CheckCity, we try every means possible to work with the borrower before we go that route," she says. Further, she asserts that payday lenders don't want to lend to borrowers that can't repay.

Perhaps that is true for CheckCity but not for the industry as a whole. Bailey's experience seems to prove otherwise.

Bailey filed for bankruptcy in 2004. Her $41,000 of debt included seven payday loans. In 2005, with limited income, she turned around and borrowed another $3,271 via 16 payday loans from nine different lenders. "As an alcoholic or a drug addict does not know where the money will come from for their next fix, an addict of payday borrowing wonders where the next lender is that you can borrow from in orderto pay the other [lender] you used that money to pay yet another [lender]," says Bailey.

Cycle of Debt

Critics of the payday industry say that most payday customers--like Bailey--are repeat or "trapped" borrowers locked into revolving high-priced, short-term credit rather than more reasonably priced long-term credit. Preston Cochrane, president and CEO of the AAA Fair Credit Foundation, a nonprofit credit counseling agency, says nearly a third of the people his agency assists are tied up in payday loans. "And if they have a payday loan, they typically have three or four loans, not just one."


Moreover, Cochrane says in his experience, the payday lending business model is set up to encourage borrowers to return "again and again to renew the loan. Once someone gets into the cycle, it's hard to get them out."

Some states subscribe to a database that tracks payday loan activity to prevent borrowers from taking out multiple payday loans within a certain time period. Frank Pignanelli, a lawyer and lobbyist for the Utah Consumer Lending Association, says that would be prohibitively expensive.

Gibson adds that at CheckCity, she can see how many lenders a borrower has visited in a certain time period and other factors that identify a borrower's stability and ability to repay a loan. She claims that many payday lenders use a third-party reporting agency to monitor customer borrowing habits in order to weed out those with a troubled borrowing history.

Short-term credit is often the last, best option for CheckCity clients, whose only alternative would be to bounce a check. "[Our customers] are very thankful that we are able to save them money by offering an effective, cheaper option to their short-term credit needs in lieu of bouncing checks," says Gibson.

"There is a reason this industry is well-liked and used: It's cheaper and more convenient than the alternatives [fees and penalties]," says Pignanelli. "You can't even get a $300 loan for a week from a bank or credit union."

But that short-term loan could prove expensive in the long run. A study from the Center for Responsible Lending found that the typical payday borrower pays back $793 for a $325 loan. And according to research from the FDIC's Center for Financial Research, high-frequency borrowers account for a disproportionate share of a payday lender's loans and profits.

Unreasonable Rates?

While other states have put caps on the usury rates (according to Jaramillo, the cap is 36 percent in New York), Gibson says it would be impossible for a payday lender to operate in Utah with a cap of 36 percent because the business model is built around processing microloans for short periods of time, usually a week to two weeks. Such a low interest rate would not generate enough revenue to cover overhead expenses, wages, benefits to employees or income taxes, she says.

"The cost to issue a loan is well above the fee we would make if the APR was set at 36 percent. In fact, at that rate we would only collect 69 cents for a $100 loan for a week, which wouldn't even pay the employee to process the loan, let alone cover rent or other overhead expenses," she explains.

"The smaller the dollar amount and the shorter the loan period, the higher the APR has to be in order to break even. The APR that we need to charge to make a profit and cover expenses at my company is 417 percent, which translates into a relatively small fee. If a customer borrows $100 for four days, the fee is only $4.57."

Further, Gibson says her industry encourages the responsible and informed use of its financial products. "Legislation has been passed to help reduce the cycle of debt that borrowers can get into. One Utah law requires short-term lenders to stop charging interest on a loan after 10 weeks, effectively enforcing a 10-week interest cap," she explains.

Another Utah law requires payday lenders to offer interest-free extended payment plans. "These are two effective ways to help ensure borrowers can repay their short-term loans, avoid collections and reduce the need to take out multiple loans."

Gibson also points out that of the one million-plus cash advance transactions in Utah in 2010, the industry received less than 10 complaints. However, those complaints were made to the Utah Department of Financial Institutions. In truth, more complaints were filed to the Utah Better Business Bureau (BBB).

Jane Driggs, president of the BBB in Salt Lake City, says in 2010 her office received 256 complaints against Utah-based payday lenders--a 52 percent increase over the previous year. Nationally, the BBB received 1,143 complaints against payday lenders. If you do the math, nearly one out of four complaints was against a Utah payday lender. Nonetheless, compared to the million-plus loans generated by Utah payday lenders in 2010, the number of complaints is fairly negligible.

Despite the criticism from consumer advocates, Gibson says the payday lending industry thrives because it provides a valuable service. "It is very rewarding work, especially with the positive feedback we receive from our customers," she says. "All types of unexpected events can come up and, unfortunately, many people do not have a backup plan."

On the other hand, Cochrane believes many payday loan customers "are addicted to spending and don't have the money." Thus, they get over-extended and caught in a debt trap from which they cannot get out.




By Gaylen Webb | Illustrated by David Habben
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Title Annotation:Payday Loans
Comment:Do payday lenders offer a way out or just enough rope to.
Author:Webb, Gayien
Publication:Utah Business
Date:Oct 1, 2011
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