Payday loan stores thrive despite crackdown

ATLANTA -- When Pam Sanson needed a quick $300 to pay the bills, she never expected her decision would cost her more than $900 in interest in just six months.

Sanson had taken out what's known as a payday loan, a quick short-term loan with a very high annual interest rate -- 600 percent in Sanson's case. Such loans are prohibited in most states because they exceed legal limits on interest rates, yet thousands of loan stores continue to operate around the country, especially in poor, minority neighborhoods.

The weakened economy has helped make these loans more attractive -- and even harder to pay off.

"It's like a virus spreading out there," said Georgia insurance commissioner John Oxendine, who has been trying to crack down on lenders who prey on the poor. "It's very frustrating -- we'll shut one guy down and a couple more will pop up."

There are as many as 24,000 payday loan stores nationwide that take in $2.4 billion in fees and interest each year, according to a 2001 report from Consumer Federation of America.

The companies charge as much as $30 every two weeks per $100 borrowed -- the equivalent of a 720 percent annual interest rate.

The companies are able to evade state limits on annual interest rates -- typically between 25 and 60 percent -- by using a loophole in the National Bank Act. The law allows so-called "rent-a-bank" agreements, in which payday lending chains pair up with banks in states with lax lending laws so they can export high interest rates.

For example, USA PayDay now gets its customers' loans from a bank in Delaware, which along with South Dakota doesn't cap interest rates and has favorable tax laws.

Officials at the Office of the Comptroller of the Currency have gotten four federal banks to discontinue their dealings with payday lending companies by claiming they weren't doing business in a safe and sound manner. That forced Advance America, Cash America, ACE Cash Express and Dollar Financial to stop using federal banks for payday lending.

But those companies still use state banks to get money for loans at high interest rates. State banks are regulated by the Federal Deposit Insurance Corp., which hasn't pursued payday lenders as aggressively as the OCC. The FDIC has issued a cease and desist order against at least one state bank, Lincolnwood, Ill.-based Brickyard Bank.

The average person who uses payday loan services is a young parent making between $25,000 and $50,000 a year, said Penny Pompei, executive director of Community Financial Services Association, a payday industry group.

Payday loan opponents say they target the poor and trap people in an endless cycle of debt. There's always a better way to get money than a payday loan, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

"You keep paying the finance charges to roll the loan over to the next payday," she said. "Once you get started, you have trouble stopping. You don't get out of a financial hole by digging it deeper."

North Carolina has been the nation's fiercest battleground over payday lending, said Christopher Peterson, an attorney for U.S. Public Interest Research Group, a consumer group.

After a four-year experiment with payday lending, North Carolina lawmakers allowed state laws that permitted the loan stores to expire in August 2001. Since then, the companies have had to comply with the state's 36 percent interest rate limit or find themselves in court.

In Virginia, laws were passed that try to regulate payday lending, but that resulted in more companies moving to the state, Peterson said. That's because the laws legitimized payday loan companies by legalizing their practices, and they allowed local lenders to issue payday loans without having to partner with out-of-state banks, he said.

Other states such as Ohio and New Mexico have been trying to pass laws that cap interest rates and provide customers better information about how much money they'll pay in interest.

"It's a rapidly spreading industry," Peterson said. "Things have gotten worse. We're fighting payday lenders at every turn."

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On the Net:

Community Financial Services Association: www.cfsa.net/

Consumer Federation of America: www.consumerfed.org/

Georgia Insurance Commissioner: www.inscomm.state.ga.us/

U.S. PIRG: www.uspirg.org/