NYT: Seductively Easy, Payday Loans Often Snowball

by KUACOU241@YAHOO.COM on 2006-12-24 09:21:20

New York Times
December 23, 2006

Seductively Easy, Payday Loans Often Snowball

By ERIK ECKHOLM

Photo: http://www.nytimes.com/images/2006/12/23/us/23payday_lg.jpg
Caption: Rick Scibelli Jr. for The New York Times
Earl Milford, at home with his granddaughter, pays $1,500 a month just
to cover the interest on what he had intended to be short-term loans.

GALLUP, N.M., Dec. 20 - Earl Milford put up an artificial Christmas
tree in the wooden house on the Navajo reservation near here that he
shares with a son and daughter-in-law and their two little girls.

But money is scarce and so are presents. "It's all right," he
said, "they know I love them."

Mr. Milford is chronically broke because each month, in what he calls
"my ritual," he travels 30 miles to Gallup and visits 16 storefront
money-lending shops. Mr. Milford, who is 59 and receives a civil
service pension and veteran's disability benefits, doles out some
$1,500 monthly to the lenders just to cover the interest on what he had
intended several years ago to be short-term "payday loans."

Mr. Milford said he had stopped taking out new loans, but many other
residents of the Gallup area and countless more people across the
country are visiting payday lenders this month, places with names like
Cash Cow, Payday Plus and Fast Buck, to get advances of a few hundred
dollars to help with holiday expenses.

While such lending is effectively banned in 11 states, including New
York, through usury or other laws, it is flourishing in 39 others. The
practice is unusually rampant and unregulated in New Mexico, where it
has become a contentious political issue. The Center for Responsible
Lending, a private consumer group, calculates that nationally payday
loans totaled at least $28 billion in 2005, doubling in five years.

The loans are quick and easy. Customers are usually required to leave a
predated personal check that the lender can cash on the next payday,
two or four weeks later. They must show a pay stub or proof of regular
income, like Social Security, but there is no credit check, which leads
to some defaults but, more often, continued extension of the loan, with
repeated fees.

In many states, including New Mexico, lenders also make no effort to
see if customers have borrowed elsewhere, which is how Mr. Milford
could take out so many loans at once. If they repay on time, borrowers
pay fees ranging from $15 per $100 borrowed in some states to, in New
Mexico, often $20 or more per $100, which translates into an annualized
interest rate, for a two-week loan, of 520 percent or more.

In September, Congress, responding to complaints that military
personnel were the targets of "predatory lenders," imposed a limit
of 36 percent annual interest on loans to military families. The law
will take effect next October and is expected to choke off payday
lending to this group because, lenders say, the fees they could charge
for a two-week loan would be negligible, little more than 10 cents per
day, said Don Gayhardt, president of the Dollar Financial Corporation,
which owns a national chain of lenders called Money Marts.

The new law will have little impact on the larger practice because
military families account for only a tiny share of payday lending,
which lenders defend as meeting a need of low-income workers.

Mr. Gayhardt said the industry had prospered because more people worked
in modestly paying service-sector jobs, and in a pinch they found
payday loans cheaper and more convenient than bouncing checks, paying
late fees on credit cards or having their utilities cut off.

Mr. Gayhardt, who is also a board member of the Community Financial
Services Association of America, a trade group that represents about 60
percent of payday lenders, said the frequency of extended rollovers and
huge payments was exaggerated by critics.

He said the association supported "fair regulations," including a
cap on two-week fees in the range of $15 to $17 per $100, a level now
mandated in several states, including Florida, Illinois and Minnesota.
This translates into effective fees of about a dollar a day for those
who repay on time, which he said was reasonable given the risks and
costs of business.

"We want to treat customers well so they'll come back," Mr.
Gayhardt said in a telephone interview from his headquarters near
Philadelphia.

Even so, higher fees and sorry stories are not hard to find. Payday
lenders have proliferated over the last 15 years, including here in
Gallup, a scenic but impoverished town of 22,000 with a mix of Indian,
Hispanic and white residents and a striking density of storefront
lenders.

At least 40 lending shops have sprung up, scattered among touristy
"trading posts," venerable pawn shops and restaurants along the
main street (old Route 66) and with as many as three crowding into
every surrounding strip mall.

"Payday lending just keeps growing, and it just keeps sucking our
community dry," said Ralph Richards, a co-owner of Earl's,
Gallup's largest and busiest restaurant.

Mr. Richards sees the impact among his 120 employees, mainly Navajo,
some of whom become trapped by payday loans they cannot repay and, he
said, "develop a sense of hopelessness."

In one indication of how common the problems are, his restaurant alone
gets 10 to 15 calls each day from payday lenders trying to collect
overdue fees from his workers, Mr. Richards said. At any one time,
under court order, he must garnishee the wages of about a dozen of his
workers to repay such lenders.

The biggest problem, consumer advocates say, and the biggest source of
profits to lenders, is that too many customers find, like Mr. Milford,
that they must "roll over" the loans, repaying the same fee each
month until they can muster the original loan amount.

Over several months, they can easily spend far more on fees than they
ever received in cash and may end up by borrowing from multiple sites
to pay off others.

One restaurant cashier here, Pat T., a 39-year-old mother of five who
did not want to embarrass her family by giving her full name, said she
had borrowed $200 last year when she could not pay an electric bill
because "it was so easy to do." It took her six months to repay the
$200, and by then, she had paid $510 in fees.

Efforts to regulate the industry in New Mexico bogged down this year.
Lenders hired lobbyists to push for mild rules, and consumer advocates
were split between those who wanted to virtually shut down the industry
and others, including Gov. Bill Richardson, who promoted rules like
mandatory reporting of loans, limits on fees and rollovers, and an
option for borrowers to convert loans to longer-term installment plans.

Last summer, after legislation failed, Mr. Richardson issued
regulations along those lines, but a court declared them illegal. The
state has appealed.

The issue will be raised again in January's legislative session. Lt.
Gov. Diane D. Denish, who described payday loans as "stripping the
wealth out of the low-income community," said she feared that the
same political stalemate would prevail. In the meantime, Ms. Denish and
many others say, efforts are needed to develop private alternatives to
payday loans.

In an initiative that has attracted wide attention here, the First
Financial Credit Union will offer an alternative payday loan plan, with
a fee of $12 per $100 borrowed and a novel chance for customers to
start building assets.

Customers who attend classes in financial planning and agree not to
seek loans elsewhere will have 80 percent of their loan fees returned
to them and put into their own personal savings account, said Ben
Heyward, chief executive of the credit union.

"We'll lick the payday lending problem when people learn how to
save," Mr. Heyward said. "When they kick the short-term loan
addiction."

In the meantime, there is no shortage of borrowers.

Debbie Tang, a single mother of two, took out three $200 loans, with
total fees of $180 per month, when her child support payments did not
arrive last month or this month. Without a credit history to get a bank
loan, Ms. Tang said she felt she had little choice but to visit payday
lenders to pay the electric and gas bills until her grants for her
nursing studies arrive in January.

Like Mr. Milford, Ms. Tang has put up a Christmas tree but has no
presents underneath. She recently broke the hard news to her
10-year-old daughter and 8-year-old son: "We'll just put Christmas
off for a month," she said.



http://www.nytimes.com/2006/12/23/us/23payday.html