States to payday lenders: Denied
Governments curb loan operators that have grown so much they often outnumber McDonald's outlets
By Tim Jones
March 23, 2008
The town council of Kilmarnock, Va., celebrated St. Patrick's Day on Monday by telling one of the nation's biggest operators of payday loan shops that it is not welcome in the tiny village on Chesapeake Bay.
Ordinarily this bleat of protest against the kudzu-like growth of quickie loan shops would barely register in the daily maw of news. But Kilmarnock, population 1,200, is part of a growing nationwide movement against the $40 billion payday loan industry that after a decade of terrific growth finds itself increasingly challenged to defend annual loan rates that range from 390 percent to 780 percent.
The attorney general of Arkansas last week told payday loan operators to get out because they're harming the working poor. If they don't, Atty. Gen. Dustin McDaniel threatened to file suit to force them out of Arkansas.
Legislatures in Oregon, Pennsylvania and North Carolina have drastically cut the allowable loan rates, effectively driving the lenders out of these states. New Hampshire is about to follow suit, while Virginia is poised to impose restrictions on such loans.
Opponents of payday lenders in Arizona are collecting ballot signatures for a November vote, aimed at outlawing the short-term loans.
Communities are also using zoning ordinances to stem the growth of payday shops, which now number about 25,000 nationwide, almost twice the number of McDonald's restaurants.
"We're a small town, and I just don't agree with what they do," said Frank Tomlinson, a Kilmarnock town councilman who sponsored the zoning move to block Advance America from opening a payday lending shop. "We just want to keep them out, if we can."
$800 for $300 loan
In many regions of the country, payday loan stores have become as ubiquitous as fast food outlets and in some communities are as common as banks. They cater to low- and moderate-income wage earners who borrow against the receipt of their next paycheck. A recent study said the average payday loan customer takes out eight loans in a given year and ultimately pays $800 for a $300 loan.
The criticism of the loan rates, which are legal in the 38 states where these shops operate, is not new. But the mounting opposition to them seems to be fed by economic concerns tied to mortgage foreclosures, high credit card interest rates and the overall economic squeeze on the middle class.
In response to reported allegations that active-duty military families were being exploited by payday loan shops, Congress in 2006 moved to protect military families from the high interest rates.
"I think when that happened, people started to wonder why the government wasn't protecting everyone else," said Jean Ann Fox, director of financial services for the Consumer Federation of America, a critic of payday loans. "It's taken a while for the general public to understand what these things cost."
Advance America, headquartered in Spartanburg, S.C., argues that the growth of the industry since the mid-1990s proves there is strong demand for the loans.
"We believe this is a product that exists because consumers like it," said Jamie Fulmer, the company's director of public affairs. Fulmer said these short-term loan shops fill a need that is not provided by local banks and are preferable to paying for bouncing checks and forgoing credit card payments.
The growth of payday lending in some states has been nothing short of explosive. Ohio had 107 payday loan outlets in 1996. By the end of last year, there were 1,638, according to a recent study from the Housing Research & Advocacy Center and Policy Matters Ohio. In fact, Ohio has more payday lenders than the combined total of McDonald's, Burger King and Wendy's restaurants.
Fees in Ohio are usually $15 for every $100 borrowed for a two-week period, amounting to an annual percentage rate of 391 percent, according to the report.
"We see dramatic repeat borrowing in Ohio and other states," said David Rothstein, a researcher at Policy Matters Ohio and one of the co-authors of the recent study. A February report in Colorado found that the majority of payday loan borrowers in that state were women age 20 to 39. During 2007, the average borrower paid $573 in total finance charges to borrow $354 for 5 1/2 months.
Consumers who borrow 12 or more times a year accounted for nearly two-thirds of the loan volume of a typical payday lender, according to the report from the administrator of the Colorado Uniform Consumer Credit Code.
Advance America's Fulmer said the payday loan industry is willing to discuss some reforms but that reducing interest rate caps to 36 percent, as was done in Oregon and other states, is designed solely to drive payday lenders out of business.
Legislatures in some states, including Illinois, are debating rate caps and other reforms. A bill in the Illinois Senate is designed to close an existing loophole that does not provide consumer protections for loans that last more than 120 days.
Clearly, said Uriah King, policy associate at the Center for Responsible Lending, there is mounting sentiment to take a closer look.
"For a while there was an informal policy that credit at any price is a good thing, no matter what the price," King said. "It's becoming painfully clear that that's just not the case."