More controls urged on payday lenders

Friday, December 1, 2006

States should do more to restrict payday lenders, who pocketed $4.2 billion in fees from borrowers last year, according to a report released Thursday by the Center for Responsible Lending.

The Burien-based Washington ACORN, a community activist group, released its own report on the same day showing King County residents paid more than $40 million in excessive fees to the lending establishments.

"Payday loans sink borrowers into quicksandlike debt," said Michael Calhoun, president of CRL.

Consumer advocates and military officers say the loans -- offering quick cash advances secured on a borrower's next paycheck -- saddle borrowers with huge debt and high interest rates. The one-time fees translate into exorbitantly high interest rates on a standard annual-percentage-rate basis, sometimes as much as 800 percent.

Lending fees add up quickly if borrowers don't pay them off on time, and many "roll over" the loan repeatedly, leading to even more charges, Calhoun and others said. The average payday borrower pays back $793 for a $325 loan, the report said.

Consumer advocates want states to limit the annual interest rates charged on payday loans to no more than 36 percent -- similar to a cap on payday loans to military personnel that Congress passed this fall.

The industry begs to differ.

"This is a business, so lenders aren't going to lend money to people they know aren't going to pay them back," said Lyndsey Medsker, spokeswoman for Community Financial Services Association of America, representing about two-thirds of the 22,000 payday stores nationwide.

But Julian Bond, chairman of the National Association for the Advancement of Colored People, said the industry is siphoning "hard-earned cash" out of the wallets of working people.

Eleven states ban payday lending; lenders in Washington have a special exemption from the state's usury law, which sets a limit on what lenders can charge in annualized interest rates. Statewide, residents took out more than $1.4 billion in payday loans last year, paying out $173 million in fees, according to the state Department of Financial Institutions. More than half of the customers took out five or more loans.

The industry is growing. The number of payday lending outlets in Washington jumped 90 percent since 2000, from 377 to 716.

"They're disproportionately located in lower-income, working-class neighborhoods," said Alex Harris, Washington ACORN King County organizer.

P-I reporter Phuong Cat Le can be reached at 206-448-8390 or phuongle@seattlepi.com.

Add P-I Local headlines to