State lawmakers aim to cut payday lenders' interest rates

OLYMPIA — Washington's payday lenders say they help people in need of quick cash, but some state lawmakers say the industry's huge interest rates lead to even worse money problems.

Now a legislative push to slash small-loan interest rates could put the payday lenders in their own financial jam. State House leaders say there's widespread support to crack down on the industry.

Two House bills, one for those in the military and another for everyone, would cap interest rates at 36 percent annually. The lenders currently can charge up to 390 percent annual rates.

"If it does pass, we are done," said Kevin McCarthy, owner of 22 payday lending stores called Check Masters. Lenders say they must charge rates higher than more traditional lenders such as banks because their loans are so small.

The sponsor of the bills, Rep. Sherry Appleton, D-Poulsbo, says the industry's concerns are overblown. "They will survive," she said. "Credit-card companies survive on much lower interest rates."

But she added, "If the end result was to get rid of payday lending, that would not be such a bad thing."

The legislation is intended to protect people like Patricia Davis, who was one of the industry's best customers 10 years ago.

The Seattle woman turned to the high-interest, short-term payday loans when her husband left her, a utility bill arrived and she ran out of cash.

"I had a house and a child in school and a car and the whole car-payment thing," said Davis, a Microsoft employee at the time.

She told herself "just this once" but ended up going back every two weeks for two years. Davis could not pay off one loan without taking out another to cover the next couple of weeks.

"That one $500 loan ended up costing me about $3,600 in fees over two years," she said.

Legislators authorized payday lending in 1995, and borrowers have flocked to the businesses ever since. With 740 locations in Washington today, the number of storefront lenders has nearly doubled since 2000.

Lenders currently offer loans of up to $700 with a term of 45 days or less. Borrowers write a postdated personal check for the loan amount, plus the interest charge. The lender either cashes the check or collects cash from the customer when the loan is due.

Typically, a $700 loan over a two-week loan term has a fee of $95. Under the proposed laws, the cost would be about $60 over the new 90-day minimum loan term.

If payday lenders leave the state, Appleton foresees credit unions filling the small-loan void. But Ann Flannigan, of the Washington State Employees Credit Union, says that is a major miscalculation.

"All players will leave the market, not just the ones you want to leave the market," said Flannigan, the credit union's vice president of public relations.

The bill would require her credit union to slash its comparatively consumer-friendly 45-day small-loan rates by more than half, squeezing down their annual percentage rate of more than 80 percent.

"It's not a charity loan. It is a loan that is made by a business," Flannigan said.

Both the credit union and payday lenders say that without the high interest rates, such small loans would not be worth their while. Flannigan says her credit union breaks about even on the loans, and storefront lenders say they're current rates are needed to cover overhead costs.

McCarthy, owner of the Check Masters lending chain, said critics cannot ignore the huge market for his service.

"That demand doesn't go away if you regulate the product, it just goes elsewhere," he warned. "They would move to an unregulated Internet lender."

McCarthy says the short-term loans are a cost-effective solution for people who need cash to pay their bills.

"The satisfaction of our industry is very high," he said.

Dennis Bassford, who leads the lending chain Moneytree, said thousands of borrowers have already sent postcards to their legislators asking them to preserve payday lending.

The state Department of Financial Institutions logged 163 consumer complaints about payday lenders between 2000 and 2005, and fined two companies a total of more than $1 million this month for exceeding lending limits.

Davis said the industry generates a dangerous spiral of borrowing.

Finally out of her payday-debt cycle, Davis made a personal promise never to go back, but she said it is still "a little frightening that when I drive down my street there are five payday lenders within a five-mile radius."

"I kept my loan file so I could remember that that is not a place that I ever want to go again."

Flannigan said the Washington State Employees Credit Union tries to wean borrowers off the cycle of debt by offering financial counseling and payment plans.

Even without Appleton's bills, payday-loan rates will drop for the military in October. Congress already passed legislation that caps the interest rate for service members at 36 percent, but Appleton's military measure would lower interest rates even sooner.

Elliott Wilson: 360-236-8169 or ewilson@seattletimes.com