States take on debate over payday loans

With legal and travel fees piling up in the custody battle for his daughter, Brady Greenberg turned to a payday lender and took out a loan for $700. Two years later, Greenberg said, he has paid thousands of dollars in fees and interest after taking out loans to cover loans.

"You're at their mercy," he said. "You sink deeper and deeper into a state of failure, not being able to cover your expenses. I'm trying to never go back to them again."

Across town, Victor Cruz had a different take on the lenders as he came out of a Check Masters branch. He'd just made a payment on a loan he took out in order to have some extra cash after buying a new truck.

"They don't demand as many requirements," Cruz said in Spanish. "If you go to the bank, they don't give you anything ... Payday lenders try to help poor people."

Payday loans, which give cash to customers in return for a fee and a postdated check, have been a contentious issue for years in many of the country's state capitals.

But a year-old recession, a gloomy economic outlook and the sour aftertaste of the subprime-mortgage crisis are setting a different stage for this year's political battle of regulating the payday lending industry.

"For so long, financial products were seen above the law, something you didn't regulate, let the market sort it out," said Uriah King, policy associate for the Center for Responsible Lending, an organization that lobbies against payday lending. "Now we understand there's a price to pay for all of this, for reckless lending by a few."

Critics say payday lending is a debt trap that leaves people paying off loans for a long time, often using other payday loans, and paying heavy interest. One of the measures being introduced in Olympia caps the annual percentage rate at 36 percent, mirroring bills under consideration in states around the country.

The industry, however, contends its services provide a temporary financial bridge to people in need, and that a 36 percent cap would essentially put it out of business.

"We're regulated by the state, by the federal government. They are calling regulation something that really is elimination," said Dennis Bassford, chief executive officer of Seattle-based MoneyTree. "Here's what the bill does: First and foremost it takes away this option for the customers in an environment where credit options are fewer."

According to the Community Financial Services Association, an industry group, 95 percent of customers pay off their loans on time, and only half of the remaining five percent default on their loans. Others go on payment plans. The average loan is $300.

So far this year, lawmakers in 11 states have introduced more than 40 bills related to payday lending, according to the National Conference of State Legislatures.

In Ohio and Arizona, voter-approved initiatives passed in 2008 reined in payday lending. Ohio voters approved a law that cut the annual percentage rate that payday lenders can charge from an average 391 percent to 28 percent, and limits the number of loans customers can take to four per year. Arizona voters rejected a ballot initiative paid for and written by the loan companies to allow them to continue charging high interest rates on small loans.

It's not clear if President Obama's administration or Congress will seek tighter regulation on the industry. Former President George W. Bush backed capping interest rates for military families.

Washington state Rep. Sherry Appleton, D-Poulsbo, said the dire economic situation may help her bill this year. If it doesn't, she expects an initiative on the state ballot soon, a proposal that would pass easily, like measures in other states. In previous years, Appleton's bills were supported by many groups, but the measures failed to make it out of committee.

This year, she is also introducing a bill that would completely prohibit payday lending.

"If the Legislature wants to have control, they're going to have to step up to the plate and play," she said. "If not, I think we will see an initiative and it will pass."

Bassford, whose company employs more than 600 people, says capping the interest rate at 36 percent will force job cuts.

There are more than 24,000 payday branches nationwide operated by hundreds of companies, employing more than 50,000 people, according to the industry group. Sales reached $50 billion in 2008.

Inquiries and visits to payday lenders have increased nationwide this past year, but the amount of loans given has not because many people are being turned away as poor credit risks, said Steven Schlein, spokesman for the industry group.

While payday loans have usually been a resource for low-income populations, more middle-class people have begun using them as other credit availability dries up, said Bob Lawless, a professor at the University of Illinois' College of Law.

"I think the payday lending companies are right, they provide a service," he said. "But the question we must ask as a society is whether the benefits of that service are worth the cost, and not just the cost of the borrowers but to society at large."