Langhorne Law Debt Settlement Solution

Payday loans offer fast help -- at a price
Critics say lenders prey on the poor and desperate

By PHUONG CAT LE
SEATTLE POST-INTELLIGENCER INVESTIGATIVE REPORTER

Four days before payday, Christi was in a familiar place -- broke -- and facing so many bills that the lure of emergency cash was hard to resist.

Her old solution had been to walk down the street to a payday loan shop, write a postdated check for $575 and leave with $500 to hold her until she got paid.

But that temporary fix came with a high price -- a staggering annualized interest rate of 391 percent on a two-week loan. She took out one loan to cover another, and soon had six loans with fees of $800 a month.

"It was always the same. If I didn't have money I would go," said the 43-year-old South Seattle woman, who agreed to be interviewed if her last name wasn't used.

The payday lending industry says it provides a needed service to middle-class borrowers facing temporary cash crunches. But a Seattle Post-Intelligencer analysis reveals that payday loan companies locate near the poor, blacks such as Christi, and the military.

Consumer advocates say such lenders prey upon the uninformed, ensnaring desperate borrowers in a spiral of debt.

"Their business is geared toward confusing people and trapping them in this treadmill and squeezing every dollar that they can out of them," said Robert Pregulman, executive director of WashPIRG, a consumer protection group in the state. "The whole premise behind the industry is to target a certain group of people and take advantage of them."

Payday lenders have a special exemption from the state's usury law, which puts a limit on what lenders can charge in annualized interest rates. That cap fluctuates, but is generally about 12 percent.

Retail stores with sales installment contracts also have an exemption from the law; banks can charge more because they're governed by national laws.
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Fighting bills introduced in the Legislature this year to regulate the short-term loans, a leading payday lender told lawmakers that the industry doesn't target any group. The P-I analysis found otherwise.

In Washington, there are a disproportionate number of payday shops in areas with higher percentages of black people, according to a statistical analysis conducted for the P-I by a University of Washington researcher.

Areas with the highest percentage of blacks had twice the concentration of payday stores as the rest of the state. The number of stores increased in areas with high percentages of poor people of all races, but they also went up in black neighborhoods that weren't so poor.

Parts of Renton, Skyway, Lakewood and South Seattle -- areas with high concentrations of blacks -- have far more payday lenders and far fewer traditional banks than areas with few blacks, even after adjusting for population, poverty, education and income, according to the analysis.

"As an industry, they are cognizant of their target demographic. They need to be close to their target demographic, and that's why they're in black neighborhoods," said Steve Graves, a California State University-Northridge geography professor whose own studies found that payday outlets set up in the poor and minority neighborhoods of Chicago and New Orleans.

"That's where they believe their business is going to be strongest."

A statistician asked by Moneytree to look at the P-I's findings had concerns about whether the analysis examined the right or enough variables, or considered how factors were related.

"The whole racial element is very difficult to tease out," said Pat Cirello of Cypress Research Group, who disagreed with the P-I's findings.

The loans aren't predatory and don't target any group, said Dennis Bassford, chief executive officer of Moneytree, the Seattle-based lender with 55 stores in Washington.

He locates his stores without the benefit of demographic studies, he said. "What I do is stand on a street corner, look at the traffic patterns, look at the surrounding businesses," putting them near banks, restaurants and retail shops, he told lawmakers earlier this year.

"It's very representative of America's middle class," said Linda Medsker, a spokeswoman for Community Financial Services Association of America, the industry's leading trade group based in Alexandria, Va. She cites the group's commissioned surveys that show borrowers make between $25,000 and $50,000 a year.

Some people make poor choices, but the industry relies on turning one-time users into chronic borrowers and charges them usurious rates, critics say.

Payday lenders target the working poor who are living week to week, said Jean Ann Fox, consumer protection director of the Consumer Federation of America, based in Washington, D.C. They have a bank account, a steady income, little or no savings and are often stretched so thin that an emergency can send them into a tailspin, she said.

Mary Lewis says they go after vulnerable people, like her son.

Donald is deaf, mute and autistic, but managed to take care of himself for 18 years, his 76-year-old mother said. Her 35-year-old son got paid low wages, and overextended himself with payday loans. He made some bad choices, like taking a vacation, she said, but the interest rates were staggering.

When he finally called his parents for help, he had loans worth $6,000 and was being evicted from his Lake City apartment. Lewis said she tried to work out a way to pay the money back, but the stores hounded her until her son declared bankruptcy.

"They try to place as many offices as they can in areas near bases and where they can get people who are on small salaries," said Lewis, of Olympia. "They're like a leech."

The industry promotes responsible use of the loans, works out payment plans for those who need it and allows people to pay back the loans within 24 hours without fees, Bassford said. Interest rates are fully disclosed and borrowers know the terms of the loan, supporters say.

Michael Bird knew the fees were steep when he took out two loans in February, but he needed to help pay for his sister's funeral and then to cover rent. But he didn't think the rates were fair, he said.

"It was too much," said the 47-year-old Des Moines man. "It was my choice, but I didn't like it. ... I didn't have anywhere else to turn to."

He repaid both loans, and hasn't taken out another since. He's learned to set a budget, he said.

Customers rarely borrow once. One in four borrowers took out loans between 10 and 19 times a year, according to a recent survey by the Department of Financial Institutions, the agency that regulates the state's more than 600 payday outlets.

The average borrower with 11 loans a year pays $600 in fees on a $300 loan, a 2004 report in the Yale Journal of Regulation noted.

The industry says its fees are no higher than fees on bounced checks or overdraft protection.

Washington legalized payday lending 10 years ago. In 2003, borrowers in this state took out $1 billion -- an 84 percent jump from 2000. About 22,000 outlets exist nationwide.

"We made it a much more profitable industry," said Rep. Shay Schual-Burke, D-Normandy Park, referring to legislative action in 2003 that raised the maximum payday loan by $200 to $700. "We actually authorized these predators. I'm not too proud to say that we made a mistake."

She and others introduced bills this year to cap interest rates, reduce the maximum loan to $500, let a borrower skip a payday before repaying a loan and implement a database.

The only bill to pass was one that codified "military best practices," which the industry voluntarily follows, such as deferring collection when the person is deployed for combat.

"If we're really trying to solve this problem, does regulating or doing away with an industry, is that going to help the problem of overspending?" asked Rep. Dan Roach, R-Bonney Lake, during a hearing. He added, "The way I see it, it's a personal choice, saying 'I know I only have $100, but I'm going to spend $125.' "

Payday lenders are a growing influence in Olympia, contributing nearly $200,000 to Washington state political candidates and committees last year.

Two former state regulators lobbied against the bills, including Mark Thomson, who left the Department of Financial Institutions to join Moneytree as its director of government affairs.

In 2003, when the Legislature increased the amount that could be borrowed from $500 to $700, Thomson, who worked at DFI at the time, testified in support of that measure.

Former DFI Director John Bley also testified against those recent bills, saying that such legislation wouldn't benefit consumers.

Christi first took out loans from her payday lenders in her Rainier Valley neighborhood. Later, after declaring bankruptcy with $22,000 in credit card debt, she went to other shops in Renton.

"I didn't have any other choice," said the single mother, who supports four grandkids ranging in age from 15 months to 10 years old on her $2,200-a-month salary handling medical records at a nursing home. "I couldn't get a loan at the bank, and I went it and got it from them."

There were plenty to choose from. The 20 ZIP codes in the state with the highest numbers of blacks had 16 payday outlets per 100,000 people, twice as many as the rest of the state.

The P-I analysis showed that payday stores steered clear of well-to-do and highly educated communities -- those with median household incomes of more than $60,000.

Christi hasn't taken out a loan in a few months, but she desperately wanted to several weeks ago when she was short on rent.

"I'm trying my best not to use them again," said Christi, who is getting help from the Fremont Public Association to get out of her financial mess. "I never thought it would be this hard."

ABOUT THE RESEARCH

The Seattle Post-Intelligencer asked statistical analyst Assaf Oron, a doctoral student in the University of Washington's statistics department, to examine the relationship of race, income, education and military employment to payday-loan locations. The P-I provided Oron with data: Payday store information came from a database of small-loan endorsement licenses provided by the Washington Department of Financial Institutions; bank data came from the Federal Deposit Insurance Corporation; and ZIP code-level demographic data came from Census 2000.

Oron performed a descriptive analysis of payday outlets, allowing the P-I to estimate how demographic and socioeconomic factors influenced their location. He found a pattern of association between blacks and payday locations, as well as military populations and payday locations. Similar analysis for Hispanics and Asian Americans did not show such patterns.

Oron also performed regression analysis -- which adjusted for the effects of population, income, poverty rate and education -- and found that a high percentage of blacks and military employment was significantly associated with the location of payday lenders. His work was reviewed by Paul Sampson, research professor in the University of Washington department of statistics and director of the statistical consulting programs.