Copyright 1999 The New York Law Publishing Company
The National Law Journal
May 24, 1999, Monday
SECTION: CORPORATE BRIEF; Pg. B1
LENGTH: 996 words
HEADLINE: 'Payday' loans under scrutiny
BYLINE: BOB VAN VORIS, NATIONAL LAW JOURNAL STAFF REPORTER
HIGHLIGHT:
Congressman and others seek to curb high-interest abuses.
BODY:
Ruth Barnett, of Tennessee, borrowed $ 200 in 1994, but over the next 14 months, she claims, she wound up paying nearly $ 2,000 to settle her debt.
"It's just one vicious circle," she said in a deposition.
If a Chicago congressman has his way, however, lenders will no longer be able to charge triple-digit interest rates on the short-term financings commonly called "payday loans."
Lenders claim that the loans, which have grown explosively in recent years, fill a need for working people who lack access to credit cards or other sources of emergency cash. The lenders say they should not bear responsibility for a small minority who get into financial trouble. Opponents say payday lenders exploit their customers, offering money to people with nowhere else to go.
The loans, which lenders prefer to call "deferred-deposit transactions," work this way: A customer needing quick cash goes to a payday lender, usually located in a check cashing outlet. The customer writes a check for a few hundred dollars dated a week or two in the future -- generally the next payday -- which the lender holds. On the day the check comes due, the customer can redeem it in cash or simply let the lender cash it.
If the customer can't afford to pay, however, he or she may extend, or "roll over," the loan by paying another fee.
Calculated on an annual percentage rate (APR) basis, the fee represents an interest charge typically totalling [sic] several hundred percent.
The financings often create a merry-go-round of debt for those who can least afford it, and to make matters worse, some lenders use unfair or illegal collection practices, lawyers and consumer activists allege, threatening expensive civil penalties or criminal prosecution for passing bad checks.
To curb such abuses, Representative Bobby Rush, D-Ill., of Chicago, introduced the Payday Borrower Protection Act of 1999 on May 4. If enacted, the bill would limit annual interest rates to 36%, provide for full disclosure of loan terms, prohibit rollovers and prevent lenders from accepting funds from a second payday lender to pay the first. It would also close a federal loophole that exempts nationally chartered banks from state payday loan regulation.
The bill aims to provide some consistency in an area that is subject to a patchwork of state laws and regulations.
The Consumer Federation of America, which tracks state regulation of payday loans, says that although 19 states prohibit these loans, another 19, plus the District of Columbia, permit them.
Courtroom assault
The lawyers who have sued payday lenders have invoked a panoply of remedies, including federal and state truth-in-lending laws, state usury and consumer protection statutes, common law fraud and RICO, the federal racketeering statute.
Chicago lawyer Daniel Edelman, of Edelman & Combs, has filed more than 60 individual and class action complaints, mostly in Illinois federal courts, against lenders charging interest at rates of between 100% and 900%.
Richard A. Fisher, of Logan, Thompson, Miller, Bilbo, Thompson & Fisher P.C., in Cleveland, Tenn., has sued payday lenders in Florida, Kentucky, Pennsylvania and Tennessee. In Alabama, he represents consumers who intervened in a declaratory judgment brought by payday loan companies seeking to block state regulators.
Mr. Fisher works in tandem with Jack L. Block, of Chicago's Sachnoff & Weaver Ltd., and with local lawyers in each of the states, typically filing statewide class actions against individual companies. Lawyers have also sued payday lenders in California.
A few public-interest lawyers have gotten involved as well. In Milwaukee, the Legal Aid Society filed a class action against one payday lender and is assisting in a second suit. Executive Director James A. Walrath says that he has received inquiries about at least six other companies and may file more lawsuits.
Robert E. Rochford, a New Jersey lawyer who serves as deputy general counsel to the National Check Cashers Association, a trade group comprising more than half the nation's 6,000 check-cashing centers, says that payday loans brought in $ 810 million in revenue industry wide in 1998. Estimates for 1999 anticipate a jump to $ 1.44 billion, with projections topping $ 2 billion in 2000.
Mr. Rochford says that the industry's growth reflects an underlying need for the service and that the industry has supported bills prohibiting excessive rollovers and shady collection practices. But he insists that some criticism is misdirected and that it is unfair to focus on annual percentage rates for loans that are intended for only a week or two.
"Using an APR analysis on deferred-deposit transactions is like going to a cabdriver in New York City and asking the fare to San Francisco," he says. "The service is not designed for that purpose."
Jean Ann Fox, director of consumer protection for the Consumer Federation of America, says that at least half the states considered legislation relating to payday loans this year. Some state officials are using existing laws to crack down on abuses. Among recent developments:
* On May 12, Texas Attorney General John Cornyn announced suits against three Texas companies offering payday loans at annual rates of 650% to 860%.
* Arkansas Attorney General Mark Pryor settled a suit against Checks-2-Cash L.L.C. on May 6. The company agreed to stop making payday loans and reimbursed the office $ 70,000 in costs.
* On May 6, Louisiana's Senate voted to limit interest rates to 72%, setting up a possible conflict with the state's lower house, which has passed a cap more than twice as high.
* In Indiana, a bill to regulate payday lenders died in the recently completed legislative session.
* Bills to legalize payday loans in Virginia, Florida and Arizona have failed.
* In April, Pennsylvania Attorney General Mike Fisher announced a $ 125,000 settlement with a company he said charged interest rates as high as 574%.
GRAPHIC: Photo 1, BOBBY RUSH: Illinois Congressman wants payday loan reforms; Photo 2, JOHN CORNYN: The Texas attorney general recently sued three lenders.
