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Payday lending still pays despite legislation

Loophole in new rules means little change in industry
by: Jim Clark, Erika Silver of the nonprofit Human Solutions can see several payday loan businesses from her office, near Southeast 122nd Avenue and Powell Boulevard. Advocates for the homeless and low-income people say the firms have found a way around recent legislation aimed at curbing lending practices seen as predatory.

Erika Silver says she sees the impacts of payday lenders.

A case manager for Human Solutions, a nonprofit group that works with homeless and very low-income people in east Portland and Gresham, she tells the story of one homeless family that found housing with her agency's help - only to fall victim to payday loans with an astronomical interest rate.

'They are homeless again,' she said. 'It's not supposed to work that way.'

Last spring, Gov. Ted Kulongoski and the Oregon Legislature appeared to fix the problems Silver describes - by approving a bill during a one-day special session that was supposed to curb what critics call payday lenders' predatory practices.

But today, Silver still can see five payday loan companies from the door of her Southeast Portland office, and she still hears the stories. In part that's because the bill won't go into effect until July 2007. But it's also because payday lenders have figured out a way around the law.

According to data kept by the state Department of Consumer and Business Services, about one-fourth of the payday lenders registered in Oregon have already applied for a type of lending license that would enable them to escape the restrictions adopted by the Legislature in April.

That's why advocates for the poor are gearing up for another try.

'We need a uniform cap on all loans in Oregon,' said Angela Martin of the economic fairness coalition of Our Oregon, a union-backed nonprofit. She added that most states have taken a more aggressive approach to protect consumers; the piecemeal approach taken in Oregon 'has not worked in any state.'

A spokeswoman for the payday loan industry, however, said the crackdown is misplaced.

'The Legislature in the 1980s decided that money was like any other commodity, and the free market should set the rate,' Luanne Stoltz, of the Oregon Community Financial Services Association, said. 'It's never been my experience that government setting the prices for anything has been to the consumer's advantage.'

We've been here before

If the rhetoric on both sides sounds familiar, it should.

Early this year, amid a push by consumer advocates and several cities to adopt tougher regulations, the then leader of the Republican state House, Rep. Karen Minnis of Wood Village, joined Democrats in adopting Senate Bill 1105, regulating payday lenders.

Among other things, it set a cap of 36 percent per year on loans offered by lenders who had obtained licenses from the state under its 'short-term' loan program.

However, the cap does not apply to the state program that regulates loans for so-called 'conventional' lenders.

As David Tatman, an administrator for the Oregon Department of Consumer and Business Services, put it, the law adopted last April left 'a couple of loose ends that weren't addressed.'

He said the current trend, in which 91 of the state's 354 payday lenders have applied for a 'conventional' license, 'defeats the purpose and the intent of 1105.'

To combat what Tatman called 'a cycle and spiral of debt,' his agency is formulating a new package of legislation on behalf of Kulongoski.

Among other things, the not-yet-announced bill would:

• Set up a database to track consumers who take out payday loans. This would enable enforcement of SB 1105's requirement that consumers take a seven-day break between loans, to stop them from taking out one loan to pay off another.

• Tackle out-of-state Internet lenders by requiring them to be licensed in Oregon to offer loans here. One way to enforce this, Tatman said, would be to limit out-of-state firms' access to Oregon courts if they are not properly licensed here.

• Lengthen the terms of the loans and require that consumer payments slowly pay off the principal, not just the interest. Payday loans sometimes do not require payment of the principal until the very end of the loan's terms, which can lead to default.

• Require payday lenders to look at consumers' ability to repay the loans - something that Tatman said the companies currently do not do.

'A payday lender doesn't take a look at somebody's financial circumstances,' Tatman said. 'They just say, 'Well, give me a postdated check and we'll call it good.' '

Industry sees a market

Stoltz said that while a few consumers 'abuse' payday loans, it's unfair to limit other consumers' access to such loans, which she said are often 'more economical' than bouncing checks and paying late fees on bills.

'The demand won't go away,' she said. 'If there are no legal sources, these people will turn to illegal sources.

'As long as people are fully informed, and we believe they are … we believe competition would set the best rates for any product,' she said. 'Payday lending has by far the most favorable data of any type of loan. They have the lowest default rate, they have the lowest bankruptcy rate, and the lowest complaint rate of any other type of lending. … There were over 800,000 payday loans taken out last year, and there were only nine complaints.'

Martin, however, said the industry's numbers are misleading.

For instance, the default rate does not take into account that consumers often take out a number of payday loans, one paying off the other, before defaulting. As for the 4 percent default rate claimed by the industry, 'the rate is much higher than that,' she said.

Loans stack up

Martin and Tatman have worked with credit unions in Oregon to provide consumers with what they call cheaper and safer alternatives to payday loans.

'Most of the credit unions have indicated willingness to provide alternatives to payday loans,' Tatman said. 'The interest rates are much lower, there is little to no application fee, and the loans are usually structured so that the repayment of principal and interest is automatic.'

For Jean DeMaster, who works with Silver at Human Solutions, the entire issue boils down to the story of one of her clients whose doctor told her she needed $100 orthopedic shoes.

'She went to the payday loan people because she didn't want to not pay her rent,' DeMaster said. 'She thought that she would be able to get overtime in the following month and pay back the payday loan. She didn't get the overtime hours that she thought she was going to get.'

Instead, she got another payday loan to pay off the first one.

'Eventually she owed $1,000 for this one pair of shoes … and she ended up being evicted because she ran out of payday loans, going from one to the next.

'For us it's an issue that we're very upset about,' DeMaster added. 'We feel that our clients are really suffering from this.'