State Weighs Curbs on Payday Loans

By Chris L. Jenkins
Washington Post Staff Writer
Sunday, January 21, 2007

Manny Reyes took the loan money and, boy, was it easy. Three hundred dollars in his pocket to help pay for January's rent and a broken axle on his pickup truck -- cash he needed because he paid off some hospital bills for his brother.

"This is the third one that me and my wife have now, but I think I should be able to pay all of them off," Reyes, 37, said in front of Fast Payday Loans on Mount Vernon Avenue this month. To get the loan, all he had to do was write a post-dated blank check, show identification and a check stub to prove that when he gets paid this Friday, he'll be able to pay off the loan and a $45 fee.

"I'll pay on time, but I may have to come back again if I have to help my brother again," said Reyes, a plumber from Baileys Crossroads.

The rite of borrowing modest amounts of cash against a future paycheck -- known as payday lending -- has become an increasingly popular practice for working families in Washington's suburbs. It has also become big business across Virginia.

But the routine is under increasing scrutiny in the commonwealth, where a broad coalition of religious and consumer advocacy groups say they are concerned that the practice enables low-income earners such as Reyes to unwittingly take on more debt than they can handle. They are joined by a bipartisan group of lawmakers in the General Assembly that wants to reverse a 2002 law that eased restrictions on the payday loan industry.

Their efforts pit them against a national coalition of lenders who say they offer an honest service to moderate-income families who find themselves stretched to the limit.

"Our customers are the heart of the working class," said Jamie Fulmer, director of investor relations for Advance America, Cash Advance Centers Inc., a South Carolina-based payday lending company that has about 150 sites in Virginia. Of people like Reyes, he said: "These are folks who just need a little bit of help getting to the end of the month. It can be the most rational alternative for them. There are very few other options."

While such lending is effectively prohibited in 11 states, the practice has proliferated in Virginia. There are now nearly 800 centers, an increase from 419 in 2002 when the state uncapped the regulations on the industry. About 60 of the outlets are in Northern Virginia.

According to state figures, more than 445,000 Virginians took out more than 3.3 million payday loans in 2005, totaling nearly $1.2 billion. The average customer takes out about seven loans a year, according to state figures. Loans can be as high as $500 at a time.

In Virginia, the increased activity has concerned some lawmakers because they think the industry takes advantage of people on the margins, with borrowers going back often and digging themselves deeper and deeper into financial holes. Calling the industry's advertising "predatory," they note that the fees charged in Virginia -- $15 per $100 borrowed -- work out to annualized interest rates of about 391 percent or more.

Industry officials, however, say that annualized interest rates are a deceptive barometer and ignore the realities of how customers use their service. Most borrowers pay back their individual loans within the agreed time. Customers in Virginia are protected by law from such dire situations, they said, because lenders are only able to recoup their original loans, without additional late fees.

Still, opponents are unbowed. "It's a remarkably deceptive business," said Jay Speer, executive director of the Virginia Poverty Law Center, one of the groups fighting to place caps on the industry. He said he was particularly concerned about state statistics that showed that almost 91,000 Virginians in 2005 took out at least 13 loans from the same lender. Those numbers do not take into consideration whether a borrower took out others from a separate money store.

"What these lenders are banking on is that people will come back over and over, and often they do because they have to get another one to pay off the first," Speer said.

Payday loans have caught the attention of Pentagon officials and members of Congress, who in September imposed a limit of 36 percent annual interest on loans to military families because of concerns that they were falling too far into debt. The law is scheduled to take effect in October.

Some lawmakers want to do the same in Virginia and cap the annualized percentage rate at 36 percent, a level that payday lenders say would drive them out of business. That rate would effectively mean that lenders could charge only $1.38 per $100 for a loan.

"I think in some cases a little government regulation is good," said Del. John M. O'Bannon III, a Republican from suburban Richmond who's sponsoring the bill. "These places have ginned up a market for themselves and now are claiming that they are performing a service. I just don't buy it."

Efforts in the General Assembly to place caps on the lenders won't be easy, although some politicians are trying to use it to their advantage in an election year. There are 11 bills before the General Assembly: five that would effectively drive the lenders out of the state; and six that would allow the current rates to stay intact but would, among other things, place a cap on the number of loans a borrower can take out at one time and mandate that lenders offer interest-free payment programs.

Indeed, some lawmakers argue that the centers provide a service to working- and middle-class residents who don't qualify for credit cards and aren't eligible for other types of loans. Others said the horror stories of circular debt were being exaggerated by critics.

Industry advocates added that the fees they charge for their loans were less onerous than those charged by check-cashing outlets or credit card companies and that they were being unfairly targeted by some lawmakers. And they pointed to statistics from the state that found that of the millions of transactions conducted in 2005, the State Corporation Commission recorded only 53 complaints.

"Nobody is being duped here . . . this is not a small-print issue," said Del. Mark D. Sickles (D-Fairfax). "My view is: Let's regulate it more, but don't abolish it at this point."

Interviews with more than a dozen customers in Northern Virginia over the past week found that many have come to count on the access to easy money if they are in a pinch, although several admitted they sometimes took out one loan to pay another.

Percy Jones, who works as a chef, among other jobs, and who recently moved to Dumfries from South Carolina, said he has several outstanding loans to payday centers. He said he was waiting for a check from his previous job to be able to pay everything off. The District native added that he has tried to avoid relying on payday lending, but having four teenagers to support on a modest $32,000-a-year salary forced him to cut corners.

"I can see how people would see this as bad, but this is how I've had to scrape by," he said.

He added that in some cases he has paid one loan off with another, but always knew he had money coming in the future that made him secure. He expects to take out more over the coming months because life in Northern Virginia is more expensive than in South Carolina.

"It's a way of life for some of us," he added, counting several $20 bills as he headed to a brown Chevrolet. "It would be better if it wasn't, but, frankly, it's like an addiction."