Council Panel Targets Rates for Payday Loans

Payday lending was criticized at a D.C. Council hearing yesterday as an abusive service targeting minority and poor customers, and defended as a useful financial tool for people needing some emergency cash.

Owners, employees and other supporters of stores specializing in short-term loans wore stickers with the slogan "I choose payday advance" at the hearing before the Public Services and Consumer Affairs Committee.

They listened in the audience while critics told the committee that payday lending traps borrowers in a cycle of debt and urged adoption of a law limiting fees that now run 400 percent a year or higher.

"They target the working-class people, who are already struggling," said the Rev. Noemi Mena, pastor of Hispanic ministries with National City Christian Church. "We are not saying they shouldn't exist. We are saying that they should be capped."

The city's attorney general has proposed limiting the annual rate charged at payday loan services to 24 percent. A committee vote is expected next week.

In effect, the proposal would limit to less than $1 the maximum fee firms could charge for a $100 loan repaid within two weeks. Now, they charge customers $15 or $16 to borrow $100 for two weeks.

A payday loan is a short-term cash advance, usually repaid with the next paycheck. If the borrower doesn't repay the loan within the agreed-upon time, the loan can be rolled over -- with another fee.

Unlike traditional banks, companies making payday loans do not require a credit check, only proof of a job, a checking account and a Social Security number.

"In life, emergencies do come up," said Jimmie Vaughan, 66, who took out a $600 loan two weeks ago to repair his car and attended the hearing in support of the industry. "Because you don't qualify for a bank loan, it's a choice."

Payday lending has come under fire on a number of fronts. Several states this year considered restrictions on payday advances, like the 36 percent cap Congress approved last year on loans to members of the military. Efforts to impose changes in Virginia failed.

The industry has responded with a public relations campaign, running ads advising customers to use payday loans responsibly. Owners said they serve customers ignored by other lending institutions and give struggling borrowers extra time to pay their debts.

"We provide people with cash that they may need," said Mike Donovan, D.C. director of operations for Check 'n Go, a payday loan company with 16 outlets in the District. Check 'n Go charges $16.11 for each $100 borrowed for two weeks -- 419 percent a year.

"We take pride in serving customers that traditional banks have forgotten," Donovan said.

A common criticism at yesterday's hearing was that the industry takes advantage of people who can least afford to pay high fees.

"The essential point is that their entire business is based on people in economically depressed neighborhoods," said committee Chairman Mary M. Cheh (D-Ward 3).

Willie Green, a senior adviser for the Community Financial Services Association of America, which represents most of the 22,000 payday loan firms in the United States, said a 24 percent rate cap would drive many out of business.

Some critics said they would welcome that.

"They prey on the weak and those who believe they have no other options," said Eugene Dewitt Kinlow, political action chairman of the NAACP's D.C. branch. Set a cap, Kinlow urged, adding, "If they do not want to play ball, we should put them out of business."

Cheh said reforms must dramatically cut the profit rate. Otherwise, she said, "there are no reforms at all."