Payday lenders face crackdown

Georgia would enact one of the nation’s toughest laws against “payday lenders” if Gov. Sonny Perdue signs a bill state lawmakers endorsed last month. Although states have cracked down on the industry, none has gone as far as Georgia.

If the bill becomes law, lenders who violate Georgia’s criminal usury cap of 60 percent annual interest would face as much as 20 years in prison and a fine of $25,000 per transaction.

Mr. Perdue, a Republican, has until May 17 to sign or veto the bill, which has captured the industry’s attention because of its harsh penalties. Other states may attempt to provide borrowers with more consumer protections, but none is expected to follow Georgia’s lead in outlawing the lending, advocates on both sides of the debate said.

“Despite what has happened in Georgia, almost everyone else agrees there is consumer demand for this product,” said Rick Lyke, spokesman for Financial Service Centers of America Inc., an industry trade group.

Payday loans, also known as cash-advance loans, are usually between $250 and $500 and help cash-strapped borrowers make it to their next paychecks. Lenders tend to ask few questions, but they often charge high interest rates that sometimes exceed 1,000 percent a year when the debt is rolled over.

For example, one borrower in Georgia told the Associated Press last year that she turned to a payday lender when she needed a quick $300 to pay the bills, but it ended up costing her more than $900 in interest in just six months.

Lenders operate between 20,000 and 24,000 stores in the United States, and take in $2.4 billion in fees and interest each year, according to a 2001 report by the Consumer Federation of America.

The stores tend to be located in poor neighborhoods.

The typical customer is young — about two-thirds of them are younger than 45 — said a Georgetown University study commissioned by the Community Financial Services Association of America, another industry trade group.

Typical customers have annual incomes between $25,000 and $50,000, the study found. Slightly more than half have at least some college education. About 2 percent are in the military, the study said.

The federal government does not regulate small-scale lending in the United States, leaving the matter up to the states.

At least 13 states, including Maryland, do not permit payday lending. However, opponents say payday lending sometimes continues in these states because the legal penalties are so weak that prosecutors don’t find it worthwhile to seek criminal charges.

In some of the states, companies attempt to skirt the law by selling telephone cards in lieu of loaning cash. A customer who needs $100 would receive that amount in exchange for promising to pay $22.50 for a phone card every two weeks for a year, the Associated Press reported.

“There are all sorts of schemes people dream up to try to hide the fact they are loaning you money,” said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Since 2002, Virginia has capped the amount payday lenders can charge at 15 percent and has limited borrowers to one loan at a time. The maximum amount a person in Virginia can borrow is $500.

The District limits the rate lenders can charge to 10 percent and the maximum amount a person can borrow at $1,000.

Georgia is already one of the states where charging unusually high interest rates is illegal, but the new legislation makes it a felony instead of a misdemeanor.

The bill allows for prison time and heavy fines because it classifies payday lending as racketeering.

The legislation would allow consumers to file class-action lawsuits, and it would require lenders to be licensed by the state insurance commissioner.

The Georgia Industrial Loan Association, a group of about 1,000 regulated lenders who make loans of $3,000 and less, pushed the measure, along with advocates for the poor, the elderly and military personnel.

Representatives for the Community Financial Services Association of America said it was inappropriate for lawmakers to bow to pressure from the Georgia Industrial Loan Association, because its members compete with payday lenders.

“The unfortunate thing is the state has allowed the GILA to create a monopoly for itself,” said Stephen Benjamin, the Community Financial Services Association’s legal counsel.

The Georgia legislature passed the bill March 4. Mr. Perdue has not reviewed the bill, said Loretta Lepore, his spokeswoman.

“When he does review it, he’s going to want to ensure that there are no unintended consequences for businesses that are operating in good faith,” Ms. Lepore said.