- The Washington Times - Monday, March 5, 2007

COLUMBIA, S.C.

A new TV ad campaign urges viewers to use payday loans only for emergencies. One scene shows a broken-down car. Another depicts a young boy in a doctor’s office, his arm in a sling.

“Please borrow only what you feel comfortable paying back when it’s due,” says Darrin Andersen, president of the Community Financial Services Association. A new emblem will tell borrowers which lenders meet his trade group’s requirements, Mr. Andersen says in the ad.

The $10 million campaign, announced last month along with some industry policy changes, surfaced as states from Virginia to New Mexico consider legislation to limit payday lending practices. But it’s not stopping consumer watchdogs and people already in debt from questioning the motives of an industry that lends money at annual interest rates exceeding 400 percent.

“Payday lenders make it easy for consumers to get trapped in predatory debt,” said Teresa Arnold, legislative director for the AARP in South Carolina.

Payday lenders offer quick cash advances — for a fee — secured by a postdated personal check from the borrower. Customers are supposed to repay the loan when they receive their next paycheck. Borrowers who can’t pay often “roll over” the loan repeatedly, leading to more charges that can quickly add up and lead to a cycle of debt. Customers are drawn to the lenders because, unlike banks and credit unions, they don’t run credit checks.

Rena McFadden and her husband are two persons who have become trapped. Lenders are threatening court action unless the McFaddens quickly repay the $2,400 they owe.

“The time to repay is too short. He’s been trying to talk to them, but they won’t talk,” said Mrs. McFadden, a 39-year-old who works in a dry-cleaning shop. “They want the money by the next payday. How are you supposed to pay your bills?”

More than 22,000 payday advance locations in the United States collected $6 billion in revenue last year, according to Steven Schlein, a spokesman for the Community Financial Services Association, which represents about two-thirds of payday lending companies.

The payday loan industry’s biggest policy change would give customers more time to pay back a loan with no financial penalty. This “extended payment plan” would be available at least once a year and provide borrowers between two and four extra months to pay off loans. The industry also proposes to ban ads that promote payday advances for “frivolous purposes” such as vacations.

But lawmakers are still pushing changes. In South Carolina, home to Advance America, the nation’s largest payday lender, lawmakers are considering a measure that would cap the annual interest rate on loans at 36 percent and limit the number of payday loans a consumer could have with a single payday loan company.

Eleven states already have similar interest-rate limits on payday lenders, according to consumer watchdogs, and the payday lending industry considers such rates too low to remain profitable. New proposals in 10 other states would impose similar limits, said Carol Hammerstein, a spokeswoman for the Center for Responsible Lending in Durham, N.C.

Ms. Hammerstein said the push for new interest rate limits comes in the wake of caps imposed last fall by Congress. Legislators put a 36 percent annual cap on loans to military service members after disclosures that thousands of troops were in debt to payday lenders.

State Rep. Alan Clemmons, a Republican who introduced the South Carolina legislation, said it’s needed because neighboring states have either banned or sharply restricted payday loans. In response, lenders have increased business in South Carolina, and the state has become “payday lender Mecca,” Mr. Clemmons said.

Jamie Fulmer, director of investor relations for Spartanburg, S.C.-based Advance America, said the vast majority of customers pay back their loans on time and that penalties for bouncing checks or making late credit-card payments are more severe than payday loan rates.

He said the industry was willing to consider “reasonable” change, but that Mr. Clemmons’ proposal to cap the loans was a backdoor attempt to end them. It would amount to the industry earning only $1.38 per $100 for a two-week loan — far too little to cover overhead, he said.

“It costs more money to go to a bank and withdraw my own money from an ATM,” Mr. Fulmer said. “The market is pretty efficient. If there were someone out there who could offer this product to consumers less expensively, they would do it.”

AARP in South Carolina is not content with the industry program announced last week. Ms. Arnold said the number of payday lenders in the state has more than doubled during the past five years. AARP’s 2005 survey of credit counselors found that one in four clients had payday loans — usually multiple loans — and that the loans were a major part of their credit problems.

“It’s not unusual [for counselors] to see clients paying $1,600 for a $500 loan,” Ms. Arnold said.

At Fort Jackson near Columbia, the head of the installation’s consumer advocacy and financial advising programs said she knows soldiers who had been paying up to 900 percent interest on their loans.

“We’ve seen some pretty ugly cases,” Madelyn Mercado said.

Lately, she has seen a drop in the number of soldiers seeking help because of payday loan problems. Although Ms. Mercado said she can’t be certain of the reason, she thinks the drop is because of the interest limits passed by Congress and signed into law by President Bush in October.

“We used to see two, three, four soldiers a week with this problem,” Ms. Mercado said. “We haven’t seen a soldier come in with a new payday lending problem since the end of December.”

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