Officials call payday financing "loan sharking"
By Stephen Rothman • Bankrate.com

When Melissa Hampton needed an advance on her weekly paycheck she borrowed $150 from a local loan store in Prestonburg, Ky., and promised to pay it back plus a fee.

Six months later, Hampton was still low on cash, but now owed more than $1,000 in fees to the loan store, which threatened to throw her in jail if she didn't pay up.

"By the time I got off the phone, I was scared to death," said the 23-year-old Lexington, Ky., housewife, who's debt eventually forced her into bankruptcy.

"Deferred deposit" businesses are common
Hampton's experience is becoming all too common, consumer advocates warn. These deferred deposit businesses, as they are also known, will cash paychecks in advance and give the borrower two weeks to pay the loan back plus a hefty fee. If the borrower doesn't pay in time the person can let the loan deadline "roll over" another two weeks and another fee is tacked on.

That's what Rodney Jackson did. Jackson, 39, and a retired Warren County, Ohio, police officer, said he borrowed $200 from a payday check service in Florence, Ky., last October.

"I needed to get my car repaired," he said, adding that he thought he could pay back the amount with money he was due from his student loan and Social Security.

Fees keep racking up
He wrote out a check to the loan service for $250 in exchange for $200 in cash. Since then, he has been making $50 biweekly payments to roll the loan over. He has now paid more than $500 and still owes the original $200 amount.

"I went to them and asked how many $50 do I need to pay before I satisfied the debt," Jackson said. "I was told I would have to continue paying the $50 every two weeks until the loaned amount was paid off no matter how long it takes."

Jean Ann Fox, director of consumer protection for the Consumers Federation of America, Washington, D.C., said that these sorts of abuses have forced many states to examine deferred deposit businesses. Payday check services have been outlawed or severely curtailed in 13 states, and 25 others have usury statutes prohibiting exorbitant interest rates, but the industry still is attempting to make inroads primarily in the southeast, Fox said.

Interest charged climbs as high as 1800 percent
Payday loans now are permitted in Colorado, Washington and Tennessee, where many of these businesses first cropped up. Loan stores also are seeking legal status in Georgia and Kentucky where borrowers have sometimes been charged 700 percent to 1800 percent interest on a small loan, said Kentucky State Rep. Jack Coleman (D-55th District).

Coleman has introduced legislation to control the industry in his state. "We had to do something because this industry has been running wild for six years," Coleman said, adding there is plenty of evidence that people have been driven into bankruptcy.

Georgia Industrial Loan Commissioner John Oxendine agrees. "What we have is loan sharking and it must be abolished." Oxendine, whose department regulates the small loan business, said payday lenders in his state have been charging annual interest rates of 600 percent and up to 700 percent.

Some states want to abolish paycheck loans
He added that Georgia legislature is considering limiting or abolishing the deferred deposit industry. "I think Georgia must do something this year, or they (payday loan offices) will commit even more atrocities that will damage the lending community," he said.

However, David Davis, president of the 300-member Kentucky Deferred Deposit Association, defends the industry's business practices. "Payday loan offices provide a service abandoned by the financial community," Davis said. "It simply costs too much for them to put a small loan on the books."

As to the high interest rates, Davis said: "Would you risk loaning someone you didn't know $100 on a promise to pay it back in two weeks? That's what we do every day." Davis' firm owns 15 Check-N-Go stores in Kentucky.

Paycheck lenders to critics: Do the math
Davis invites critics to do the math: "A borrower has three bills due on Wednesday, and won't be paid until Friday. If he is late on his bills, there are late charges. If he bounces one check it's $60. If he bounces three checks it's $180.

"It makes a lot of sense to people who need temporary financing to pay our charges which are a lot less than fees they would face if they bounced their checks," he said.

Addison Parker, a legal aid attorney with the Appalachian Research and Defense Fund of Kentucky Inc. doesn't argue that payday loan offices serve a need in her community, but he said many of the lenders' practices are illegal under current Kentucky law. The abuses include threatening to throw a borrower in jail for not making loan payments on time, Parker said.

Kentucky lender accused of racketeering
A federal judge in a Kentucky case brought by Parker's office agreed. Despite an attempt by the lender's attorney to have the case thrown out, the loan store stands accused of fraud, misrepresentation, racketeering and violating provisions of the federal Truth In Lending Act.

"What this kind of service targets is working, lower income people — People on benefits and those who don't know how to manage their money no matter how much they make," Parker said.

As it stands now, payday loan offices in Kentucky "are violating all kind of laws and are subject to the severest penalties," said Sidney White, a court-appointed trustee for those debtors seeking Chapter 13 bankruptcy assistance to pay off their debts.

Lending changes are slow in coming
What these companies are trying to do is get the Kentucky legislature to pass a law that will change that, Parker said, so what is now illegal can be legal.

Admittedly, the proposed law in Kentucky isn't what "I would like it to be," said Coleman, "but it is a start. In two years, we may have enough data to decide that we should shut it down completely," he said.

-- Posted: February 17, 1998