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Cashing in on the needy? Payday loans make it possible to cover unexpected bills, but the price is steep -- triple-digit interest By JOHN HENDREN The Associated Press It's a financier's dream: Lend money to workers with steady jobs and short-term cash problems -- at up to 800 percent annual interest rates. That vision is now a lucrative reality for a group of street-corner bankers who have made "payday lending" one of the nation's fastest-growing industries. A borrower writes a postdated check to the lender, to be cashed on his or her next payday, and walks out with cash. The loan can be renewed as often as the borrower likes. In less than a decade, payday lenders have created a new industry and overcome challenges by lawsuits and states that called their triple-digit interest rates illegal. They've succeeded by redefining the word "loan" and persuading lawmakers in 19 states to exempt them from laws that limit interest rates. Now they're working on changing the law in states that still consider them outlaws. Janet Delaney found out how payday loans work when she needed $200 to pay her bills. A friend told the hospital food service worker about a new storefront loan office called "Check Into Cash." The store let her write a check she couldn't cover and gave her $200 on the spot. They agreed not to cash it until her next payday -- for a $38 fee. When payday came, the $16,000-a-year worker didn't have $200 to spare. Fine, the payday lender said, pay another $38 and you're off the hook until next payday. A year later she had paid $1,220 in fees. And she still owed the $200. "I had to write a check to pay my light bill, my phone bill. That's the way it went every two weeks," said Delaney, who lives with her daughter, son-in-law and newborn granddaughter in a rented two-bedroom apartment in Cleveland, Tenn. "I never dreamed it could get to be such a mess." Fees like hers have created a profitable and fast-growing industry that didn't exist a decade ago. W. Allan Jones opened his first Check Into Cash office, the one Delaney visited, in 1993. Now he lends to the masses at 270 storefronts from California to the Carolinas. His company had $21.4 million in revenue last year and is opening 15 stores a month. Now he's preparing to sell shares in his company, the first stand-alone payday lender to go public. "People are willing to pay for convenience," Jones said. "I'm just lucky. I hit on something that's very popular with consumers." His is the most dramatic of many stories of newfound wealth made on payday loans. The number of check-cashing outlets -- many of which offer payday loans -- has doubled to 6,000 since 1990, according to the National Check Cashers Association. Another 2,000 offices do nothing but payday loans, said Bob Rochford, deputy counsel for the association. One of them, Advance America Cash Centers, was founded by former Blockbuster Entertainment executive George D. Johnson, who has expanded the chain to nearly 500 stores. "There is an obvious need," Rochford said, "and it is a very popular service." But not with everyone. A number of borrowers in Tennessee banded together and filed a class-action lawsuit against Check Into Cash. It cost the company $2.2 million to settle earlier this year. More than a dozen class-action suits against payday lenders in Tennessee, Kentucky, Alabama and Florida are ongoing. By the time he settled with borrowers in Tennessee, Jones and his colleagues already had persuaded state legislators to pass a 1997 law permitting payday lending, with some limits. Along the way, he made more than $23,000 in political donations. Since 1990, payday lenders have persuaded lawmakers in 19 states to change the law to exempt them from limits on interest rates. Another 13 states -- including Oregon -- allow payday loans by setting no limits on rates or, in the case of Indiana, by setting a maximum annual rate but allowing a $33 per loan finance charge. The remaining 18 states and the District of Columbia have "usury" laws that cap interest charges with no payday loan exemptions -- at rates ranging from 17 percent a year in Arkansas to 57.68 percent in Georgia. Some payday lenders that are bound by state laws do business in states with usury laws. Their reasoning rests on a hairsplitting definition of "interest." When lenders linked with the Gambino family Mafia charged 3 to 5 percent per week for illegal loans made out of a South Florida check cashing office, no one argued that it wasn't interest. Payday lenders call their charges "fees," not interest. Therefore, they reason, the charges don't violate state interest rate caps. Although they lend smaller sums than loan sharks -- usually $100 to $500 -- payday lenders often charge similar amounts. A typical rate, 20 percent every two weeks, adds up to an annual percentage rate of 520 percent for borrowers who keep renewing their loans. "The interest rates charged by these people would make the Gambino family blush," said Birmingham, Ala., lawyer Lang Clark, who has reached tentative settlements with several Alabama payday lenders in recent weeks. Payday lenders argue that APR is a poor measure of payday loans because most borrowers repay them in weeks, not years. The average loan in Colorado was for 17 days, and only 58,000 of the 374,477 payday loans made last year were renewed, according to state figures. Critics argue that offers promising easy money today at high rates to be paid another day are like loan sharks' come-ons, an unreasonable temptation for desperate people. The main way borrowers get in over their heads is through revolving loans. New laws in Tennessee and other states technically prohibit borrowers from renewing loans. Borrowers must come in on payday and put money on the counter instead of just paying another fee. But they can immediately write another check and pick up the very same cash they placed on the counter. The lenders call it a new loan. "They still walk out with the same $200," said Richard Fisher, who has pursued class-action suits against Check Into Cash and other lenders in Tennessee, Kentucky and Alabama. "It's a shell game." Though some may get in over their heads, a ban is no answer, said Sam Choate, Check Into Cash's general counsel. "That's sort of like saying: Let's close Las Vegas or Atlantic City down, because some people have problems with gambling," he said. Alabama class-action lawyer Clark counters: "A drug dealer never forced a guy to smoke crack, and we've got laws against that." Payday lenders have been accused of abuses beyond mere high rates. Treasure Coast Cash of Stuart, Fla., used bogus Martin County Sheriff's Office stationery to threaten delinquent borrowers, according to the Florida comptroller's office. Another lender, Cash 2 U, prosecuted late payers under the state's bad check law and got treble damages -- even though the law doesn't apply to postdated checks. Lynn Knight called to warn a Hanceville, Ala., check casher she'd be late in repaying the $200 she borrowed at 520 percent APR. It did little good. The 19-year-old nursing home worker had to bail herself out of jail to care for her 6-month-old daughter. Her father, Clayton Lee Finley, says her payday lender used the threat of jail just as a loan shark might have used the threat of violence. "They used to have the men come out and break your legs," he said. "Now these companies are using the justice system to collect outrageous amounts of interest from desperate people." photo by Bob Pennell Check Into Cash is one of the Rogue Valley businesses offering payday loans. Practice thrives in Rogue Valley By David Preszler C ash advances until payday -- and the high interest rates that come with them -- aren't hard to find in the Rogue Valley. About a half-dozen places offer the short-term loans -- usually about two weeks -- for fees ranging from $15 to $24 per $100 borrowed. That works out to annual rates of 390 to 624 percent. Oregon is one of a dozen states that sets no limits on interest rates for payday loans, and businesses offering them have sprung up throughout the state. There are 93 licensed locations, most of which opened in the last year, according to state officials. "We've got these companies opening up on every corner all over the state," says Jan Margosian of the state attorney general's office. "We have seen in the last six months some things where the APR was 500 percent; one of them was even 1,100 percent." Both Medford branches of Check Cash Northwest -- a 12-store chain based in Salem -- offer the service, as does Ship N' Chek. Two national chains built solely on payday lending, Check Into Cash and Check N' Go, have opened in the last year. Patty Dungey, who owns two Check Cash Northwest stores in Medford, added the service to her 10-year-old business last year and says it's been very popular. "We do heavy volume," she says. "It surprises me." The service appeals to people living on tight budgets who run into unexpected expenses such as auto repairs or other emergencies. "These people are people that live week to week," says Dungey. "It's really been a lifesaver for a lot of people." She adds that it allows them to save face -- avoiding things such as bounced checks or having to ask an employer for an advance. While some may frown on the high interest rates, Dungey points out that other high-risk rates -- for credit cards or auto loans -- also are high. And if borrowing that $100 keeps you from bouncing checks, the $15 that her company charges may be lower than the bank fees you incur. Dungey says it's because the loans are short-term that the interest rates look so high. The relatively minor requirements to get the loans -- basically proof of employment and a checking account -- also drive the rates up. "We are dealing with high-risk people," she says. "We don't do credit checks. We are taking losses." Her company, like most others, does grant extensions but requires that the built-up interest be paid before each extension. "We try to discourage the extensions and people carrying them for a lengthy amount of time," she says. Though Oregon doesn't limit interest rates, payday lenders are licensed through the state and audited each year, just like other lending institutions. Several bills aimed at regulating the industry more closely will be debated by the state Legislature this session. State officials say no consumer complaints against the companies have been filed. Local managers at the other payday lenders in Medford declined to comment, referring questions to their corporate offices. Today's Business Index Mail Tribune Copyright � The Mail Tribune 1999, Medford, Oregon USA