WASHINGTON- The U.S. Public Interest Research Group (U.S. PIRG) and the Consumer Federation of America (CFA) unveiled their combined study of payday lenders and the tactics they use to evade state laws regarding rates and disclosures at a Nov. 13 press conference. The two consumer groups accused payday lenders of "renting" bank charters to get around state interest rate caps and laws limiting short-term loan rollovers. "Big payday lenders don't want to comply with state laws designed to limit their triple-digit interest rates, so they are renting bank charters in a cynical attempt to avoid state consumer protections," CFA Director of Consumer Protection Jean Ann Fox said. In a typical payday loan, a consumer writes a personal check for $230 to borrow $200 for two weeks-"until payday." The annual percentage rate (APR) on that loan would be 390%. At the end of the two weeks, the customer must pay back the lender, allow them to deposit the check, or pay the interest to roll over the check for another two weeks and pay additional interest. U.S. PIRG Consumer Program Director Ed Mierzwinski pointed out that three-digit interest rates are not the exception, but the rule: 97% of payday lenders studied charged a minimum of 300% APR. "I am very disappointed that the bank regulators.continue to allow predatory lending," he said. However, according to Community Financial Services Association (CFSA) Board Member Lynn DeVault, representing Check into Cash, APRs may not be appropriate when addressing payday loans. While she admits they are proper to use because they are the law, in reality, payday loan debts are not kept for a year. Payday advance customers choose between bouncing a check for a $20 to $30 charge from the bank, plus a charge from whoever the check is written to or an $18 fee for a payday advance, she pointed out. "What would you do? You do the cheapest thing." DeVault explained that more than half of the fees payday lenders charge go toward keeping that store in operation and that payday lending stores' profit margin is no different than the typical financial services provider. Additionally, DeVault points out, banks do not have to disclose non-sufficient funds or late charges as an APR, so the flat fee payday lenders charge should not be presented as an APR. Also, if a customer pays back the loan before the two weeks is up, the APR can be skewed into the absurd. According to CFA and U.S. PIRG, the lending practices lead to coercion when it's time to pay up. "The holding of personal checks by lenders make these loans inherently coercive, with over-extended borrowers faced with the choice of allowing the check to bounce, paying to extend the loan, or being threatened with `bad' check charges or prosecution," the study said. In the face of check fees or legal action, many borrowers choose to roll the loan over. Mierzwinski said of the loan rollovers, "That's where payday lenders are really putting it to the chin of consumers." Eighty-three percent of payday lenders allowed customers three or more loan rollovers, he said. CFSA, which represents more than half of the payday lending industry, has issued a "best practices" guide for its members. The guidance includes the lesser of a four-time rollover maximum on loans or what the state law allows. Other items in the best practices include full disclosure of the APR, truthful advertising, encouraging consumer responsibility, no criminal action, and self-policing. The consumer groups accuse payday lenders of targeting particularly vulnerable consumers, such as women in welfare to work programs and members of the military. According to the study, noting the business plan for The Cash Exchange, a payday lender, "welfare to work plans create a fertile market for payday lenders." The plan also describes the customers as mainly minority, income under $25,000, high school education or GED or less, between 18 and 59 years of age, and female heads of households with dependents. "Half of Americans live paycheck to paycheck," Fox said. "Those are the people who need the most protection, not the least." "Why target someone as a customer who could not pay you back?" DeVault responded. She said that the consumer groups are seriously mischaracterizing their customers. "Every payday advance customer has a bank account and a job," she emphasized. Yet, consumer advocates "want to continue to characterize our customers as poor, ignorant, and needing protection," she said. "You can fool 10 people. You can't fool 10 million people," DeVault added, noting the size of the industry, which continues to grow. The payday lender commented that it's ironic that consumer advocacy groups, which pushed Community Reinvestment Act legislation, are leading the charge against payday lending companies that are only trying to make short-term loans throughout the community that typical banks will not service. "We are encouraged a little bit by what credit unions have tried to do," Mierzwinski said. He and Fox noted that credit unions are trying to provide alternatives to payday lending for their members. Still, more needs to be done, the consumer advocacy groups urge, including: * Enforcing state usury laws and small loan laws and enacting anti-broker laws, lowering price caps, limiting rollovers, and protecting consumers against coercive collection practices; * Lawmakers and regulators should prevent use of a national bank charter by payday lenders and eliminate `bad' checks as basis for small loans; and * Traditional financial service providers, including credit unions, should provide affordable overdraft protection and credit arrangements. Consumers need to help themselves, the study also suggested. They need to try to build up rainy day savings to cover financial emergencies, seek budgeting and debt management assistance, and shop around for the best credit. "Consumers with too much month at the end of the paycheck deserve better legal protection against predatory lenders," Fox concluded. "Lenders who misuse bank charters and who devise tricks and ruses to evade state consumer protections must be stopped." The Colorado attorney general is currently in a court battle questioning the legality of payday lenders using national bank charters to get around state laws. The Office of the Comptroller of the Currency has filed an amicus brief in the case, stating that it is not proper usage of a national bank charter. (See related payday lending story on page 21) [email protected]