The Payday Loan Puzzle

Published July 28, 2006, in the Keizertimes

Payday loan recipients can walk out of local businesses with cash in their pockets, but a cloud of debt hanging over their heads.

The Keizer City Council might help wring the cloud dry with an ordinance that would restrict payday lending in Keizer. The ordinance, similar to ones adopted by eight other Oregon cities, will be discussed at the council's meeting August 7.

"If people start dealing with the issue at a local level, state leaders will need to step up their efforts," said Angela Martin, director of economic fairness project for Our Oregon.

Our Oregon represents a coalition of non-profit organizations advancing an agenda of economic and tax fairness.

The ordinance, proposed by Councilor Chuck Lee, would complement actions taken by the state Legislature earlier this year.

Currently, only three business in Keizer offer payday loan services.

The payday loan process

To secure a payday loan, customers only need to have a checking account and proof of employment.

The borrower postdates a check for the amount needed plus any fees and an interest payment, and receives cash for the amount of the loan. In return, the borrower promises that the check can be cashed on their next payday.

For a loan of $100, the average fee is $18.83, according to 2005 statistics from the state department of consumer and business affairs. The average loan size is $380, according to the same study.

In the event the borrower cannot repay the loan on the promised date, the business can "roll over" the loan to a new maturation date as long as the borrower pays the interest from the prior loan.

A $300 loan could end up costing the borrower up to $540. The problem gets worse for frequent borrowers.

"It's not uncommon to borrow money from one lender to pay off another and end up with several small loans all over the place," said Martin.

State legislators act

In April, state legislators approved a bill restricting payday loan services.

The legislation, which takes effect in July 2007, limits assessable fees on the loans to $10 per $100, restricts interest rates to 36 percent annually, prohibits the loan business from rolling over the debts more than twice, and requires minimum of 31 days for repayment on any payday loan.

However, Martin said payday loan businesses are already moving to evade the restrictions.

"The bill only covers loan businesses with licenses for short-term loans (60 days or less). The businesses are already reapplying to become long-term lenders," she said.

By becoming long-term lenders, the payday loan businesses avoid the limits enacted by the Legislature, but can still offer relatively short-term loans by setting the loan due dates at day 61.

Local leaders respond

The ordinance up for discussion at the Keizer council's next meeting, Aug. 7, is intended to provide pathways out of debt, rather than place restrictions on the local businesses, Martin said.

The ordinance takes a three-pronged approach.

First, it would put an end to interest-only rollover and require a payment on the principle amount of the loan each time a loan is rolled over.

"It doesn't eliminate the problem, but it decreases the overall cost of the loans," said Martin.

Second, payday loan businesses would be required to offer 60-day repayment plans to any borrower.

Lastly, it would require such businesses to offer a 24-hour right to cancel.

Lee is hoping the council decides to move forward and at least schedule a vote on the ordinance at a later date.

Keizer would benefit from the groundwork laid by the other cities that have passed such ordinances, he said.

"It won't take a lot of time, but I think passing this ordinance, we send a message that Keizer is not the place to set up these businesses," said Lee.

He sees payday loan businesses as contributing to other societal problems, such as methamphetamine abuse.

"In my work with No Meth Not In My Neighborhood, I've seen how finances contribute to other problems from drug abuse to property crime. In passing an ordinance like this we set up another layer of protection for the poor in the Keizer community," he said.