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Payday Loans Under Review

April 24, 2002
By: Jon Ariztimuno
State Capital Bureau

JEFFERSON CITY - She may not be a dentist, but most customers still feel pretty uncomfortable when they walk into Bridget Jeffrief's office.
Jeffrief is branch manager of the Columbia and Jefferson City chapters for the Consumer Credit Counseling Service, a nonprofit agency that assists those in dire economic straits.

Her customers ask for her help in paying off loans they cannot afford. Many of them have also taken out what is known as payday loans.

Payday loans are unsecured loans under which, under Missouri law, cannot exceed $500. In exchange for cash, the borrower writes a check for the credited amount plus a fee, which isn't cashed by the loan company until the customer's next payday.

For example, if a customer were to borrow $100, a check for $115 would be made out to the loan company and cashed two weeks later, on that customer's payday.

But, if the payments aren't made on time, the interest rolls over. This works out to a 391 percent cumulative annual interest rate.

Now before Missouri's legislature are measures to restrict the interest rates that can be charged by the payday loan industry.

One bill that has passed the Senate and now is pending in the House would impose other consumer protections.

For instance, the borrower would have to read and sign a paper with the required steps about the paying off conditions.

The extension of the due date to pay the loan company, also called rollover, could not be renewed more than six times.

One of the requirements of the bill is that, in every rollover, 5 percent of the principal must be paid.

Jeffrief, who contacts creditors to reschedule payments for borrowers, said that the objective for the customers is to pay "a certain amount each month to pay back the actual principal amount, not to continue to renew it."

The average client for the company, Jeffrief said, has taken out more than just a payday loan, but also has other loans and credit card bills.

Proponents of regulation said one of the main risks of payday loans is that consumers keep taking more loans out without having paid the previous ones. Jeffrief said one individual that requested Consumer Credit Counselling services had a total of 21 payday loans. "We don't ever see someone that has just one or two," she said.

When the sponsor of the bill, Sen. Ronnie DePasco, D-Kansas City, went down to Springfield, he said he saw more payday loan businesses there than grocery stores.

"There was a big need to regulate them. They were ripping people off terribly", he said.

DePasco showed satisfaction about the only amendment passed on the bill, sponsored by Sen. Bill Kenney, R-Lee's Summit. The amendment would force the payday loan business to draft a report every two years about their activity, including the number of loans and the percentage charged.

"At least we have a record," said DePasco.

DePasco said that this bill is an attempt to take care of the mistake he said the legislature made years ago by taking the interest-rate caps off for these type of loans.

"We let the market dictate the percentage and this is how it worked out," said DePasco in reference to the boost of the title and payday loan industry when the caps were taking off.

The chairman of the Banks and Financial Institutions Committee and sponsor of the bill in the House Chris Liese, D-St Louis County, expressed approval of this particular piece of regulation.

"I think we have a good agreement," said Liese. "I think both sides are going to get what they want.I am going to support that."

Liese also sees the past deregulation of the payday loan industry as a mistake. "The way the caps were taken off of the payday loans wasn't done very well," he said. "It was done at the last minute. They weren't heard in either committee and they weren't heard on the floor of the House".

Thiry-five complaints were made last year out of a half-million transactions at the Division of Finance, according to Liese.

The bad reputation of the payday loan industry is not real but deliberately created by people that don't know much about the issue, Liese said.

"I think people that don't really try to understand what is going on create more than the bad reputation that is there," he said.

Students, church groups and social welfare groups came to the Capitol on several occasions to lobby against abusive interest rates.

"I think that those consumer groups and church groups had a legitimate concern about industry practices," said Mark Rhoads, lobbyist for the Community Financial Services Association of America, a trade group formed mainly by national payday loan industries.

Rhoads said the main point of this "consumer oriented" bill is the payment schedule that he said keep people out of the "cycle of debt."

"From an industry perspective, the bill that was perfected last week represents a fair and good compromise which we endorse," he said.