By Christine Metz
The Bend Bulletin
July 9, 2006
Want $300 fast?
All you need is a bank account, a pay stub and a driver’s license to visit one of the many lending institutions along Bend’s Third Street.
While you can walk out the door with $300 cash in hand, if you don’t pay it off by the next paycheck, or three paychecks after that, the $300 loan could wind up as a debt of $540 in eight weeks.
Bend city councilors, nonprofit organizations working with low-income people and members of faith-based institutions worry that the tactics payday lenders take can leave their users in a whirlpool of debt that is almost impossible to escape.
On the heels of state regulations placing more restrictions on payday loans, the city of Bend is looking at an ordinance that would further regulate payday lenders in Bend. If approved, Bend would follow five other Oregon cities that have payday regulations that go beyond what is on the state books.
Bend Councilor Chris Telfer proposed the ordinance after working with a group in her church that is trying to start a low-income credit union.
Telfer said she heard stories of families in Bend getting caught in a debt trap after borrowing money from payday lenders to cover utility bills, groceries and medical expenses.
"You know, a lot of people are getting hurt by this, innocent people," Telfer said. "This is a way to help them."
Thom Shauklas, whose company owns one of the 26 payday lending shops in the city of Bend, said it’s a service that allows consumers to take out short-term loans to avoid expensive overdraft fees at banks or to finance vacations to the beach.
"Most consumers are happy with our product," Shauklas said. "It meets a need. It’s not predatory. It’s a type of small loan that has its place in the financial market."
Payday loans prevalent
Statistics from the Oregon Department of Consumer and Business Services show that there are 16 businesses with short-term lending licenses and 10 businesses with conventional lending licenses in Bend. The city of Bend is home to the vast majority of payday lenders in Deschutes County.
In 2004, borrowers in Deschutes County took out more than 24,000 payday loans that added up to more than $7.4 million.
Liz Hitt, executive director of the Bethlehem Inn, said she isn’t sure how payday lenders can use high rates and the rollover tactics. She calls them legal loan sharks.
"They are sharks feeding off the poor at their most vulnerable," Hitt said.
Each year, Hitt said, about a dozen of the people who come to the homeless shelter list payday loans among the financial problems that led to their homelessness. She guesses that other clients have also had troubles with payday loans, but don’t mention it.
On the track to homelessness, Hitt said, getting a payday loan is among the last steps some people seek before losing shelter.
"It’s one of the places they go in the last, desperate attempt to avoid the end of the line," Hitt said. "But it just propels them forward faster."
Tamera Kellogg, a homeowner specialist for the Central Oregon Community Action Agency Network, said about 20 percent of the families she works with to find housing used payday loans or other loans that have a similar business model.
While Kellogg doesn’t see the loans as predatory, because borrowers come to lenders for money, she said they are tilted to the lenders’ advantage.
"Basically, it is set up in the beginning to almost fail," said Kellogg, who once worked at a business that issued payday loans.
Many of the people she saw come through the door were those who had just spent beyond their income and needed payday loans to subsidize their living expenses. Usually the borrowers can’t get a line of credit from the bank, but they need a small amount of money immediately, she said.
Shauklas defended payday loans and said they shouldn’t be considered predatory.
Shauklas is vice president of Oak Brook Financial Corp., a company that owns 44 payday lending businesses in Oregon, including Check Cash on Third Street in Bend.
Almost all borrowers, who represent a wide swath of socioeconomic levels, leave payday lenders knowing exactly how much they paid for the loan, Shauklas said.
Those who have rallied against payday lenders, Shauklas said, are hearing from the 2 percent to 3 percent of the consumers who are not paying their bills.
"The paradigm changes when you see the world through the lens of the 2 to 3 percent," Shauklas said.
The consumers standing in line for a payday loan are similar to those standing in line for a cup of coffee at Starbucks, Shauklas said.
"You interview the people in Starbucks and some are unemployed, some might be blue collar and some white collar; some have no money and have gotten into terrible debt," Shauklas said. "Should the city of Bend pass a law to regulate the dollar amount for a cup of coffee for those who can’t afford it (at Starbucks) and should go to Safeway or Thriftway for instant coffee that’s cheaper?"
Shauklas said that payday lenders offer a service that banks and other companies no longer provide because it’s too expensive. He questioned why the payday lenders are under fire, not banks that are charging high overdraft fees or credit cards that tack on costly late fees and high interest rates.
Paying for a payday loan
Angela Martin, director of the Economic Fairness Coalition, a project with Our Oregon, said payday loans are designed to trap people into a cycle of debt.
Our Oregon, a progressive political organization working on economic and tax issues, is lobbying to toughen state and local legislation on payday loans.
The cry for tougher regulations at the state level came from religious groups, senior citizen organizations and social service agencies, Martin said.
A study by the Oregon Department of Consumer and Business Services showed that out of more than 1,000 borrowers, close to one-third admitted to taking out payday loans to pay for groceries.
"The idea that any family is financing their dinner at a 521 (annual percentage rate) is an outrage," Martin said. "These families are just trying to pay rent to put food on the table."
In most cases, payday lenders charge between $10 and $30 for every $100 borrowed, Martin said. In order to get the money, most borrowers write a check to the lender for the amount of money they borrow plus the fee it costs to borrow it. At any time, lenders can cash the check.
The goal is for borrowers to pay off the loan at their next payday, which is often every two weeks. If the borrowers don’t have the money by the next payday, they can ask the lenders to roll over the loan for an additional fee.
For every time the loan is rolled over, which in Oregon can be up to three times, another fee is added.
Interest on the loan can accumulate up to a 521 percent APR, meaning someone who borrows $300 could end up paying $540. APR (annual percentage rate) is the interest rate and all of the extra costs added onto a loan, compounded in a year’s time.
At the end of the three rollovers, if borrowers don’t have enough money to pay off the loan, they can go to another payday lender to borrow more money.
As is the case in Bend, payday lenders are often clustered close to each other making it easy for borrowers to go from lender to lender, Martin said.
The Department of Consumer and Business Services study also showed that two-thirds of borrowers roll over their loans.
"It goes on and on and on," Kellogg said of the borrowing cycle. "You’re always paying interest, which is high, and just renewing and renewing and renewing."
Regulating payday loans
Following legislation passed in five other Oregon cities, the city of Bend gave the first of two approvals this past week to an ordinance that would require borrowers of payday loans to pay off 25 percent of the original loan, plus the interest on the remaining balance.
If borrowers can’t pay off the loan after it is rolled over the maximum number of times, then lenders would be required to set up a 60-day payment plan for no additional charge.
"We need to stop the cycle of one borrowing after another borrowing. They are never given an opportunity to pay the loan off," Martin said. "This sets them up to succeed to pay the loan off."
The ordinance would also give borrowers 24 hours to cancel the loan without any fees or penalties.
Shauklas called the city’s ordinance cavalier, capricious and an easy emotional fix. By requiring borrowers to pay down the principal before rolling the loan over and entering into a payment plan at the end, the city is taking away consumer choice, he said.
"This is a very paternalistic approach to borrowing," Shauklas said. "Cities are saying you don’t know what you should need, but we do."
In April, during a special legislative session, state lawmakers passed regulations that limit the annual interest rate on payday loans to 36 percent and stipulated that lenders could charge no more than a 10 percent fee on the first loan. The borrower would also have 31 days to pay off the loan, and the loan could only be rolled over twice.
The legislation will go into effect July 2007. Martin worries that most payday lenders have already found ways to circumvent the new laws.
Shauklas, who is also president of the state association that lobbied against the new regulations, said the state legislation is Draconian and payday lenders will not be able to turn a profit.
"It will put a lot of people out of business," he said.
Car title loans
Bend resident Chuck Hemmingway wishes the regulations on payday loans would extend to car title loans, which operate under a similar model but use car titles as collateral rather than checks.
Hemmingway said his stepdaughter, a single mother of four who lives in Bend, ended up having to pay $1,400 on a $500 loan. The moment she walked out the lender’s door with $500 in cash, she already owed $830. The debt continued to grow in the 2 1/2 months it took her to pay off the loan.
"She was too embarrassed to come to us. She wanted to do this on her own and was using it to buy food for her kids, to pay the rent. She thought she could do it and then she got sick," Hemmingway said.
With interest and late fees, the amount his stepdaughter owed just kept building, Hemmingway said.
"You can’t afford to trip with one of these things. As soon as you miss one payment, then boom, it starts snowballing," he said.
When the lender threatened to take away her truck, Hemmingway said his stepdaughter asked for help. Hemmingway and his wife helped pay off the loan. They noted if the lender had taken away his stepdaughter’s vehicle, she probably wouldn’t have been able to find a job.
Martin said that plans are in the works to lobby lawmakers to put restrictions on car title loans in future legislative sessions. The groups decided to tackle payday loans first because there are far more of them, she said.
Finding alternatives
Those working for nonprofits agreed that other lending agencies, such as banks, do not offer similar services as payday loans, which let people borrow a couple hundred dollars or less for a short period of time.
Telfer said a group has been working to form a local credit union, which could offer short-term loans at far lower interest rates than payday lenders.
Hitt said there are alternatives other than borrowing money, such as using food banks when someone needs groceries. Borrowers can also try to talk to the people or companies they owe money to first to see if they can set up a payment plan or get a deferral.
"We try to educate folks that feel desperate that there are options," Hitt said.
But Martin said for those in a crisis, when the electricity is about to go off, payday loans are the first place to go.
"For many people, that is the most obvious option for them because the neon signs are the first thing they are able to see," Martin said.
Payday Loan Fairness: [x] Yes, [] No
©2006 Our Oregon. All rights reserved. Photos by Leah Nash.