Payday lending: Is it help or trap?

Activists are asking the state to crack down on payday lending.

By DON SHILLING

VINDICATOR BUSINESS EDITOR

Frank Sinkovich is proud to be a payday lender.

He figures the loans from his Boardman business help people keep their electricity turned on or pay a bill without bouncing a check.

“We’re a service for people who have a temporary need and no one else to turn to,” said Sinkovich, manager of Abe’s Cash Advance, 4605 Market St.

But some people are working to turn off the cash that flows freely from businesses such as Abe’s. Borrowers now can receive two-week loans of up to $800 simply by having an income and a checking account.

Critics, however, say payday lenders aren’t helping people who are low on cash — they are trapping people into a cycle of debt.

State Rep. Robert Hagan of Youngstown, D-33rd, has joined with critics by co-sponsoring legislation that would drastically curtail the fees and interest that payday lenders can charge.

Most payday lenders are operated by national corporations, but Sinkovich decided to open Abe’s in 2004 with the help of partner Anthony Thomas, a local appraiser and property manager.

They make money, but they help people, too, said Sinkovich, a retired insurance agent.

If someone doesn’t have the money to pay an electric bill and is going to get service cut off, his business can step in to give that person a loan for two weeks.

The electricity stays on, and the person can pay back the loan — plus fees and interest — from his next paycheck.

He figures it keeps people away from crime.

It also must be a good way to make a profit. Payday lenders have sprung up all around Ohio since they were first authorized by state law in 1995. As of 2006, Ohio had nearly 1,600 payday lending stores, including 99 in the Mahoning Valley, according to Policy Matters Ohio.

Opponents are concerned by the explosive growth, which they say is being fueled by people’s misery. For many, payday lending is a debt trap that’s hard to shake, said James Callen, executive director of Northeast Ohio Legal Services in Youngstown, the group that provides free civil legal aide to low-income people.

Borrowers from payday lenders often don’t have enough cash to pay the fees and interest even after their next paycheck, he said. So they take out another payday loan to repay the first one and are charged more fees and interest, he said.

Callen is part of a coalition that’s supporting the bill introduced by Hagan and Rep. William Batchelder, a Republican from Medina.

The bill would cap fees and interest to an annual percentage rate of 36 percent. That means fees and interest on a $100 loan could amount to no more than $1.38 over two weeks.

Sinkovich said such caps would put him out of business because he couldn’t make a profit.

Callen said the bill is based on a 2006 federal law that placed a 36 percent APR cap on payday loans to military personnel and their families.

Another reform bill pending in Columbus calls for even stricter caps — 25 percent APR.

Now, payday lenders are allowed to charge fees and interest that reach 390 percent APR.

It works like this: The state permits a maximum interest rate on a 14-day loan of 5 percent. The fee amounts to 10 percent on smaller loans and slightly less than 10 percent on larger ones.

On a $100 loan, that works out to $5 in interest and $10 in fees. But when that $15 is calculated on an annual basis, it becomes 390 percent APR.

“I never thought I’d say this, but credit cards are a better deal,” Callen said.

Another opponent, Thomas Allio, said the explosive growth in payday lenders shows that people aren’t just using them for one-time emergencies that can be solved by the next paycheck.

State law says that a borrower can’t take out a second payday loan with the same lender until the day after the first loan is repaid. Allio said payday lenders have grown rapidly because borrowers must use a second lender if they want to get a loan to pay off another loan.

“Why would Mahoning County need 42 of these if they are not feeding off each other?” asked Allio, senior director of the Social Action Office at the Catholic Diocese of Cleveland.

The Hagan-Batchelder bill would not allow borrowers to receive more than one payday loan at a time from any lender. It would create a registry to keep track of outstanding loans.

The payday lending industry is working against such efforts and supporting the third reform bill. This bill wouldn’t change interest rate and fee levels but it would require lenders to offer a payment plan to borrowers who can’t repay their loan.

Darryl Dever, a lobbyist for Ohio’s payday lenders, said low APR caps would wipe out the profits that allow the industry to exist.

“Those aren’t reform. It’s elimination,” he said.

Supporters of those bills are sensationalizing the matter by highlighting the 390 percent APR, he said.

“They do that because it sounds horrible,” he said.

The APR is on the loan documents because it’s required by federal law, but borrowers know the interest rate is 5 percent for two weeks, Dever said.

“Consumers understand that clearly,” he said.

Paying a $15 fee for a $100 loan can be a good deal if someone needs cash immediately to pay a bill that’s due, he said. The alternative for some people might be to write a check that will bounce, which might cost $60 in bounced check fees from the bank and the vendor, he said.

Dever dismissed the critics’ claims that borrowers are bouncing from lender to lender to repay loans.

“There are storefronts because people are using the product,” he said.

Critics say that the average payday borrower takes out 13 loans in a year. Dever dismissed the methods used to come with that number.

A better number, he said, is that the average borrower uses 1.7 different lenders in a year. This was taken from a study that looked at government filings made by publicly held lenders.

The state keeps track of the number of storefronts but not the number or dollar amount of loans.

Dever acknowledged that some people make bad decisions and find themselves unable to repay their loans.

Sinkovich at Abe’s Cash Advance said industry statistics show that 8 percent of payday loans can’t be collected.

“Some people use it in a way they shouldn’t be using it. That’s why the legislators are up in arms,” he said.

He said he has about 300 customers who are in good standing, with about half of them being regular customers who may come in every month or every two weeks.

He has about 300 other customers whom he wouldn’t loan to again. Many of those people had been good customers but then found themselves in difficult circumstances and walked away from their loans, he said.

One of his customers, a retired Boardman woman, said she is careful that she isn’t caught in a cycle where she can’t pay back her loans. She borrows from Sinkovich about once a month.

“If you get in a jam, sometimes that’s where you have to go,” said the woman, who didn’t want to give her name.

She said she’s used the cash to pay bills or to go out of town but sometimes she said she borrows money “just to use it.”

Like most payday lenders, Sinkovich has a post-dated check that the borrower signs when the loan is taken out. Sinkovich said most borrowers take the check back as a receipt when they pay.

If they don’t repay and he can’t reach them on the phone, Sinkovich will call the bank to determine if the check can be cashed. Often, borrowers will close accounts or put a “do not pay” order on the check, he said.

If he can’t cash the check, he will turn the borrower over to a Missouri company, which attempts electronic withdrawals from a person’s account. The withdrawals are timed to immediately follow a direct deposit of a paycheck into the account.

Sometimes, money just can’t be collected and is written off. But soon, Sinkovich is adding another tactic — the courts.

He recently retained a lawyer who plans to take 25 of his borrowers to small claims court. If they still don’t pay, the lawyer will take legal steps to garnish wages.

The critics of payday lending say such people who need cash will have other alternatives if payday lending is restricted. Allio noted that 12 states — including Pennsylvania — do not allow payday lending.

He said the market will develop new loan programs, such as an effort created in 2006 by Ohio credit unions, including Warren-based Seven Seventeen Credit Union.

The program, called Stretch Pay, provides small loans that must be repaid in 30 days and carry an interest rate of 18 percent APR. On a $250 loan, the interest due is $3.70.

The loans also have a $35 fee but that covers all loans made within a year. A second loan can’t be taken out until the first one is repaid.

About 2 percent, or 1,300 members, have used Stretch Pay at Seven Seventeen, said Karen DeSalvo, senior vice president for marketing.

She said the credit unions stepped in because too many of their members were getting caught in a cycle of taking out repeated payday loans to pay off fees and interest.

People needing small loans aren’t just low-income members, DeSalvo said.

Forty-five percent of Stretch Pay users have incomes between $30,000 and $99,999, and 5 percent have incomes of $100,000 or more.

“These are people making $50,000 or $60,000 a year getting caught in payday lending,” she said. “They are overspending their means.”

shilling@vindy.com