PAYDAY LOAN ABUSE

BACKGROUND -- Although it remains illegal in some states, payday lending -- which many consider "predatory lending" -- is growing by leaps and bounds across the nation, and in Washington state. Payday lenders were allowed back into the state under legislation passed in 1995. Since that time, payday lending has grown to an annual $1.4 billion business with $174 million in annual fees and more than 800 payday locations statewide.

After a 10-year track record, what we are discovering is that people taking out payday loans are not, for the most part, taking out short-term emergency loans but rolling them into medium- or long-term loans with exceptionally high annual percentage rates, fees and penalties. According to the Department of Financial Institutions, just 18% of the 293,104 payday borrowers in 2005 had only one loan in the year; 48% of them had six or more loans in 2005.

By state law, payday lenders are allowed to lend out a maximum of $700 at a time and the fees are $15 per $100 loaned up to $500, and $10 per $100 above $500. In other words, if you took out a loan for $700, your fees would be $95. If the loan were for 7 days, the annual percentage rate would equal 782%; for a 14-day loan the annual percentage rate would be 391%. The average payday loan in Washington state is for $400 and the average length of the loan is for 18 days (APR of 304%).

Typically, customers are asked to post-date a check for the borrowed amount and the fee for the 7th or 14th day. If a worker doesn’t have the money in his or her checking account to cover this, they face bank overdraft charges and penalties and possible fraud charges. As a consequence, individuals end up rolling over payday loans either from the same company or borrowing from another payday lender to pay back the first. For many, the resulting debt trap may take years to escape, with the initial loan being repaid many times over.

Studies done in both Washington and Oregon reveal that payday lending disproportionately impacts communities of color and the military. Studies of state employees in both states show that household incomes of borrowers tended to be between $30,000 and $60,000. The primary reasons given for borrowing from payday lenders was first, to pay bills, and second, to pay for groceries.

LABOR'S POSITION -- The Washington State Labor Council, AFL-CIO recognizes that payday lenders are not the source of financial fragility, but the terms of trade under which they operate can significantly worsen an individual's financial misfortune. The WSLC supports fair and responsible legislation that lowers the interest rate charged by payday lenders, lengthens minimum borrowing times, requires lenders to factor in ability to repay into loan calculations, and restructures short-term debt into medium-term debt after a short period of time.

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