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Payday loans are a fast growing segment of this country's fringe banking economy, which includes pawnshops, check cashing stores and consumer finance businesses. Payday loan companies make high-interest, short-term loans with payment due at the borrower's next pay check. Payday loan companies say they're supplying a service consumers are demanding. Consumer advocates say too many borrowers can't pay off the loans and refinance their way deeper into debt. Federal and state regulators are casting a more watchful eye on the activity.

	St. Paul Community Stabilization Project organizer Jolene Mason talking to a payday loan borrower. (MPR Photo/Dan Olson)

Two St. Paul payday loan customers located with the help of a community service agency agreed to talk if their names aren't used.

One of the borrowers said she turned to a pay day loan because of a financial crisis. "I was behind on bills and there was a few that were going to be cut off and I couldn't do it and I called them and they agreed to borrow me the money and I did," she said.

She has a job, a home and a checking account, but no overdraft protection or line of credit with her bank. She borrowed $300 from a payday loan company at a cost of $75 due up front. That $75 works out to an interest rate of 25 percent every two weeks - or 650 percent calculated on an annual basis.

New problems arose. The woman couldn't repay the entire amount of the first loan. She refinanced paying additional fees each time.

"And when you refinance, you have to refinance that $75 plus another $50, so I was doing that for awhile so they'd take out a little bit at a time. Finally when I got them down, that's when I paid them off," she said.

The woman remembers she refinanced every two weeks for four months at a total cost of about $1,500.

On the other hand, payday loans worked exactly as advertised for this St. Paul man. We talked in a parking lot near his place of work. He says a family member asked him for money for "an unexpected automobile expense." Without a car, the family member couldn't get to work. No job and the family crisis would worsen.

"They might've had to come to live with me or the situation would've gotten more serious," he said.

	Georgetown University Law Center professor Gary Peller says payday loan companies take advantage of people of modest means who face financial crisis. He says the business is immoral. "This is corporate gangstership," he says. (Submitted photo.)

The man didn't have the money to help his family member so he borrowed $250 for two weeks from a payday loan company. The family member paid it off on time. Crisis averted. Cost of the loan: $23 - or about 9.2 percent for two weeks.

Truth-in-lending laws require companies to calculate the annual percentage rate - or APR - of loans, so multiply 9.2 by 26 - the number of two-week periods in a year - and the payday loan interest rate is close to 240 percent.

The borrower says the cost was reasonable given the need for the money because "it was based on what's available in the system and for helping a family member out," he said.

The St. Paul man's endorsement of payday loans is music to the ears of John Rabenold, an executive with Ohio-based Check 'n Go, the country's second-largest payday loan business.

Calculating payday loan interest rates, Rabenold says, is fair only if is compared to bank fees. Say the St. Paul man whose family member's car needed repair bounced a check to pay the bill. The bank and car repair shop each charge $20 - a total of $40 - for a returned check. That works out to an annual interest rate of 520 percent.

Rabenold says suppose someone needs to pay a bill of $100 but doesn't have overdraft protection or a line of credit with the bank. "That customer who's about to bounce that $100 check could come into one of my stores to cover their check at a $15 fee, thereby saving themselves $25 to $35," he says.

But what often happens to payday loan customers, Gary Peller says, is illustrated by the woman borrower's experience. Because they are unable to pay off the loan in time, they refinance the debt and pay more in fees than the amount borrowed.

"(A) customer who's about to bounce that $100 check could come into one of my stores to cover their check at a $15 fee, thereby saving themselves $25 to $35" - John Rabenold, an executive with Ohio-based Check 'n Go

Peller, a Georgetown University Law Center professor, is helping with class-action suits in four states that would impose tighter regulation of payday loan companies and seek damages for consumers who've refinanced their debt.

"What typically occurs is that borrowers will not pay by the due date - say in two weeks - and at that point (they will) roll over the debt for another two weeks and then maybe another two weeks, and so very often a borrower pays substantially more than they borrowed," according to Peller.

State regulators in Indiana found evidence to support Peller's assertion. Their findings became the basis for a Consumer Federation of America study that roundly criticizes the payday loan business.

Consumer Federation Director of Consumer Affairs Jean Ann Fox says the Indiana survey of payday transactions found a majority of customers didn't pay their loans on time.

"They concluded that 77 percent of payday loans are rollovers and the average customer had over 10 loans per year," she says.

The payday lenders fire back that an industry-commissioned survey of their customers shows a very small number - five percent - take out another loan to pay for the previous loan.

The woman from St. Paul says she was encouraged by the loan company to refinance rather than pay off her loan. "Of course they would send me a little letter saying, 'You don't have to pay it off, just pay $50 plus another $75 and each time it was $50 and another $75," she says.

Payday loans have been around for a long time, often as an informal activity conducted on the side by people in other lines of work. Companies who make payday lending a central part of their business have come on the scene in the past decade.

Ohio-based Check 'n Go is privately held and John Rabenold won't reveal income except to say the business is profitable. The country's largest payday loan business, Ace Cash based in Irving, Texas is publicly traded. Its revenue the past five years has more than doubled, and its net income in the same period has nearly quadrupled. State officials say there are 43 payday loan companies licensed for business in Minnesota. An industry spokesman says there'd be more but the state limits the interest rates and fees.

However, payday loan businesses have found a loophole. Many listed in the Twin Cities Yellow Pages do business over the phone or on the Internet. They sidestep state interest rate limits by renting bank charters from banks in Delaware or South Dakota, which have no interest rate limits. The businesses say it's legal for an out-of-state bank to loan money and charge interest rates allowed by their home state.

An advertisement for one Twin Cities telephone number, advertised as a payday loan business, says the loans are through County Bank. County Bank is based in Rehoboth Beach, Delaware and is one of the country's biggest payday loan banks. County Bank didn't return a call for this report.

Georgetown University Law Center professor Gary Peller says payday loan companies take advantage of people of modest means who face financial crisis. He says the business is immoral. "This is corporate gangstership," he says. "The Mafia didn't used to get interest rates at this level when they were making small loans on the street."

The two St. Paul borrowers differ in their opinion of payday loans. The man says they help people pay unexpected bills. The woman says she'll never do business with them again.

There are proposals before Congress to limit payday lending but they haven't been given a hearing. Regulators in some states have tightened rules on the business. The federal Office of the Comptroller of the Currency in January warned a Pennsylvania bank which rents its charter to payday loan companies that too much of its business is tied up in the activity.

Even so, the payday loan industry is booming - by one estimate doing $78 billion a year in business. An industry spokesman says there are 10,000 businesses making payday loans and predicts the number will double in the next two years.

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