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Who is that masked man offering you cash against your next paycheck?

Eloise Starson, 46 years old, is a virtual prisoner of a payday loan company. She borrowed $450 in early July to meet a crisis. Now, she must cash in her life insurance policy to escape the dreary round of paying and borrowing, paying and borrowing.

Ten years ago, Starson (not her real name), with two years of college, was a sales person earning between $35,000 and $40,000. Suddenly, a swarm of catastrophes hit her at once. She lost a baby, had three operations, one of them a hysterectomy, spent 18 days in a mental hospital, lost her job and had her car repossessed. "If it hadn't been for my parents, I would have been out on the street," she said. Deep in debt to doctors and hospitals, her only way out was to file a Chapter 7 bankruptcy, "which is a straight dissolution of debt," she said. "You walk in owing $25,000 and you walk out owing nothing."

Starson managed to get a new job, paying less than the one she lost, but she was able to begin putting her life back together. Divorced for the third time, she lived with her 13-year-old daughter. Then, last July, her daughter was arrested. "I needed a chunk of money I could not put my hands on any other way [than a payday loan]," she said. "My credit history has derogatory information in it so I knew I couldn't qualify for loans through a credit union or something. A payday loan was my only alternative at that particular time. So I took it." She borrowed $450 from one of the 11 Loan Mart stores in Tucson. Loan Mart is owned by Eagle National Bank, headquartered in Pennsylvania.

"I have to keep renewing it [the loan] because I can't afford to pay it back at the moment. I take in [to the lender] $517 and they give me $450 back in cash." That comes to $67 every two weeks in interest, almost 15 percent, or an annual percentage rate of 384. According to the law that allows such loans, Starson will have to stop rolling her loan over after the eighth time. If she goes that distance, she will have paid $536 in interest on a $450 loan. After her eighth rollover she can circumvent the law by waiting 24 hours to renew the loan.

Every month, Starson must set priorities: "Am I going to pay my lease on my car, my house payment or only the payday loan?" Now, to get out of the trap, she has decided to cash in a paid-off life insurance policy her parents took out on her when she was an infant. "If I didn't have my life insurance to cash in, the situation would last forever."


STARSON IS THE VICTIM of what used to be called usury, a word hardly recognized in Arizona's laws, thanks largely to men like House Speaker Jim Weiers and Senate President Randall Gnant. In most of human history, usurers were pariahs. Usury--excessive interest charged on a loan--was condemned by the ancients. Plato, Aristotle, both Catos, Seneca and Plutarch denounced it. In fact, what we think of as ordinary loan interest itself was called usury (payment for use) and all major religions--Hebrew, Christian and Islam--disapproved of it. Both the Bible and the Koran characterized it as sinful.

Ancient Greece and both Republican and Christianized Rome also opposed it. In 1311, Pope Clement V totally prohibited interest among Christians, allowing only Jews to lend money. Their monopoly of the profession played a large role in the growth of anti-Semitism. Dante put usurers in the same circle of hell as the residents of Sodom.

Almost from the United States' beginnings, states regulated interest rates, capping the amount of interest legally charged for what we now call consumer loans, mostly around 8 to 12 percent.

But the 1970s brought a cataclysmic change in the nation's financial underpinnings, when inflation was raging and banks had to borrow funds for their own use at nearly 20 percent. Interest caps of 8 to 12 percent no longer made sense. Legislatures simply threw up their hands in despair and scrapped usury caps, allowing standard consumer loans to rocket up to as much as 26 percent.

Arizona was an exception. By the year 2000, while every surrounding state--California, Utah, Nevada and New Mexico--had done away with ceilings for small loans, Arizona still retained a usury cap of 36 percent.

In those states where usury caps were history, the justification was that consumers were smart enough to comparison-shop for loans on purchases like homes and cars. But not much attention was paid to small-loan regulation. Late in the 1980s, payday loans and car title loans became common in southern states. In the early 1990s, they began to creep westward.

It was all part of a deregulation trend, initiated under President Reagan. One impact on American consumers of financial deregulation was the rapid growth of the so-called predatory lending (or fringe banking) industry--check-cashing outlets, payday loan companies, car-title loan companies, rent-to-own stores, high-cost second mortgage companies, sub-prime auto lenders and traditional pawn shops. (Today, however, the number of pawn shops seems on the decline because payday lenders have moved into their financial territory.)

Meanwhile, Americans are up to their noses in debt. In 1980, total U.S. consumer debt was $954 billion. Not including mortgages, that was 7.96 percent of personal disposable income. In 2000, it was $5,178.9 trillion, but the debt percentage of personal disposable income was only 7.82 percent, possibly because disposable income had grown. In the period January-June 2000 alone, consumers increased their credit purchases by more than 20 percent, racking up a total of $1.054 trillion, of which more than half--$600 billion--was charged on Visa. That, of course, was added to whatever debt was already in their portfolios.

Credit card debt has become an addiction. By 1994 the average American cardholder was carrying nearly $4,000 of debt forward from month to month at an annual interest rate of 17 per cent. In fact, some economists attribute the stunning 1990s economic boom to the flood of consumer credit. However, that debt has created two enormous problems for consumers: bankruptcies and usury. In 1980, Americans filed 287,570 non-business bankruptcies. In 2000, they filed 1,217,972.


PAYDAY LOAN companies are a big part of the fringe-banking sector. Federal Deposit Insurance Corporation Chairman Donna Tanoue estimated that by sometime this year there may be 25,000 stores reaping $6.75 billion of fee income per year by processing $45 billion of loan volume. A survey of 230 payday lenders in states where such lending is legal found that payday lenders make short-term consumer loans of $100-$400 at legal interest rates of 390 to 871 percent.

How can it possibly be legal? Because in Arizona and other states the legislatures have allowed themselves to be all but annexed as payday loan subsidiaries. As the Consumer Federation of America put it in a report on the growth of the industry, "Payday lenders are hiring high-priced hired guns to seek enactment of weak, pro-industry legislation. So far, the strategy is working. Already, the payday lenders have been granted a safe harbor from usury laws in 23 states and the District of Columbia and flourish in states with no usury laws to prevent rate gouging."

Only a little more than a year old in Arizona, the payday loan industry is already thriving here. The legislation allowing such lenders to operate in Arizona took effect September 1, 2000, and payday loan stores spread like an epidemic. For example, Ace Cash Express has nine stores in Tucson; Check Advance has three; Loan Mart has 11.

The bill enabling the industry to grow so rapidly in Arizona went through both houses of the Arizona legislature without raising much of a stir. Only a handful of people and organizations testified against it when legislative hearings were held. They included Phyllis Rowe of the Arizona Consumer Council, Eddie Sissons of the William E. Morris Institute for Justice and Hugh Hegyi, a deputy attorney general.

Although the legislation specifies that the state banking department is to license payday lenders, that department did not testify either for or against the bill. Despite its responsibility to license payday lenders, the banking department has no list of them. When asked how he thought the industry could justify charging such outrageously high interest on payday loans, Richard Houseworth, the state banking superintendent, said, "I don't think they consider it as interest. They don't count it that way. It's really a fee." It's a strange explanation, since the "fee" is a fixed percentage of every size of loan.

The bill adopted by the legislature contained the following explanation: "Deferred presentment companies, often known as payday lenders, offer short term (usually less than 30 days), small loans (usually under $500) against a person's paycheck or other source of income. Typically, customers must prove that they have both an open checking account and a job or steady source of income. The customer reads and signs an agreement that discloses the transaction terms, then writes a personal check for the advance amount plus the fee charged by the lender and immediately receives cash in the value of the check less the fee. For example, a person who needed $200 for two weeks in a state that permitted a 15 percent fee would write a check (postdated for two weeks) for $235.29 ($200 + $35.29 fee) and receive $200. [The calculation reveals something about the legislature's mathematical ability: In fact, the fee of 15 percent should be $200 + $30.] The person would have to make sure that there was going to be at least $235.29 in his checking account at the end of the two-week period. If the person did not have $235.29 in his checking account at the end of the two-week period, he could extend, or roll over, the loan. A 15 percent fee would be charged again for this extension, but based on the original amount of cash needed plus the previous fee amount."

Working on behalf of the bill was one of the heavy hitters of the Arizona lobbying industry, Michael Preston Green, whose law firm, Fennemore Craig, is among the four or five biggest in the state. Green specializes in government relations, administrative law and municipal zoning. After graduating from Yale, he got his law degree from the University of Southern California in 1966. His firm, with offices in Tucson and Phoenix, describes itself as having "a diverse practice reflect[ing] a strong business focus. We have represented clients responsible for the growth of the region's infrastructure, including the transportation, telecommunications, real estate and finance industries ... . All our clients have access to legal advice ranging from acquisitions to zoning that span from the governmental relations area to intellectual property."

The payday loan legislation had the enthusiastic support of Jim Weiers, the Republican House speaker. A subprime car-loan lender, he once said he had never made a loan (on a car) for less than 30 percent. In the other legislative body, Randall Gnant, Senate president, who lists his occupation as entrepreneur/businessman, gave strong support to the bill. He once objected to Attorney General Janet Napolitano's suggestion that an acceptable maximum interest rate for lenders ought to be 10 to 12 percent. He said, "Who died and made the attorney general God so she could decide how much profit a business can make in this state?"

Not many legislators raised their voices against the bill. One who did was Representative John Loredo, a Phoenix Democrat. He called the payday loan industry "basically legalized loan sharking, and it's wrong." Only 32, Loredo has been a liberal activist. As a youngster he worked with the late farmworkers union president Cesar Chavez organizing marches, rallies and boycotts.

Most legislators representing Pima County voted in favor of the bill. Local Senators voting in favor: Ann Day, Keith A. Bee, Ruth Solomon, Peter Rios, Victor Soltero. Voting against: George Cunningham. Local Representatives voting in favor: Kathleen Dunbar, Steve Huffman, Bill McGibbon, Marion Lee Pickens, Dan Schottel, Carmine Cardamone, Herschella Horton, Debora Lynn Norris, Lou-Ann M. Preble. Voting against: Harry R. Clark, Rebecca Rios, Sally Ann Trujillo Gonzales, Andy Nichols. (It should be noted that not all these legislators are still in office.)


WHO ARE THE payday lenders' clients? Are they unwitting dupes who do not understand how interest is calculated? "Surprisingly enough, the people who use our business are between the ages of 35 and 45 with a household income of $35-40,000," said Dennis Munczenski, senior vice president of operations for Check Advance, which has been operating in Arizona since last February. The company's corporate name is Venture Services. Its corporate headquarters is in Chattanooga, Tenn.

Munczenski, an amiable, even charming, representative of the industry, referred this reporter to a Georgetown University survey covering "a nationally representative sample of payday advance companies belonging to the industry trade association, the Community Financial Services Association of America." According to the study, members of the association "operate about half of the approximately 10,000 offices offering payday advance credit. The survey was conducted from December 28, 2000 to January 9, 2001."

Although the executive summary of the survey report is burdened by academic prose, it makes several interesting points. "Payday advance customers are primarily moderate-income consumers who are often in early stages of the family life cycle. They are more likely to use consumer credit and tend to have higher levels of consumer debt relative to income than the population as a whole ... . [T]hey have a strong demand for credit, which at the margin makes them insensitive to interest rates on loans."

They seem careless about credit. "Nearly all payday advance customers were aware of the dollar amount of the finance charge on their most recent new advance. But few were able to report accurate annual percentage rates despite recalling receipt of that information in Truth in Lending disclosures. A likely explanation is that payday advance customers used finance charges rather than annual percentage rates in decision-making."

Of course, payday loans are not their only debts. "Nearly all payday advance customers owe other types of consumer credit. They are concentrated in the middle levels of educational achievement ... . Many customers recognize that payday advance credit is costly. Although many customers consider the cost of payday advances to be the same or less than fees for returned checks or late payments, a very large number thought payday advances were more expensive."

Although the Georgetown study makes payday loan borrowers sound like the average yuppie, Kim McGrig, spokeswoman for Consumer Credit Counseling Service (CCCS) in Arizona, says, "The payday loan is a last resort for many. They use it because they are in a desperate situation. The consumer who uses this type of service is probably unable to obtain credit in any other way. You cannot go into a bank and get a loan for $300. You certainly can on a credit card. [But] people in this situation are not able to get credit cards or have already maxed them out. A way to say it is that they are unable to use traditional forms of credit."

Munczenski of Check Advance speaks of the industry as though it were providing a humanitarian service, like a food bank or mental health clinic. "From the consumer aspect," he said, "it is probably their only viable, dignified choice to go out and get emergency moneys until the next payday. Sometimes people get a little embarrassed going and asking their friends, neighbors and family members for moneys when they're running a little short, so we offer that alternative to them."

Munczenski's company, Check Advance, charges 17.65 percent for a 14-day loan (458 percent APR). "Compared to what banks charge for bouncing checks and what merchants charge when they [customers] write bad checks, we are cheaper than those sources," he said.

He contends that interest rates in the payday loan biz are high because the default risk is also high, somewhere around 12 percent of all borrowers in his company's experience. "We have a tremendous amount of people who, number one, file bankruptcy; number two, just refuse to pay us. Three, you've got a lot of scam artists out there; they come in and use the service and you don't find hide nor hair of them anymore."

Check Advance operates in six states--Wisconsin, Ohio, Kentucky, Tennessee, Mississippi and Arizona. Arizona has a total of eight Check Advance stores.

Some payday lenders have other financial operations, such as check-cashing or mainstream banks. But Check Advance offers only payday loans or, as Munczenski calls it, "deferred presentment." "In Arizona we're considered deferred presentment because we're charging a fee. It's not an interest we're collecting. In other places, it is interest."

He blames banks' loan policies for the growth of his industry. "Typically, the banks won't loan under a thousand dollars any more. They say that to do loans of this nature, it's just too costly for them. Unfortunately, it's the banks who put this type of service in business."

McGrig of Consumer Credit Counseling Service, however, believes that payday lenders are basically predatory. "These [borrowers] are people who are in a financial crisis at the moment and the problem is that they are not always making rational, sound financial decisions in that situation. The other thing is that you cannot borrow your way out of debt. We say that all the time at CCCS. If you're using this type of service as a method of budgeting, something is not right. It is a real red flag for you. There need to be some serious changes."

Another profile of payday-loan borrowers comes from the Wisconsin Department of Financial Institutions. According to its analysis of payday loan borrowers in that state, released last June, "Statistically, 54 percent of the payday loan borrowers were female, 46 percent were male. The average age of all borrowers was 39."

Their income was relatively modest. Of 321 borrowers surveyed, 229 had a take-home income of $18,675. Those who reported incomes before deductions averaged $24,673. "The average loan length ... is approximately 14 days ... . The average disclosed annual percentage rate (APR) of all loans reviewed was 542.2 percent ... . [A] shorter loan term results in a higher APR. For example, if a loan term is three days instead of the typical 14 days, a borrower could have a disclosed APR of over 1,000 percent."

Critics believe the entire payday loan industry is like a predatory animal crouched by a water hole, waiting for a victim. "Most of my clients are hit with a crisis that pushes them over the edge," said Jan Brownlee, a counselor at the non-profit Consumer Credit Counseling Service. "Most start a payday loan fairly low, at $100 or $200. But then bad things happen and they borrow a little more. By the time they get to the max they can borrow, $400 or $500, they are sunk. That's two weeks of a paycheck, so they have to continue borrowing to pay money for things they have to have.

"I have a client who has eight separate payday loans, which is illegal." Borrowers are required to sign a statement specifying they have no outstanding payday loans with other lenders. "So he could be prosecuted because he is perpetrating fraud. But his situation came about because he lost his job and was without income for four months."

"The industry caters to low-income people," said Brownlee. "If someone needs a car repair and borrows $500 and is living from paycheck to paycheck, how is he going to come up with an extra $500 to pay back the loan?

"Society is letting these people down. The industry preys upon people who can least afford it. Banks will not give small loans, so the industry is really filling a need because there are a lot of people out there in this situation. But that doesn't make me feel any more comfortable about it. It's legalized loan sharking, that's what it is. When you're charging somebody 400 or 500 percent interest, that's legal loan sharking. That should be criminal."

According to Brownlee, though, at least one payday lender will show some compassion to its victims. Check Advance "will allow $20-a-month payments on principal [when a borrower is deeply in debt]. It will not charge interest or late fees and will stop calling people [to harass them about their debts]. But not every place does that." Dennis Munczenski confirms Brownlee's remarks. He says his company attempts to help borrowers avoid bankruptcy.

Consumer Credit Counseling Service has a debt repayment program. "We contact a person's creditors and renegotiate the terms of their debts," said McGrig of CCCS. "We ask them to lower interest rates, waive fees, waive interest, take smaller payments--all designed to get the person out of debt. This is after a counseling session where we go over budgets and debts and incomes. It is a comprehensive program." Most clients learn about CCCS from credit unions and word of mouth. There are also TV commercials that suggest people with debt problems can get counseling from the non-profit organization.

The local CCCS number is 795-2227.


ELOISE STARSON HAS sought counseling and is trying to whittle down her payday-loan debt a little at a time. "Maybe next time I will borrow only $400 and pay back $452 or something," she said. "I will definitely not get any deeper. I think of myself as a victim because I haven't been able to get free and have been stuck."

The good news in her life is that her daughter is back living with her. "She didn't appreciate being in jail," said Starson. "And I didn't like it, either."

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