June 27, 2008 -- As his oldest son battled cancer, Richard Gilmore battled lenders who charged him interest rates of 391 percent.
Gilmore, an Ohio social worker, said he fell behind on his bills after struggling with his own medical problems. Seeking quick cash, he obtained several $500 loans from what are known as payday lenders -- businesses that make small, short-term loans with fees and interest rates that, calculated on an annual basis, far exceed rates charged by traditional banks.
Payday lenders say that they're often the only choice for cash-strapped folks with battered credit. But Gilmore said that, for him, they proved a poor choice: The stress of trying to pay off some $7,000 in loans, he said, made him nearly suicidal.
Then, in the midst of his financial nightmare, Gilmore's 19-year-old son was diagnosed with stage 3 lymphoma. In an effort to put his financial troubles behind him and focus on his son, Gilmore pleaded with payday lenders to let him work out a repayment plan. The lenders, he said, wouldn't budge.
"I was having a really hard time just making it week to week," Gilmore said.
Tracy Frysinger has a different story to tell. A single mother in Cleveland with two grown daughters, Frysinger, 42, spends her days working in the accounting department of a manufacturing company and her nights in college, working toward a degree in business management.
When money is tight, she said, she is grateful for payday loans.
Frysinger estimates that she has taken out about 20 payday loans in the past two years, also with interest rates at about 390 percent. She has used the loans -- each worth a few hundred dollars -- to pay for expenses ranging from textbooks to car repairs.
With a poor credit history, Frysinger said she doesn't qualify for bank loans. And, she added, "I don't have family to go to to say 'Hey, my car is broken down, can you help me out?'"Payday loans, she said, work for her because she's careful with her money.
"If you think that you're going to borrow something, you have to be able to manage and budget your money," she said. "If you can't do that, you shouldn't be trying to go there to borrow money."
Stories like those of Gilmore and Frysinger fuel what has grown into a national standoff between payday lenders and those who oppose them. Legislative and legal battles abound from coast to coast as public officials debate whether payday lenders hurt or help Americans who have fallen upon hard times.
Waiting Until Payday
Traditionally, payday lending works like this: A borrower provides the lender a postdated check for the amount being borrowed plus loan fees. The lender holds on to the check for the term of the loan -- typically two weeks -- and cashes it on the borrower's next payday.
According to the Community Financial Services Association of America, a payday lending trade group that represents nearly two-thirds of the nation's payday lenders, the typical fee charged by lenders is $15 for every $100 borrowed, which, if calculated over a year, results in a 391 percent interest rate.
But payday lending opponents say they've seen rates reaching above 1,000 percent and they accuse the industry of preying on vulnerable borrowers. They argue that payday customers often land in a "debt trap": They can't repay their loans on time and find themselves taking out additional loans or rolling over existing loans -- paying interest rates on the loans while delaying payment on principals -- to make ends meet.
Payday lenders "are counting on a borrower's inability to repay a loan," said Kelly Griffith of Stop Payday Predators, a group fighting payday lending in Arizona. "The problem with payday loans is the product itself is designed for people to fail."
Payday lending supporters, meanwhile, take issue with the three- and four-digit interest rates derided by their opponents. They counter that it's unfair to ascribe an annual interest rate to loans that are meant to be repaid over a period far shorter than a year.They also object to how they've been portrayed in the media. Steven Schlein, a spokesman for the Community Financial Services Association, said that among six top U.S. lenders -- Advance America, Check and Go, QC Holdings, Dollar Financial, CheckSmart and ACE -- the average default rate is 2 percent.
Schlein said that the opposition trumpets "horror stories" while ignoring the many who have benefited from payday loans.
"If bounced check fees were $10 [instead of $35], this industry wouldn't exist," he said. "If banks and credit unions made small loans, this industry wouldn't exist. For many people, this is absolutely the only way to get a $300 loan."
Capped Out of Business?
Arizona and Ohio are among the latest battlegrounds in the payday lending turf war.
Payday industry proponents in Arizona have put forth a ballot initiative that would allow payday lending to remain legal in the state while adding tighter regulations -- including a ban on rolling over loans -- to the industry. As of now, the 2000 law that originally authorized payday lending in Arizona is set to expire in 2010.
In Ohio, Gov. Ted Strickland signed into law earlier this month a measure that caps interest rates on payday loans at 28 percent. Payday lenders there are campaigning to repeal the law.
Though the U.S. payday industry garners $6 billion in revenue a year, lenders have argued that interest rate caps such as the one passed in Ohio and in other states make it too expensive for them to continue offering payday loans.
Yolanda Walker, director of public relations for Cash America, which owns the Cashland chain of payday lending stores in Ohio, said that the 28 percent cap amounts to less than 10 cents a day in interest for the company's payday loans.
"We have to keep the lights on," she said.
Christopher Peterson, a University of Utah law professor who has studied payday loans, has little sympathy for lenders who say they simply can't afford to charge lower interest rates.
"Even if the loan is expensive to administer, that doesn't mean that it's socially beneficial," he said. "We wouldn't say it's OK for this heroin dealer to sell heroin because he's barely breaking even."
From Laws to Lawsuits
Peterson said that payday loans, or loans with similar durations, and interest rates have existed throughout American history -- and have been illegal for most of it.
Dating back to the days of the Declaration of Independence, he said, "social leaders recognized that payday loans were destructive to society and taking excessive amounts of interest was immoral."
It was not until the late 1980s, he said, that things began to change. By then, he said, payday lenders who had been operating illegally began forming trade associations and lobbying to be recognized under the law.
A shift in politics, Peterson said, also proved key to the evolution of legal payday lending: Conservative evangelicals who had once opposed the practice, he said, changed their minds after aligning themselves politically with "big business" conservatives.
"Some of the strongest proponents of usury regulation had their voices silenced," he said.
Since then, he said, more than 30 states have legalized payday lending.
Meanwhile, the number of payday lending locations has grown substantially: Schlein, of the Community Financial Services Association, said there are roughly 24,000 payday lending storefronts today, up from 10,000 eight years ago.
But the tide may be turning.
In passing its interest rate cap law, Ohio is the latest of five states -- the others are North Carolina, Georgia, New Hampshire and Oregon -- to restore payday lending restrictions. The District of Columbia has also passed a payday lending rate cap -- 24 percent -- and the federal government made it illegal last year for creditors to grant payday loans to members of the military.
Public officials and private lawyers have also headed to court to fight payday lending.
In Arkansas, lawyer Todd Turner said he has represented at least 30 class-action cases against lenders. Turner said that payday lenders operating in Arkansas are trying to skirt interest rate limits set in the state's constitution.
"I'm going to keep filing lawsuits and I hope that civil law will ultimately close a lot of these places," he said.
In West Virginia, where payday lending was never legalized, the state attorney general's office sued or settled with dozens of Internet-based payday lenders making loans to state residents. The state is also investigating collections agencies employed by payday lenders.
"Eventually, when there's no one there to collect them, it'll be another roundabout way of making them stop," assistant attorney general Normal Google said.
Schlein said that the payday lending industry has been undeterred by the challenges it has faced so far. The legal status of payday loans, he said, has been debated in different states for the past 10 years.
"We win some, we lose some," he said, "and things come out in the middle."
A tentative win for the industry may come from California, where a bill in the state assembly this spring proposing a 36 percent interest rate cap on payday loans has failed to make headway.
California assemblywoman Lois Wolk was among the critics of the bill. She echoed the argument set forth by payday lending proponents that, for some borrowers, payday loans are the only option.
Wolk said that visiting payday lending stores and meeting their customers helped inform her opinion.
"The people that I talked to were nurses, service people. ... They all said this was a great convenience to them and they knew it was costly," she said. "They had no choice because there weren't alternatives available to them.
"I think until there are clear alternatives that are available and achievable," Wolk said. "I was very unwilling to make draconian change in the market."
Looking Beyond Payday Loans
Payday lending opponents argue that there are viable alternatives to payday loans, such as working out payment plans with bill collectors, planning ahead by setting aside emergency funds or using credit cards.
Leslie Parrish, at the Center for Responsible Lending in North Carolina, said that the payday industry's own surveys show that most borrowers have access to credit cards.
Parrish said there's a lot of confusion surrounding credit cards. Consumers may believe that using their cards will prove more expensive than using payday loans. But, Parrish said, with two-digit interest rates, credit cards are actually cheaper options than payday loans.
Parrish said that Ohio, in particular, is offering incentives to banks and credit unions to make short-term loans with low interest rates more widely available to consumers.
Still, payday lending supporters argue that when states ban payday loans, the results aren't pretty and, to make their case, they often cite a study conducted by two staff members at the Federal Reserve Bank of New York.
They found that households in Georgia and North Carolina -- both states that enacted bans on payday lending -- had more bounced checks, more complaints about debt collectors and filed for bankruptcy more often than households with access to payday lending.
"Georgians and North Carolinians do not seem better off since their states outlawed payday credit," a report on the study concluded.
Payday lending critics are skeptical of the study. Peterson said that the Georgia and North Carolina check clearance sites cited in the study included checks stemming from Virginia and South Carolina, where payday lending is legal. He said that the study also failed to control for the financial hardship caused by 2005's Hurricane Katrina.
If the study had been published in a journal, Peterson said, "economists would tear it to pieces."
In Ohio, former payday borrower Richard Gilmore and borrower Tracy Frysinger are each hoping for different outcomes as the payday lending industry fights to repeal the cap it says would put payday lenders out of business.
Frysinger hopes the repeal efforts succeed and criticizes lawmakers who sought to shut down payday lenders in the first place.
"These people that make these laws and decide these laws are good for the general public don't have any clue what it's like to have a need to borrow $300 or $400," she said. "They're not ever put in the position."
Gilmore wants to see the repeal effort fail. Before the governor signed the payday interest rate cap, Gilmore testified before the Ohio state legislature about his experiences with payday lending.
"I didn't want anybody to have to go through what I had gone through," he said. "You can't really do it justice unless you've live it yourself."
Today, things look brighter for Gilmore: His son has recovered from cancer, he said, and he has managed to get rid of most of his payday loan debt through debt forgiveness and court-brokered repayment plans.
"I mainly consider myself lucky because my son came through his sickness," he said. "It was his sickness that gave me the guts to finally put this to an end."