Payday lenders are spending millions of dollars to back ballot initiatives that challenge state restrictions on their cash-advance practices.The $85 billion payday industry provides short-term loans, usually secured with a check postdated to the borrower's next payday, with an interest rate that works out to an average of $15 per $100 borrowed on a two-week loan. The practice has come under fire partly because of the high interest rates.
Payday lending is illegal in 15 states, thanks in part to a wave of lending laws passed since 2001, and the federal government has capped interest rates on loans made to military families. Several cities have used zoning changes to limit the number of lenders, especially in low-income neighborhoods.
Now payday lenders are fighting back with the ballot measures. They are pouring $30 million into initiatives that will be on the Nov. 4 ballot in Arizona and Ohio, where payday-lending branches outnumber Starbucks and McDonald's outlets combined. The two states have laws that kicked in this year that cap annual interest rates at 36% and 28%, respectively, effectively outlawing payday lenders, which have a business model that depends on average annual rates of 391%.
"Most people think eliminating a credit option in a time of credit crisis is a bad idea," said Stan Barnes, chairman of Yes on 200, a political-action committee that is championing the Arizona ballot initiative. Yes on 200 is financed by the local affiliate of the Community Financial Services Association, a national payday-lending group.
Critics of the payday industry say lenders prey on the same low- and moderate-income families that took out subprime home loans. They cite stories of customers who get a two-week, $100 advance, and are still paying off the principal, plus hundreds of dollars in fees, years later.
"The payday-lending industry realizes that in some ways, this is the beach of Normandy," said Cleveland councilman Joe Cimperman of this year's initiatives. He helped pass a law that capped the number of payday lenders relative to Cleveland's population.
Ohioans for Financial Freedom, the payday-lending industry's group in the state, has spent more than $16 million on the initiative there, compared with $265,000 by their opponents, according to campaign-finance filings with the Ohio secretary of state. The group has used the money on ads and mailers promoting payday lending and on a signature drive to put the initiative on the ballot.
In Arizona, the wording of the ballot initiative suggests it would impose further regulation on payday lenders; in fact, it would roll back much tougher rules. Yes on 200 is promoting the initiative with a counterintuitive strategy: spending money on ads that depict payday lenders as unscrupulous. One ad says, "Arizonans agree: Payday lenders who rip off hard-working Americans need to be stopped," and asks voters to support the ballot initiative.
Payday lenders and some others argue that banning the practice altogether isn't the answer. The typical payday customer can't turn to traditional banks, which rarely offer small-dollar loans; other options for paying unexpected bills, such as overdrawing an account or bouncing a check, can be more costly than payday loans. "Simply ending payday lending by itself is not a terribly productive activity," said Rebecca Blank, a senior fellow at the Brookings Institution.
Experiments are under way to encourage small-dollar lending by traditional financial institutions. Pennsylvania's Better Choice loan program funds credit unions to issue lower-percentage-rate loans with longer-term payback plans than those offered by payday lenders. A program called Bank on San Francisco pays marketing costs for banks that agree to reach out to those who don't have accounts. Several Ohio banks have begun offering cash-advance programs.
Nicki Newman, who worked at two payday-lending stores during the past six years, most recently at Heartland Cash Advance in Chillicothe, Ohio, said if a customer didn't come back later for a new loan, the company would call them weekly. That ensured that the same 200 to 300 customers returned every two weeks to pay off their previous loan and take out a new one.
Ms. Newman's former employer at Heartland, Larry Hauser, said he fired her for criticizing payday lending at work. He said the marketing strategies used by his business are similar to those used by other industries.
"I call my customers every week for the same reason a car-servicing company sends you a message when it's time to get your oil changed," Mr. Hauser said.
