States, churches take aim at payday lenders

By Jim DuPlessis - Jim DuPlessis

MULLINS -- Kathryn Gales was a 56-year-old widow when she made a series of decisions that left her without a car and hundreds of dollars in debt to payday lenders.

"I was stupid," Gales says, sitting in the living room of her one-bedroom apartment. "I did it on my own, but it was a bad mistake. It just turned into a mess."

Gales' debts were eliminated after her pastor intervened and a lawyer sued the lenders.

But critics of payday lenders say that outcome is rare for the thousands of South Carolinians who take out payday loans each year. Those critics want tougher state restrictions on the sky-high-interest-rate lenders or an outright ban.

Payday lenders say most of their borrowers are responsible and don't get caught in a spiral of debt.

Government should not step in to limit consumers' choices, they add. They say their service allows people to get small amounts of money at a cost that is less than a chain of bounced checks or utility cutoff fees.

This week, nearly 10 years after it legalized payday lenders, the S.C. General Assembly is on the verge of deciding whether to restrict them.

At 9 a.m. Thursday, a House subcommittee will hear testimony from consumer credit counselors and loan companies on a bill passed Feb. 19 by the Senate.

The Senate's proposal could go into law if it passes the House, differences are worked out between House and Senate leaders, and it is signed by the governor.

If no action is taken before the session ends in June, the bill will die.

Payday lenders are under attack in other states as well.

They have been pushed out of business in Georgia, North Carolina, Pennsylvania and Oregon in recent years.

This year, New Hampshire and Virginia have passed laws restricting payday lenders. Arkansas' attorney general suspended payday lenders' activities in March and ordered them to forgive outstanding loans, alleging they violated that state's constitution.

There is other heat as well:

• Former borrowers in South Carolina and five other states have filed class-action suits against Spartanburg-based Advance America, the nation's largest payday lender. Several S.C. legislators, some of them sponsors of the bill restricting the industry, represent the former borrowers in one of the suits.

• The worsening economy is forcing more and more borrowers to default, increasing lenders' charge-offs for bad loans and cutting into their profits.

• The S.C. Baptist Convention and the S.C. Conference of the United Methodist Church -- the state's two largest denominations -- passed resolutions last year condemning predatory lending.

'Something's wrong'

Gales didn't have a history of debt troubles. In fact, she had little experience with debts at all.

She had been driving a 1984 Pontiac that she had bought used for $900 in cash. But it was breaking down. Her church, First Baptist of Mullins, gave her a 1999 Chevrolet Lumina.

Her husband died in June 2006.

Gales had no children, no close relatives. For the first time in her life, she had no one to help her. At age 56, Gales never had signed a mortgage or borrowed money for a car.

A few weeks after her husband's death, Gales took out a title loan for $815 on the Chevrolet. The loan required her to repay $2,625 over 12 months or lose the car.

Gales started having trouble making the $219 a month title loan payments, so she took out payday loans. She made 10 title loan payments and then lost her car. On top of that, her payday debts had climbed to more than $1,400 -- her total income for two months.

"Stupid me," Gales said. "I knew I shouldn't have done it, and I've regretted it every day since."

Over six months, Gales took out 18 loans with payday lenders.

When Gales told her pastor, the Rev. Jim Kirkland of Mullins First Baptist Church, what had happened, he was outraged that many of the companies had been willing to lend $600 at a time to a woman on a fixed income of $700 a month.

"They loaned her as much as her total monthly income in the same day," he said. "They said they had lending criteria. What criteria? The bottom line is they have no criteria.