Payday loan stores thrive despite the crackdown.
ATLANTA (AP) -- When Pam Sanson needed a quick $300 to pay the bills, she never expected her decision would cost her more than $900 in interest in just six months.
Sanson had taken out what's known as a payday loan, a quick short-term loan with a very high annual interest rate -- 600 percent in Sanson's case. Such loans are prohibited in most states because they exceed legal limits on interest rates, yet thousands of loan stores promising cash until payday continue to operate around the country, especially in poor, minority neighborhoods.
The weakened economy has helped make these loans more attractive -- and even harder to pay off.
"It's like a virus spreading out there," said Georgia Insurance Commissioner John Oxendine, who has been trying to crack down on lenders who prey on the poor. "It's very frustrating -- we'll shut one guy down and a couple more will pop up."
Sanson, who lives south of Atlanta, borrowed the money last January and wrote a check for $375 that the lender agreed not to cash as long as she and her husband paid the $75 interest on the loan every two weeks.
"At the time, we were both working, and I didn't see any reason I wouldn't be able to pay it off the following payday," she said.
What went wrong
But her husband lost his job, and her hours at Wal-Mart were cut because she had surgery. Eventually, Sanson couldn't afford to pay the $75 interest, much less the $300 principal.
Her check bounced and USA PayDay threatened to send detectives to put her in jail, she said. Sanson hasn't heard from USA PayDay since she contacted the state insurance commissioner's office.
There are as many as 24,000 payday loan stores nationwide that take in $2.4 billion in fees and interest each year, according to a 2001 report from the Consumer Federation of America.
The companies charge as much as $30 every two weeks per $100 borrowed -- the equivalent of a 720 percent annual interest rate.
The companies are able to evade state limits on annual interest rates -- typically between 25 percent and 60 percent -- by using a loophole in the National Bank Act.
The law allows so-called "rent-a-bank" agreements, in which payday lending chains pair up with banks in states with lax lending laws so they can export high interest rates.
Officials at the Office of the Comptroller of the Currency, which charters federal banks, have gotten four federal banks to discontinue their dealings with payday lending companies by contending they weren't doing business in a safe and sound manner.
But companies still use state banks to get money for loans at high interest rates. State banks are regulated by the Federal Deposit Insurance Corp., which hasn't pursued payday lenders as aggressively as the OCC.
USA PayDay owner Richard D. Clay II didn't return phone calls seeking comment. But a lobbyist for an industry group, the Georgia Community Financial Services Association, argues that payday loan companies provide a valuable service to people who need money in a pinch.
"It can help pay medical expenses for a sick child, or it can carry families through for their food until the next paycheck comes in," lobbyist Jet Toney said.
The average person who uses payday loan services is a young parent making between $25,000 and $50,000 a year, said Penny Pompei, executive director of Community Financial Services Association, a payday industry group.
Payday loan opponents say they target the poor and trap people in an endless cycle of debt.
States such as Ohio and New Mexico have been trying to pass laws that cap interest rates and provide customers better information about how much money they'll pay in interest.