The Big Squeeze

Thinking about taking out a payday loan? Think again, sucker.

Teresita Perico is an old woman now, and embarrassed besides. She'd rather not discuss the letter Dallas County District Attorney Bill Hill mailed her recently, the one saying she faced jail time for evading her debtors. It's caused too much grief, this letter, "and it's taken a toll on her health," says Tess Young, Perico's daughter.

So Tess Young will tell the story. And she'll say this up front: "Nobody should get away with charging that much interest."

Perico's husband, Jose, has Alzheimer's and lives in a retirement home in Irving. Young needs help, too. She's recovering from a divorce. Last July, needing money, Perico turned to Americash, a payday lender. She repaid her first loan and took out another in September, this one for $500 but charging $152 in interest. "To charge that much is exorbitant," Young says. "You're already poor or strapped for cash to begin with."

Cash America's Tom Bessant says without payday 
lenders, the people who most need money wouldn't get 
Cash America's Tom Bessant says without payday lenders, the people who most need money wouldn't get it.

Then trouble hit. Perico's bank statement carried transactions that weren't hers. Young doesn't think Americash manipulated her mother's account and neither does Perico. But Perico closed it to be safe. The same day she closed the account, she opened another. That's when Americash cried foul. It couldn't extract from Perico's account the money she owed the company. The checking account she'd used to take out the loan no longer existed.

Soon after, the letter from the district attorney came. Perico faced prosecution for writing a bad check and evading the law. She faced the possibility of jail time.

"This is repugnant, especially in a state that prides itself on Christian values," says Harvey Joseph, the Dallas lawyer who took Perico's case pro bono. "Payday loans prey on the poor and the desperate and the ignorant."

But Perico soon found relief. Joseph explained Perico's situation to the DA's check-writing department, and records show that on May 23, Perico's case was dismissed. "They seemed very sympathetic, very helpful," Joseph says of the DA's office. Americash didn't respond to an e-mail seeking comment, and the DA's office didn't answer calls asking how often a payday lender forwards accounts to the district attorney. But a clerk working in Oak Cliff at Justice of the Peace Precinct 5-1, where Perico's file is held, says she sees cases similar to Perico's but with worse outcomes "all the time."

"I just keep coming back to this idea of Christianity," Joseph says. "The New Testament was against interest. So how can a legislature--how can a governor, who signed a bill in a Fort Worth church [in June], allow these people to get away with charging 780 percent APR?"

Well, there are two ways to answer that. The first is that state Representative Dan Flynn, of East Texas, didn't want payday lenders exploiting Texans anymore. The second is that he might have allowed it to happen anyway.

Flynn proposed a bill this past session that would have limited the amount payday lenders could charge to $15 for every $100 borrowed. Most payday lenders charge between $15 and $20 for every $100 borrowed. Teresita Perico's loan was $33 for every $100. "I just didn't feel like there was any consumer protection," Flynn says. "I was trying to stop the cycle of debt."

Celia Hagert is a senior policy analyst at the Center for Public Policy Priorities, an Austin think tank hoping to better the lives of poor and moderate-income Texans. "The main problem with the bill is that it would have allowed [payday lenders] to basically triple the interest rates," Hagert says.

Hagert is referencing a complicated Texas formula that involves a flat fee, interest per annum, dividing these numbers over here, multiplying those over there and then dividing some more. The best way to grasp what she means is to imagine a $300 payday loan. Under current Texas law, the annual percentage rate for a two-week loan is 135 percent. Under Flynn's bill, the APR for a two-week loan could be as high as 390 percent.

"This legislation came from the industry, disguised as a regulatory bill," Hagert says.

It's true that Flynn negotiated with payday lenders on this. If he hadn't, he says, the lenders would have never agreed to a government-instituted cap of $15 in interest for every $100 borrowed. The lenders would have continued charging, say, $33 in interest for every $100 borrowed, he says. But it's also true the opportunity existed for Flynn to be wooed by the payday industry. It sent 16 lobbyists to Austin for the session, at a cost of perhaps $1.1 million, according to filings with the Texas Ethics Commission.

But Flynn maintains he's no dupe. He's a former bank regulator who says Hagert and critics like her always exclude two salient points from their arguments. The first is that payday lenders don't abide by Texas law anyway. Some charge as much as 780 percent APR. His bill would have limited APR to 390 percent. But his bill, he says, should never be viewed in terms of APR; it would have limited the number of loan extensions to two. And this is the second point. So instead of paying off interest week after week, month after month, but never the principal, Flynn's bill said a payday lending client could pay down the interest twice, and then the payday lender couldn't extend the interest a third time. This, he says, makes Hagert's APR argument irrelevant, because the interest would never extend through a year. It would only extend through one month.

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Payday loans can turn into a big problem if you delay the repayment. The interest keeps piling up as time passes by. In order to avoid such situations, do an in-depth study of your repayment plan and terms of agreement before getting the loan. Otherwise you will get stuck under a large stack of debt and getting out will not be easy.