When Jeffrey Smith needed some quick cash to pay a medical bill, he turned to a payday loan store near his home outside Phoenix.
He eventually took out a string of payday loans and fell into a vicious cycle in which he would call out sick from work so he could drive all over town to pay off loans and take out new ones. The experience left him in bankruptcy, lying to his wife and fighting thoughts of suicide.
Stories like Smith's and a growing backlash against payday lending practices have prompted legislatures around the country to crack down on the businesses.
In the most severe case, Arizona lawmakers are on the verge of shutting down the entire industry in the state. A law took effect in Washington this year capping the amount of payday loans and the number that a borrower can take out in a year. And in Wisconsin, lawmakers are locked in a heated battle over whether to regulate the industry.
Payday lenders say they are providing an important service, especially in a dreadful economy where people are short on cash. Detractors say the industry preys on desperate people with annual interest rates that routinely exceed 400 percent.
"It's sort of like a twisted person that's standing on the street corner offering a child candy," Smith said. "He's not grabbing the child and throwing him into a van, but he's offering something the child needs at that moment."
Payday loans are short-term, high-interest loans that are effectively advances on a borrower's next paycheck.
For example, a person who needs a quick $300 but doesn't get paid for two weeks can get a loan to help pay the bills, writing a postdated check that the store agrees not to cash until payday. The borrower would have to pay $53 in finance charges for a $300, two-week loan in Arizona — an annual interest rate of 459 percent.
Payday loan stores are ubiquitous in Arizona, especially in working-class neighborhoods of Phoenix where the businesses draw in customers with neon lights and around-the-clock hours.
Payday lenders in Arizona several years ago were granted a temporary exemption from the state's 36 percent cap on annual interest rates. The exemption expires June 30, and the industry says the interest cap is so restrictive that it will have to shut down entirely.
Bills that would have kept the industry alive languished in the House and Senate, and the year's third and final attempt was pulled Tuesday amid a lack of support.
Consumers frustrated with the economy "look for a dog to kick" because they're angry with the financial institutions they blame for the Great Recession, said Ted Saunders, chief executive of Dublin, Ohio-based Checksmart, a payday lender that operates in 11 states including Arizona.
"They want to find a villain," Saunders said. And opponents "have done a good job of painting a big X on my back."
Payday lending opponents say the industry depends on trapping some borrowers in a cycle of debt where they continually renew their loan or take out new ones because they can't afford to pay the debt while still covering their daily expenses.
Eventually, the fees can surpass the value of the initial loan so the lender profits even if the borrower defaults.
Industry proponents say the market has shown a need for short-term, small-dollar loans that aren't generally available from banks or credit unions, especially with traditional lenders being more conservative in the down economy.
They say the industry supports working families that otherwise wouldn't have access to credit in an emergency.
Supporters also say taking a payday loan is cheaper than paying a late fee or bouncing a check to cover emergency costs like fixing a car or keeping the electricity turned on.
The voting public doesn't seem to be buying the argument.
In 2008, voters in Arizona and Ohio soundly rejected industry-backed measures that would have allowed payday lenders to continue charging high annual interest rates.
A group in Montana is collecting signatures for an initiative asking voters to decide whether to cap interest rates at a level that would doom the industry.
"It's just a fairness issue," said state Sen. Debbie McCune Davis, a Phoenix Democrat who led the fight at the Legislature against payday loans. "I think when people work for a living they're entitled to have financial instruments that are ethical in the way that they operate."
Industry backers say the election results aren't a good guide because many voters have no experience with payday loan services.
"Our customers, they don't have much of a voice in these fights," said Steven Schlein, a spokesman for the industry lobbying group Consumer Financial Services Association of America.
Arizona wouldn't be the first state to kick out payday lenders. North Carolina let lapse a temporary law authorizing payday loans, and the District of Columbia repealed its law allowing them.
Ohio tried to cap interest rates at 28 percent, but some payday lenders have survived by using a state law allowing them to charge loan origination fees.
The payday loan industry has succeeded in fighting back attempts in Congress to crack down on their business thanks to an expensive lobbying effort.
When Arizona's law expires, executives have said they'll try to keep open some of their 650 stores in the state by stepping up their other lines of business, including car title loans, check cashing and prepaid debit cards.
"The payday statutes will evaporate out of the books, (but) the demand doesn't go away," industry lobbyist Lee Miller said. "Capitalism abhors a vacuum. Entrepreneurs will come forward and try to find a profitable way to meet that demand."
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