Just Business- or preying on the weak?

The limits held profits down and kept many people out of the business. A couple of Kansas City lenders in the 1980s provided professional, clean service to clients who needed to fill a gap in their finances in a legitimate way. The rest -- no more than six or seven -- did business out of walk-in shops regulated only by the free market.

During the Bush administration, the short-term lending industry built a strong lobby that brought its interests to state legislatures. The industry began to grow in states that had begun to regulate the industry more formally, at the same time allowing higher interest and fees.

In 1990, Missouri legislators decided to do the same. The ensuing law allowed the director of the Division of Finance, now an arm of the Missouri Department of Economic Development, to establish rates based on those of loan businesses in states contiguous to Missouri -- essentially pinning the interest, fees, and terms for small loans on what the market would bear. Collection costs, including bad-check charges and attorney fees associated with prosecuting a bad check or breach of a loan contract, were not considered fees or charges and could be levied against the borrower.

"What happens," says Dale Irwin, who is a partner in the law firm Brown works for, "is that when you introduce legislation to regulate a business that people once thought wasn't good for folks, you begin to legalize the behavior that was once thought harmful."

"Essentially," Brown says, "you say that the debt, no matter what the circumstances in which it was obtained, and the inability to pay it off, is the fault of the debtor. It (the legislation) was allegedly done to get government off the backs of business. But what it is, is a big step back toward putting children back into coal mines. It is a belief in economic Darwinism, where people really believe that if someone is poor, they desire to be poor.

"We need Dickens to return and remind us that people who step on the weakest are the worst criminals of all."

Getting serious Since 1990, according to Eric McClure, acting commissioner of the Division of Finance, payday lenders grew from "just a few legitimate businesses in 1990 to 200 in 1995, 250 in 1996, and 500 in 1998. The state had nearly 630 at the end of November 1996."

According to the Consumer Finance Services Association (CFSA), a short-term small-loan lender advocacy and lobbying group, more than 7,000 of the payday-loan or cash-advance businesses operate in the United States. States license about 100 new short-term lending businesses each month.

"We license the businesses and examine them to see if they are in compliance with the federal Consumer Protection Act," says McClure. "For the payday-loan companies, the rate maximum is set by this office. Generally, we want to make sure that the contracts for the loans are in the proper form. We make sure that all disclosures on rate and terms are presented so the borrower knows what they are paying on the amount they are borrowing."

Seven state examiners scrutinize Missouri's more than 600 payday-loan businesses. Operators pay a $300 annual license fee, and they can charge a $5 origination fee per loan and up to 10 percent of the loan's principal, to a limit of $15 per $100. The maximum fee a small-loan business can charge is $45; the maximum it can lend is $500.

Loans can be made for terms of two weeks to 10 months. Most payday-loan businesses use the two-week limit. The maximum annual percentage rate, including all fees, is 391 percent on loans with two-week repayment terms.

Proliferation of short-term lenders also has occurred in Kansas, especially in urban Kansas City, Wichita, and Topeka. Communities in which factory-farm and livestock operations have opened, and in rural western Kansas, also have seen new short-term lenders enter the market. In Kansas, short-term lenders can charge basically the same fees as those in Missouri. Kansas has a sliding scale for fee maximums, which are capped at $56.60. The maximum loan limit is $890, and the maximum annual percentage rate is 390 percent.

Behrens says none of the loan cost information means anything to a desperate person. "When you are standing there looking at a contract, it says right on it, real prominently, what the interest rate is," he says. "Sure, it seems high, but you are thinking in terms of coming up with $15 on a hundred bucks in two weeks. That doesn't seem like much when you really need the money."