"Pay day" loans exacerbate housing crisis

By Nick Carey

CLEVELAND (Reuters) - As hundreds of thousands of American home owners fall behind on their mortgage payments, more people are turning to short-term loans with sky-high interest rates just to get by.

While hard figures are hard to come by, evidence from nonprofit credit and mortgage counselors suggests that the number of people using these so-called "pay day loans" is growing as the U.S. housing crisis deepens, a negative sign for economic recovery.

"We are hearing from around the country that many folks are buried deep in pay day loan debts as well as struggling with their mortgage payments," said Uriah King, a policy associate at the Center for Responsible Lending (CRL).

A pay day loan is typically for a few hundred dollars, with a term of two weeks, and an interest rate as high as 800 percent. The average borrower ends up paying back $793 for a $325 loan, according to the Center.

The Center also estimates pay day lenders issued more than $28 billion in loans in 2005, the latest available figures.

In the Union Miles district of Cleveland, which has been hit hard by the housing crisis, all the conventional banks have been replaced by pay day lenders with brightly painted signs offering instant cash for a week or two to poor families.

"When distressed home owners come to us it usually takes a while before we find out if they have pay day loans because they don't mention it at first," said Lindsey Sacher, community relations coordinator at nonprofit East Side Organizing Project on a recent tour of the district. "But by the time they come to us for help, they have nothing left."

The loans on offer have an Annual Percentage Rate (APR) of up to 391 percent -- excluding fees and penalties. All you need for a loan like this is proof of regular income, even government benefits will do.

On top of the exorbitant cost, pay day loans have an even darker side, Sacher notes. "We also have to contend with the fact that pay day lenders are very aggressive when it comes to getting paid."

Ohio is on the front line of the U.S. housing crisis. According to the Mortgage Bankers Association, at the end of the fourth quarter Ohio had 3.88 percent of home loans in the process of foreclosure, the highest of all the 50 U.S. states. The "Rust Belt" state's woes have been further compounded by the loss of 235,900 manufacturing jobs between 2000 and 2007.

But while the state as a whole has not done well in recent years, pay day lenders have proliferated.

Bill Faith, executive director of COHHIO, an umbrella group representing some 600 nonprofit agencies in Ohio, said the state is home to some 1,650 pay day loan lenders -- more than all of Ohio's McDonald's, Burger Kings and Wendy's fast food franchises put together.

"That's saying something, as the people of Ohio really like their fast food," Faith said. "But pay day loans are insidious because people get trapped in a cycle of debt."

It takes the average borrower two years to get out of a pay day loan, he said.

Robert Frank, an economics professor at Cornell University, equates pay day loans with "handing a suicidal person a noose" because many people can't control their finances and end up mired in debt.

"These loans lead to more bankruptcies and wipe out people's savings, which is bad for the economy," he said. "This is a problem that has been caused by deregulation" of the U.S. financial sector in the 1990s.

Because of the astronomical interest rates there is a movement among more states to implement a cap of 36 percent APR that is currently in place in 13 states and the District of Columbia.

"Thirty-six percent is still very high," said Ozell Brooklin, director of Acorn Housing in Atlanta, Georgia where there is a cap in place. "But it's better than 400 percent."

SPRINGING THE TRAP

But even in states like New York where pay day loan caps or bans exist, loopholes allow out-of-state lenders to provide loans over the Internet.

Janet Hudson, 40, ran into pay day loans when she and her fiance broke up, leaving her with a young son and a $1,000 monthly mortgage payment. Short on cash, she took out three small pay day loans online totaling $900 but fell behind with her payments. Soon her monthly interest and fees totaled $800.

"It almost equaled my mortgage and I wasn't even touching the principal of the loans," said Hudson, who works as an administrative assistant.

After falling behind on her mortgage, Hudson asked Rochester, New York-based nonprofit Empire Justice Center for help. A lawyer at Empire, Rebecca Case-Grammatico, advised her to stop paying off the pay day loans because the loans were unsecured debt.

"For months after that the pay day lenders left me voice mails threatening to have me thrown in jail, take everything I owned and destroy my credit rating," Hudson said. After several months, the pay day lenders offered to reach a settlement.

But Hudson was already so far behind on her mortgage that she had to sell her home April 2007 to avoid foreclosure.

"Thanks to the (New York state) ban on pay day loans we have been spared large scale problems, but Internet loans have still cost people their homes," Case-Grammatico said.

A national 36 percent cap on pay day loans to members of the military came into effect last October. The cap was proposed by Republican Senator Jim Talent and Democratic Senator Bill Nelson -- citing APR of up to 800 percent as harmful to the battle readiness and morale of the U.S. Armed Forces.

There are now proposals in other states -- including Ohio, Virginia, Arizona and Colorado -- to bring in a 36 percent cap.

And, in Arkansas, attorney general Dustin McDaniel sent a letter to payday lenders on March 18 asking them to shut down or face a lawsuit, saying they have made a "lot of money on the backs of Arkansas consumers, mostly the working poor."

Alan Fisher, executive director of the said up 2 million Californians have pay day loans. There is a proposed 36 percent cap awaiting debate in California's state assembly.

"We expect pay day loans will make the housing crisis worse," said Alan Fisher, executive director of the California Reinvestment Coalition, an umbrella group of housing counseling agencies. California, a state with an estimated 2 million pay day loans, the assembly is set to debate a bill on introducing a 36 percent cap.

"Thanks to the credit crunch and foreclosure crisis, state and federal policy makers are taking a hard look at the policy of credit at any cost," the CRL's King said. "But more needs to be done, fast."

(Reporting by Nick Carey; Editing by Eddie Evans)

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