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Payday lending or predatory loans?

Senate Indian Affairs Committee hearing weighs testimony

WASHINGTON - A hearing of the Senate Indian Affairs Committee on predatory lending dwelt more on payday loans, and came with several cautions as to the difference.

Statistician Patricia Cirillo explained after the hearing that predatory loans - high interest rates and onerous terms, usually to people whose impaired creditworthiness has made it impossible to get better terms - come with every so-called ;'risk pool'' of the lending industry. The collapse of the national home mortgage lending market, in large part due to predatory loans from once-respected lending institutions to people of good credit standing, is a case in point, she said.

In any case, the conventional understanding is that so-called subprime loans, at interest rates above the prime rate available to the most creditworthy among us, are distinct from predatory lending, with its loan-shark interest rates and other advantage-taking business practices.

A committee spokesman said the hearing treated payday lending as a part of predatory lending, a distinction strongly resisted by Cirillo in written testimony and at the witness table by Jamie Fulmer, director of public affairs for Advance America Cash Advance, a payday lending company.

Fulmer appeared as a representative of the Community Financial Services Association of America, which has member organizations in and near Indian country, and he emphasized that the bad business practices of predatory lenders are simply bad business.

Payday lending is a comparatively new industry, he added, and CFSA best practices in payday lending, combined with reasonable regulation and advances for financial literacy in Indian country, will continue to spread measurable prosperity through communities.

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Committee chairman Sen. Byron Dorgan, D-N.D., began the session with reminders that not all payday lenders in Indian country are bad, and additional financial services there are ''good news.''

W. Ron Allen, secretary of the National Congress of American Indians and chairman of the Jamestown S'Klallam Tribe, called for financial literacy, banks, credit unions and community development financial institutions in Indian country, but also cautioned strongly against any kind of draconian new regulation that would drive payday lenders away from reservations. The short-term loans provided by payday lenders are essential to impoverished communities where so many live day to day without a good income cushion against hard times.

Tex G. Hall, past chairman of Three Affiliated Tribes in North Dakota, chairman of the Inter-Tribal Economic Alliance and CEO of the MTE Management private equity firm, went still further in written testimony.

''The fact is, payday loans are for small amounts ... usually for two weeks [at 15 percent interest] ... Mr. Chairman, you and I both know, banks will not loan such small amounts for short terms, there is simply no profit in it. ... [CFSA] members only give loans to consumers who can provide proof of employment or other steady source of income, and proof of an existing checking account. This indicates a reasonable expectation of an individual's ability to pay. This also disqualifies many Indian people on poor reservations where the unemployment rate is often 60 to 80 percent from taking out a loan that cannot be paid back.''

Eleanor Rogers, a student at Navajo Technical College who attended the meeting but didn't testify, had what sounded like a good last word afterward. Inflamed over the appearance and practices in a Navajo border town like Gallup, N.M., with its long vistas of payday lending outlets, some of them located in pawn shops, she gave a basic description of the problem with payday loans in her view.

''It's not a short-term loan. It becomes a long-term loan.'' Borrowers get caught up in a cycle of multiple loans a year, always paying out fees and interest on repeated short-term loans. Financial literacy is a solution, she said, but only if it's basic and to the point: ''Just pay back a bill and learn to budget.''

Cirillo, of Cypress Research Group in Shaker Heights, Ohio, said, however, that what economists call ''economic shock,'' basically in this context an emergency requiring cash outlays to address (think of a car radiator springing a leak) hits households nationwide an average of four to six times a year. No comparable Indian-specific number is known, she said, adding that even at four to six times a year, people would need repeated short-term loans.

A March report by First Nations Development Institute in Longmont, Colo., titled ''Borrowing Trouble: Predatory Lending in Native American Communities,'' appeared to get short shrift at the hearing, though the committee relied on it for the definition of payday lending as a part of predatory lending. In a review paper submitted to the committee, Cirillo shredded its credibility. She left no major point of the First Nations study unmolested. No one paid her to write her paper, she said.