Penny Troeh doesn't remember how much she needed the first time — maybe $250, to fix her truck so she could get to work. So she went to a payday lender in Whitesburg, wrote a check for a little over and walked away with cash.
Two weeks later, when she couldn't cover that check, she borrowed from another lender to get the money to pay off the first. Then, two weeks later, another one.
There are five payday lenders in Whitesburg; eventually Troeh had loans out at all of them, just to pay off her other loans.
"It got to where all my pay was going to them," Troeh said.
Fees for the loans, which seemed small at the time, had mushroomed until they ate up her entire paycheck.
Last spring, the state implemented a database to track payday lending — or deferred-deposit loans, as they are called because borrowers write the lenders a check to hold onto for two to four weeks.
Since 1998, state law limits borrowers to two loans totaling $500, but until the database was launched there was no way to know whether someone was doing what Troeh had been doing.
Apparently a lot of people were: In May, after the database went online, 51.5 percent of all the requested loans were denied. More than 16,000 borrowers had more than 152,000 loan requests turned down, (an average of nine each), according to data from the Kentucky Department of Financial Institutions.
Views of database reversed
Payday lenders say the database, which they originally resisted, has addressed the problem of illegal loans "thereby bringing an end to the perceived 'cycle of debt,'" John Rabenold, president of the Kentucky Deferred Deposit Association, said in an October news release.
Rabenold, who is vice president of Cincinnati-based Check 'n Go, recently successfully lobbied the state House Banking and Insurance Committee to kill a measure that would have capped payday loan interest rates at a 36 percent annualized rate.
Rabenold said the rate cap was a back-door way to drive them out of business.
"I cannot pay the rent at 36 percent APR," Rabenold said. "That allows me to charge 3 percent per month, or 1.5 percent for two weeks. ... In every state that has been imposed, it has eliminated the business. Thirty-six percent APR is absolute prohibition."
Fellow payday lender Jim Mischner, owner of Check Exchange in Lexington, also applauded the vote.
"Payday loan has a place in our society, and the lawmakers say I ain't so bad," Mischner said.
This was the third time Rep. Darryl Owens, D-Louisville, has proposed the cap but the first time it has gotten a committee vote, which supporters see as a move forward.
"It has been an uphill fight all along. We felt like we made a lot of progress this year," said Anne Marie Regan, co-chair of the Kentucky Coalition for Responsible Lending. "We feel like we have the public on our side."
Attorney General Jack Conway also endorsed the cap after his office's Consumers' Advisory Council looked at payday lending.
To the advisory council, the database painted a very different picture.
Far from eliminating the "rollover" problem, Conway's office said in a letter to legislative leaders, the data show "that the average consumer is trapped in a debt cycle. ... What is offered to a consumer as a short-term, stop-gap loan often becomes an insurmountable financial burden due to the high interest rate of this product."
But Mischner argues there is no need for a cap and a lot of demand for his loans.
"We had no customers who ever complained about that," Mischner said. "You only have people who need it, for something that's happened. ... These are people who needed a service. That's their choice. ... The banks don't do it. A lot of people don't have credit cards, don't have savings. Nobody has a better idea. Who are the customers going to go to?"
Rabenold said payday lending customers would rather come to them than bounce checks. "Our customers know what it costs to bounce a check, and they don't want to do that," he said.
Penny Troeh knows both sides of that argument. She eventually went to work for Speedy Cash, one of the payday lenders in Whitesburg. And that's how she found out that lenders sometimes will take installment payments, something they often deny, she said. It took a while, but she worked her debt down to one loan, to her employer.
Most of her customers at Speedy Cash were on disability, Social Security or veterans' benefits or some other kind of government payment, she said. Almost 14 percent of payday borrowers are older than 60.
"Some even had welfare," she said. "They might start out with something as small as $100 and think, 'It's only $18, no big deal.'"
But an $18 fee every two weeks adds up fast; by the end of one year, a customer could pay $468 in fees and still owe $100.
"I've sat there and cried with my customers. They don't know how to get out of the cycle," Troeh said.
Troeh, who was fired in September, now is unemployed. She and her husband, who is on disability, live in subsidized housing on $500 a month, so she understands why her customers kept coming back to borrow just a little bit to get by on.
"When they come in there, they feel there is no choice," Troeh said. "Lots of these people couldn't get bank loans. They can't borrow from a family or friends."
That's why she was hoping the state legislature would pass the 36 percent cap, as has happened in 17 other states.
"I think it would have helped a lot of customers. It would save them a lot of money, and they might be able to get out of debt," Troeh said. "The interest is so high. It wouldn't be so bad if they knew how to get out."
Rick Anders of Pikeville, owner of Speedy Cash, said he goes out of his way to let customers pay in installments "if people get in the so-called vicious circle" but that they often just take their business elsewhere.
"The majority of my clients are on fixed income and it's easy come, easy go to them," Anders said. "They know next month another check will be in the mailbox."
'Worst mistake of my life'
Wilma Boyd might have been one of their customers. About three years ago, Boyd, 64, went to a Whitesburg payday lender to borrow $400 for her daughter.
"That was the worst mistake of my life," Boyd said. "I took her at her word." But when her daughter didn't pay her back, Boyd had to cover the $478 check on her own, out of her monthly income of $694.
"I couldn't pay it," she said. So, like Troeh, she went from lender to lender. "By the time you pay the interest, you don't have nothing left."
She figures she paid about $2,800 in fees over the course of three years. And she still owes.
About six months ago, "I just quit paying it," she said. "And they've hounded me to death. They're threatening to take me to court."
If that happens, Boyd could actually end up in a better position. Small-claims courts will often force creditors to take partial payments over time.
Credit counselors also can help borrowers who get in over their heads.
"I was embarrassed," said Mary Love, 65, a retired Presbyterian minister who lives in Oldham County. Love testified in Frankfort in favor of the cap.
About five years ago, Love went to a payday lender to cover her rent. "I knew that was a place I could get the money immediately," Love said. She wrote a $230 check and got $200 in cash.
But the next month, she was short on her bills again. "So I wrote another check, but for $460 this time," Love said. "I thought I could catch up, but there's always something else that comes in."
She borrowed $400 every two weeks for almost a year. Each time cost her $60. Love figures that she paid about $1,450 in fees before she saw a Red Cross billboard that offered help getting out of debt. They sent her to credit counselors who negotiated payments with all her creditors.
At the time, she thought payday lending was helping her. "But I never sat down and added up how much it was taking out of my budget every two weeks just to keep up with it. ... If you're able to just go to them once, then they're a good thing. But what happens is, it's very easy for people to become repeaters."
10 loans per borrower
Very few borrowers go just once. According to the Kentucky Department of Financial Institutions' database, 203,861 people borrowed from payday lenders last year.
Only 23,911 did it only one time after the database began keeping track in May.
There were more than 2.1 million payday loans last year — an average of more than 10 for each customer. The average loan was $313.63, with more than $51 in fees each time.
By the end of 2010, the state's database had been online for 35 weeks. And during that time, 3,248 borrowers had 25 or more loans, meaning they were going to one lender or another almost every week.
"Obviously these folks are quite satisfied with the product," Rabenold said.
They must be; if they took out average-sized loans and paid average fees each time, then they would have paid more than $1,290 to borrow a little more than $300.
After the database crackdown in May, borrowing dropped dramatically; it was down more than $17 million, or 28 percent, from April. But over the course of 2010, borrowing gradually crept back up, to a year-end high of $64.6 million in December.
In all, about $661.4 million was borrowed last year, earning payday lenders almost $109 million in fees.
Looking at alternatives
Rabenold isn't sure why the numbers crept back up; he said his company saw a 33 percent decrease in the number of transactions in 2010 compared with 2009.
Mischner said his company lost money last year and that the cap would drive him out of business.
"We'd have had to close up," Mischner said. And that would leave more than 200,000 customers with no place to go, he said.
"Churches say they're not in the loan business. Well, who is? They don't have an alternative," Mischner said.
To some extent, he's right, Love said. So that's something she is working on.
"That was the primary reason, I felt, that it lost in committee. Folks kept saying, 'There's nothing else,'" she said.
So she is looking into how the Kentucky Coalition for Responsible Lending, which includes churches, non-profits and groups such as the AARP, can open their own micro-lending operation, with a cap on interest.
"I'm floating that idea," Love said. "We do need to look at trying to provide an alternative."
Melissa Fry Konty, at the Mountain Association for Community Economic Development, said several of the groups involved in the Coalition for Responsible Lending are talking about that possibility. Konty pointed out there are alternatives out there, such as community assistance groups or banks that will make small personal loans, but they can be harder to find.
"It's just when you're not charging 400 percent interest, you're not on every corner," she said.
But, she said, the question of an alternative shouldn't distract from the real problem. "Even if we do need more alternatives, that doesn't mean we shouldn't get rid of a defective product that is harming Kentucky families," she said.
Rabenold, of the Kentucky Deferred Deposit Association, is also working on an alternative. He said installment payments are "done every day in Kentucky."
But this summer he wants to go further.
"We're going to work on creating an extended payment plan, at no cost for customers to pay back," he said. Because getting paid back makes financial sense, he said.
Former state Rep. Jack Coleman, who sponsored legislation in 1998 to regulate deferred deposit transactions, said he would like to see a task force or state study on how the industry operates.
"They tend to position themselves as somewhere between the United Way and the Red Cross. And we know better than that," Coleman said. "The data seems to be pretty damning."
Coleman doesn't believe that a 36 percent cap would drive them out of business.
"I am sure, as creative as those people are, they can come up with some way," Coleman said. "The evidence is clear and convincing after 14 years. You can't change the stripes on the tiger. They're making tons of money and I think it's time something needs to be done."