Paying More For Payday Loans

Scott Pelley Reports On Payday Lenders Who Legally Charge Excessive Interest Rates

(CBS)  "Some people would say, 'Look, 400 percent, interest on these loans? Surely you should have known better?'" says Pelley.

"That figure isn’t flashing in front of you. What’s flashing in front of you is the dollars you’re looking for," says Kucan. "The percentage rate isn’t something you’re even considering at the time."

Kucan is suing the largest payday lender in the nation, Advance America. And according to former Advance America store manager Ginny McCauley, repeat customers like Kucan aren’t the exception.

"The majority of them would borrow the money back right that same minute," says McCauley.

Advance America is a public company traded on the New York Stock Exchange. Last year, its revenues were up by 16 percent to $570 million. McCauley was a store manager in Illinois for six years.

"I have a problem with working for a business that wants to continue to put people in a worse position and I finally took my blinders off and decided I couldn’t do it anymore," says McCauley.

Was there a lot of demand for the loans?

"People, right before payday, usually something comes up -- especially Social Security people who get paid once a month," says McCauley. "Might be the third week in the month and they need their medicine, so they would have to come borrow for those needs."

The needs of payday customers are typically too small for a bank or a credit union. But even though the loans aren’t large, the fees can be huge when a customer extends the loan every two weeks, in what some call a rollover.

McCauley says 60 to 70 percent of her customers were rollovers.

"And so the rollovers would just keep rolling on and on," says Pelley.

"Right," says McCauley. "Our company's policy was, on the 15th time, they had to pay it off in full and take a 24-hour break."

And what happened after 24 hours? McCauley says, "Most of them would come right back in."

McCauley believes she was fired last year because a new supervisor thought she wasn’t aggressive enough in lending. Advance America denies that, but wouldn’t say anything else about McCauley except that her views don’t represent company policy.

The laws on payday stores vary from state to state. Right now, 36 states regulate rollovers and fees to some degree. Other states have limits on small loans, but even then, payday lenders don’t always follow the state law. Kucan and Harris, for example, live in North Carolina, a state that limits interest to 36 percent a year.

"In North Carolina, historically, we have had laws against loan sharking, and when you are talking about 450 percent interest rates, that’s definitely loan sharking," says Roy Cooper, North Carolina's attorney general.

Cooper is trying to put payday lenders out of business in his state, but he says the payday stores are using federal regulations to beat state law: "They are, right now, using an out-of-state bank, claiming that they have the legal right to import interest rates from another state."

Payday stores partner with a bank in another state that allows high rates. It’s possible because the Federal Deposit Insurance Corporation, the FDIC, allows it.

"The FDIC has the opportunity and the authority to put a stop to this," says Cooper. "What they need to do is step in and say 'Our banks don't need to be involved in this kind of business. It’s not good for the bank. It’s not good for the customer. You just shouldn't do it.'"

The FDIC declined to talk with 60 Minutes Wednesday on camera. But this spring, it did tighten its guidelines warning banks payday loans “can create serious financial hardship.” The FDIC says a consumer shouldn’t continue payday loans more than three months a year. In other words, no more than six loans.

"The FDIC says more than six can create serious financial hardship for the borrower," says Pelley.

"Could," says Green. "It didn't say it did. It said it could."

Green is lobbying the North Carolina legislature for a state law that would legalize payday stores and limit the number of loans to 12 a year. That would cut the fees down to 210 percent.

"If your wife came home, and told you she took out a loan at 210 percent, you’d blow your top," says Pelley.

"My wife wouldn’t do it," says Green. "Because my wife, thank God, is in a financial situation where she wouldn’t. Plus, she has a master’s degree in accounting."

"You are not saying she’s too smart to do this, are you?" asks Pelley.

"And she's got excellent credit," says Green, who is the only payday lender who would talk to 60 Minutes Wednesday on camera. He said for someone strapped for cash, payday loans can be cheaper than the alternatives.

"Eliminate payday lending. What do these people have?" asks Green. "Bounced checks, cars being re-poed, furniture being re-poed. God forbid, an emergency comes up where the refrigerator goes out or the child needs to go to the doctor. Who’s gonna help them?"

So how could this happen to Harris?

"Well, we all have financial problems in one way or another," says Harris. "And unfortunately, the companies, instead of trying to help me to try to look at, 'OK, Miss Harris, let's look at your situation. Have you thought about going to credit counseling?' They encouraged me to come back."

Harris did end up in credit counseling, and, after five years, she told us she’d paid off almost all of her payday loans -- almost.

"I am down to one payday loan," says Harris. "That loan was $300. And they take $54 out every two weeks."

She's paying $1,200 a year for a $300 loan. "Because I can't pay it back," says Harris. "It's like walking through a spider web and trying to get all the web off of you. I can’t get out of it."

Sandra Harris called to let 60 Minutes Wednesday know she finally paid that last loan. It’s worth noting that Harris took out some of her payday loans online. There are hundreds of Internet sites offering payday loans at the same high rates, and states are just beginning to take legal action against these lenders. Customers give the online stores access to their checking accounts and the fees are deducted electronically.