Payday lenders in Hawai'i who offer short-term loans are eager to combat the image that they're locking low-income borrowers into a cycle of escalating debt.

The lenders have teamed with consumer advocates and state lawmakers to establish regulations for the industry.

The move is meant to protect consumers with oversight by the Department of Commerce and Consumer Affairs, but check cashing companies think they'll reap some public relations benefits.

Some states, such as Arkansas, have seen the number of check cashing companies exceed the number of McDonald's franchises. In Hawai'i, there are about 50 to 60 short-term lenders.

Hawai'i is one of only four states that does not actively regulate the industry. Hawai'i has laws that limit how much interest the lenders can charge, but there is no agency overseeing their operations.

There are, consequently, no accurate statistics on how many people are using the service in Hawai'i, nor are there data on whether the services contribute to financial problems among borrowers.

"We haven't seen the problem of payday lending here that some of the other communities on the Mainland have," said Bruce Dillabaugh, deputy director of the Hawai'i Alliance for Community-Based Economic Development.

INDUSTRY CRITICIZED

Check cashing companies are criticized for offering short-term loans to low-income clients who can't pay them back and, as a result, continue rolling them over to the point where they might be paying annual interest rates of nearly 400 percent.

Hawai'i law allows lenders to charge a 15 percent interest rate on a loan for as little as 15 days. If a customer, for example, borrows $600 for 15 days, he would pay $90 in interest. If he can't pay it, he can reborrow for another $90. If this cycle persists for a year, the borrower can end up paying $2,160 on a $600 loan.

House Bill 483 would prevent that from happening by offering borrowers an extended payment plan after four consecutive loans.

The bill will have to be heard by the Senate Commerce, Consumer Protection and Affordable Housing committee by the end of next week to move forward this session.

Committee Chairman Brian Taniguchi said the bill is tentatively scheduled to be heard tomorrow or Wednesday.

His interest in the bill stems from national news reports of people continually borrowing off their paychecks and racking up huge debts.

By regulating the industry, "We'll see if it becomes a problem here, and we'll be able to monitor it in the future if the problem develops and there are a lot more consumer complaints," he said.

Ryker Wada, consumer staff attorney at the Legal Aid Society of Hawai'i, said one reason for regulation is just to be able to locate the lenders in the first place.

"What we've found is most of the businesses are little mom-and-pop single proprietor places," he said, noting that most don't have listings in the phone book and may only have a sign in the window. "There's no real way to enforce the law unless we know who's doing the payday loans."

He said Legal Aid, which deals with a large number of low-income clients, hasn't heard many complaints, but that's not surprising.

"Generally speaking, they need these services, so they aren't going to be the ones complaining, even if they know they're getting a raw deal," he said.

SEEKING POSITIVE IMAGE

Dillabaugh said that the legislation draws from lessons learned from other states.

"We've been really surprised, and we've been really encouraged that we think that the majority of payday lenders in Hawai'i are local, small, community-based businesses who want to be good neighbors," he said.

That's certainly the image that Craig Schafer, owner of PayDayHawaii, wants to project.

As president for the Financial Service Providers of Hawaii, he said that check cashers want to shed the stigma attached to their counterparts on the Mainland.

"One of the things we wanted to do is make sure our industry is cleaned up," he said. He is in favor of more regulation and consumer protections.

But Schafer and other lenders say that they already comply with the majority of the proposed regulations.

Marie Morris, who owns Mr. Cash with her husband, said the House bill calls for "pretty much most of the stuff we're doing already."

"It's not a problem. We can live with it," she said.

She said her company makes no secret that while there will be no interest if the loan is paid off within 24 hours, the annual percentage rate on their 15-day loans is about 365 percent.

"That's right on the promissory note," she said. "It's very easy to see."

'SHORT-TERM SOLUTION'

Lenders argue that the annual percentage rate may seem high, but only the flat fee matters to those who pay promptly.

"We actually charge less than a bank does for bounced checks," Morris said. "The banks don't give out as many small loans as we do, either. It's to help people out. It's a short-term solution."

She added, "If they have a long-term problem, they should go somewhere else and get money."

Schafer said the legislation is to prevent people from continually reborrowing from paycheck to paycheck.

"The idea is to put some brakes on consumers doing that kind of thing," he said.

The bill would also restrict customers from taking out more than one loan at a time, but could be hard to enforce if they use multiple lenders.

"It's a difficult thing to monitor," Schafer said. "You can't regulate stupidity, but you can at least warn the customer not to do it."

At PayDayHawaii, customers take out four to five loans a year on average and about 59 percent a month are repeat borrowers.

"Whenever we see a person just constantly coming in and just not seeming to be able to break that cycle, we offer a payment plan," he said.

However, Schafer said it is a common misconception that most of the clients are down and out.

"We're really kind of a convenience store financial service. It's quick and easy to do and a lot simpler than dealing with a bank or commercial lender," he said.

Reach Treena Shapiro at tshapiro@honoluluadvertiser.com.