Soaked By Congress


    LOSING THE HOME: After his wife's death from diabetes, Allen Smith faces losing his modest Delaware home. He fell behind on mortgage payments and other bills. Creditors will divide the proceeds from the sale of what little he has

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    MEDICAL BILLS: Charles and Lisa Trapp met as mail carriers in Plantation, Fla. When Annelise, 8, developed a muscular disorder, she needed round-the-clock nursing care. Lisa had to quit her job. With $124,000 in doctor bills that insurance won't cover, paying off credit cards is the least of their worries. They've filed for Chapter 7 bankruptcy

    While the bill contains some genuine reforms, on balance the harm that it would do far outweighs the good. At the same time Congress has written legislation to make life more burdensome for low- and middle-income filers, it has declined to put any curbs on practices of the financial industry that are leading many individuals deeper and deeper into debt. Beverly Fox, a bankruptcy lawyer in Plantation, told TIME: "[You] have a family with an annual gross combined income of $35,000. I see they owe Citibank $10,700. At the time Citibank gave them that credit limit, which is almost 33% of their annual gross income, Citibank looked at their credit report, or should have, and could see that they already owed three or four other credit cards $3,000, to $4,000, to $5,000. They were already $15,000 in debt, and the banks continued to raise [the family's] credit limits because they are making the minimum payments. Once a family is over 30% debt-to-income ratio, it should stop using unsecured credit. But people don't know that. They think that because they've been approved for this higher credit limit, they can manage it." Because many people pay only the minimum amount due or a few dollars more, Fox says, they think everything is fine. But the balance on the cards "continues to grow, more as a result of the interest than the use of the cards."

    Consumer advocates urged Congress to include in the legislation a provision requiring credit-card companies to spell out on each monthly statement the number of years it would take a cardholder to pay off the debt by making minimum payments, and how much that would cost overall. But that proposal went nowhere because it was opposed by the credit-card industry. The Senate version of the bill requires companies to include on monthly statements a toll-free number that cardholders can call to find out how long it would take them to pay off their loan.

    Congress also turned back an amendment by Senator Paul Wellstone, a Minnesota Democrat, who proposed that lenders who charged more than 100% annual interest should be barred from collecting their debts in bankruptcy court. One-hundred percent interest? Actually, that's the bargain-basement rate. In some cases, interest rates run upwards of 1,000%.

    Welcome to the world of payday lending, where annual interest rates would make Mob loan sharks of an earlier era blush in embarrassment. The business flourishes in working-class neighborhoods, where people run out of money before their next payday. The lender may charge up to $40 for a $200 loan to be repaid in two weeks. That's an annual interest rate of 521%. In exchange for the advance, the lender requires the borrower to write a check for $240, dated to coincide with his next paycheck. When the two weeks are up, the borrower may repay the loan or roll it over into a new one, further increasing the interest charges. If the borrower fails to do either, the lender cashes the postdated check. If it bounces, the lender sues and in some states collects up to three times the value of the check, plus interest.

    An Illinois study found the average annual interest rate for such services in that state was 533%. One customer was charged 2,007%.

    Senator Orrin Hatch, a Utah Republican who has championed the bankruptcy legislation, defended payday loans. Said Hatch: "These lenders provide a vital service to the poorest borrowers. With this check-cashing service, borrowers can get the emergency cash they need without telling the boss they need a cash advance or giving up their televisions and furniture."

    The burgeoning payday-loan industry includes publicly owned companies. Ace Cash Express, Inc., of Irving, Texas, operates more than 900 stores in 28 states and the District of Columbia where it cashes checks, sells lottery tickets and provides money-transfer and bill-paying services. At a third of its stores, Ace offers payday loans. Its stock is traded on the NASDAQ.

    For a fee of $30, Ace will advance cash for a $200 check for two weeks. That works out to an annual rate of 391%. Income from the company's lending operations jumped from 7% of its total revenue in 1997 to 12% in 1999.

    The company's largest stockholder is Edward ("Rusty") Rose III of Dallas. Rose owns 11% of Ace's outstanding stock, according to documents filed with the U.S. Securities and Exchange Commission. Rose is the millionaire Dallas investor who helped George W. Bush turn a $600,000 investment in the Texas Rangers baseball team into $15 million--a 2,400% profit. Rose is one of the Bush Pioneers, the elite group of fund raisers who each promised to raise $100,000 for the Texas Governor's presidential race.

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