State regulators shut down a Boston payday loan operation last month as a preemptive strike, hoping the lending practice will not become as widespread in Massachusetts as it is in other parts of the country.

The Massachusetts Division of Banks issued a cease and desist order to Mail Boxes, Etc. at 167 Milk St. for brokering short-term payday loans without a small loan license. The company made small, short-term loans with interest rates of more than 476 percent. A consumer who took out a payday loan was to repay the loan on the date of his or her next paycheck. If the borrower could not afford to pay back the loan, it could be rolled over to a later date with an additional fee.

The loans violated restrictions in the state’s Small Loan Act, which cap annual interest rates on loans of less than $6,000 at 23 percent and limit fees to $20.

We believe at this point it is an isolated case, said Carol Lanigan, director of communications for the Office of Consumer Affairs and Business Regulation. It’s just something that our office is not going to tolerate.

The Mail Boxes, Etc. store near Post Office Square is owned by Jay and Naranbhai Patel. The Patels took applications for payday loans at the store, then faxed the forms to Cheyenne Servicing Co. in Colorado Springs, Colo., for approval. When the loans were approved, a Delaware bank, County Bank in Rehoboth Beach, would electronically transfer up to $300 to a consumer’s checking account.

The Division of Banks has filed complaints about County Bank’s payday lending with state and federal regulators that rate the bank’s compliance with the Community Reinvestment Act. In its last rating by the FDIC in May 1998, County Bank received a satisfactory rating. The state-chartered commercial bank had assets of $101.4 million at the end of 1999.

Consumer Affairs Director Jennifer Davis Carey equated payday lending to loan sharking.

It is just another unfortunate form of predatory lending. Predatory lenders who target consumers with limited financial alternatives or sophistication must be stopped, Carey said.

In other parts of the country payday loans are made by check cashing companies, banks and other companies. The loans may also be called check loans or cash advances.

Payday lending has grown increasingly common, especially in other parts of the country that don’t have a usury cap, said Steven L. Antonakes, senior deputy commissioner for the DOB. It’s a kind of business we don’t want, because we don’t think it’s good for the consumer.

7,300 Percent Interest
Eight states have small loan laws that allow lenders to make payday loans. Montana and Utah passed legislation last year that permits the practice.

Experts estimate approximately 10,000 payday lending stores operate in 30 U.S. states and Washington, D.C. Fee revenue from payday loans is predicted to reach $2 billion this year. Annual percentage rates on the loans are usually at least 390 percent, and average about 500 percent, according to data from the National Consumer Law Center in Boston. Indiana regulators found one firm that charged an APR of 7,300 percent.

Consumers who take out the loans are often financially strapped and cannot repay the loan on time, accumulating additional fees. Students, military personnel and the elderly are among those that take out payday loans.

It’s people that are having some short-term problems, Antonakes said. The problem with it is you often see they do it once, and they’re required to do it over and over again because they can’t catch up.

In Indiana, borrowers renew payday loans an average of 10 times a year, and 77 percent of payday loan transactions are renewals, according to the state’s Consumer Credit Supervisor Mark Tarpey.

Connecticut Sen. Joseph Lieberman has been critical of federal laws that make it difficult to combat businesses that make the loans. States such as Massachusetts and Connecticut that restrict interest rates on payday loans cannot bar lenders from payday-friendly states from exporting the interest rates the institutions charge in their home states.

It’s a big business and they’re making a lot of money because of all the rollovers, said NCLC staff attorney Deanna Kitamura. Rollovers are inevitable because you’re talking about very short-term loans. If somebody’s in very dire straits and needs to borrow some money, it’s very difficult to come up with the money in two weeks.

The NCLC has drafted model legislation for consideration in states that want to regulate the industry. The group suggests that the terms of the loans should be no less than two weeks per $50, and the maximum loan amount should be $300. The model act would cap interest rates at 36 percent per year and require payday lenders to make proper disclosures under the Truth in Lending Act.

In Massachusetts, Carey and Commissioner of Banks Thomas J. Curry urged banks, credit unions and other financial institutions to develop creative products to meet the needs of consumers who may take out payday loans. Such products may include small personal loans, secured credit cards, or reserve lines of credit on existing checking accounts.