If a small loan is needed to buy a new Bratz doll or Play-Station 2 for the holidays, borrowers should reconsider, credit counselors warn.

A parent still might be paying on that gift in June.

"Here comes Christmas and now borrowing will go through the ceiling," said Margo Mitchell, executive director of Consumer Credit Counseling Services.

"Parents want to give their kids a nice Christmas but don't have money to get everything. But if they had the knowledge on how to cut back, it will save them from long-term debt."

Small-loan companies are similar to retail businesses by using the holiday season to increase sales. The industry sells money.

Critics say the practice of renewing, or flipping, loans creates long-term debt. Renewing a loan means the lender will create a new contract at the end of the original contract term to extend payments.

Mitchell said the holidays should be focused on inexpensive ways of celebrating.

"The whole cause of the initial visit to a small-loan company is a debt problem," Mitchell said. "I can see going one time for a true emergency. But what is a true emergency?"

Homeless business

At least three employees of Security Finance Corp. visited John Gilbert at two shelters and brought him food. The company continued to renew his loans. He eventually took more than 37 loans in four years from two loan offices.

Gilbert and his brother, who is now his guardian, have been awarded $1.7 million in a lawsuit against Security Finance and Maverick Acqusition Corp. The company is appealing to the Oklahoma Supreme Court.

Security Finance employees are not able to take payments or conduct business outside the office.

One employee testified it was part of her job to go routinely to shelters to pick up consumers and transport them to the offices to renew their loans.

Sandra Lewis, executive director at the Day Center for the Homeless, said homeless people are often among the targeted population for high-interest, small loans.

"Usually, by the time we find out about it, they are in deep," Lewis said. "We find out when we start asking them why they are not spending money on permanent housing. We will refer them to legal aide or credit counseling services to help them figure out how to get out of the muck."

Lewis cannot stop clients from taking out high-interest loans but the shelter offers life skills classes teaching them to avoid the loans.

"Unfortunately, our laws are moving in the direction to make it easier for companies to operate," Lewis said. "People just don't understand what the interest rates are going to be until they are already in too far."

Flipping problem

"A lot of poor people will have to resort to one of the small-loan companies at some point in their lives," Bonney said. "But it's when they go back for a second one that they get into trouble.

"If you get one and pay it off, you are not going to file for bankruptcy. But if you get a second or third, you're sunk."

Bonney said the average small-loan borrower filing for bankruptcy earns between $20,000 and $35,000 and has at least two small loans pending. Some consumers had as many as 15 pending loans.

Many consumers Bonney has worked with have not taken out a new loan in a year, but they cannot pay off existing debt.

Jean Ann Fox, director of consumer protection for the Consumer Federation of America, advocates for a responsible small-loan market. She has been a critic of the payday and refund anticipation loans, which are tied to income tax returns.

"Don't get so down on the entire industry because of one egregious case in Oklahoma," Fox said. "There needs to be a well-regulated, legitimate way for credit to be available for consumers without a savings account or credit, no assets or any other way of borrowing."

Fox said recent attention has been taken off the traditional small-loan companies, such as installment lenders, because of abuses in other lending areas.

She said Oklahoma has a fairly high level of regulation for small loans but suggests reviewing how a leading company like Security Finance could take advantage of vulnerable consumers.

"The problem appears to be inadequate protection for consumers. The less leverage people have, the more protection they need from being gouged."

Andrew Morrison, executive vice president of Brundage Management Co., which manages Sun Loan Co., said consumer advocates need to work with the industry to make small loans more available.

"They believe only the wealthy and privileged should be able to borrow money and the rest needs to be protected from themselves," Morrison said. "We do need to teach financial literacy and make sure people understand the lending industry, but they still need money."

Ginnie Graham 581-8376
ginnie.graham@tulsaworld.com