Payday Loan Times

Virginia’s biggest faith-based lobbying groups have mostly separate agendas for the 2007 General Assembly, with priorities that vary from tightening the state’s divorce laws to promoting renewable energy. So reports The Virginian-Pilot.

However, the goals of the Virginia Catholic Conference, The Family Foundation of Virginia and the Virginia Interfaith Center for Public Policy line up when it comes to opposing payday advance loan lending.

“We believe this is a terribly addictive and harmful practice that has been destroying families,” said Victoria Cobb, executive director of The Family Foundation, whose constituents include many evangelical Christians.

A state law lets licensed no fax payday loan lenders charge interest that can reach an annual rate of 391 percent for a two-week loan. Most short-term consumer loans in Virginia are capped at a 36 percent annual rate.

The three faith-based lobbies want legislators to repeal the law so that interest on payday loans would be comparable to other consumer loans.

“We want to make sure families aren’t trapped in a cycle of debt,” said Jeff Caruso of the Virginia Catholic Conference. The conference is the public policy advocacy arm of Virginia’s two Catholic dioceses.

“We have yet to find very many people who think that Virginians should pay more than 36 percent APR interest,” said the Rev. C. Douglas Smith of the Interfaith Center. The organization represents several mainline Protestant denominations as well as Jewish, Muslim and Catholic groups.

Proposed legislation includes HB1684, which would repeal the payday cash loan law in 2009. The bill is sponsored by Del. Jennifer McClellan, D-Richmond.

And you thought your credit card interest was high.

A Calgary pawn shop operator has been convicted of criminal usury for charging “unconscionable” personal loan rates, including one case where a man was charged 207,981 percent interest. Aly Saad Marsy, 58, is to be sentenced Feb. 1 in Calgary provincial court.

“Through his manipulation of pawn contracts with unsophisticated and vulnerable customers, Mr. Marsy has been able to inflate his already remarkable interest rates into unfathomable rates of return,” Judge G.S. Dunnigan said in a 12-page written decision.

Although many pawn shops charge 30 percent for a one-month instant payday loan, deals and extensions which provide the lender with more than 60 percent interest are illegal.

The judge noted that Marsy preyed upon financially vulnerable customers who “perhaps unwisely, continued with these usurious arrangements out of desperation.”

Criminal usury is a little-used section of the Criminal Code more often applied to loan sharks. Marsy faces a potential fine of up to $25,000 and up to six months in jail.

In one case, a couple living on a disability pension pawned a collection of jewelry to make ends meet while the husband underwent cancer treatments.

In another, a man put his car up for collateral to obtain a $450 loan to retain a lawyer in a custody battle over his preschool daughter. In both instances, regular payments were made but the original payday cash loans were not cleared.

The balance continued to escalate as the loans were rewritten and interest was charged on interest.

The court eventually calculated the effective rate of annual interest charged to the couple at 1,281 percent, while the father’s loan was a staggering 207,981 percent; not exactly a low cost payday loan.
Eventually, the victims complained to the Calgary police, the Better Business Bureau and the consumer services branch of Alberta Government Services.

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Last September, Congress passed a law that limits the rate of interest that can be charged on a quick payday loan to members of the U.S. military and their families to 36 percent.

That bill, signed by President Bush and effective in October 2007, is designed to protect military personnel from predatory lenders who loan money at ridiculously high interest rates.

Those rates, states an opinion piece in The Austin American-Statesman, which can soar past 300 percent on an annual basis, can mire borrowers in rolling short-term debt and wreck their credit.

But if a 36 percent interest ceiling is good enough for the military, why not for all the regular Joes and Janes who find themselves in need of a quick loan?

So-called faxless online payday loans have grown into a $28 billion business in the United States - and Texas is a major player. Anyone with a regular job and a pay stub to prove it can borrow several hundred dollars for two weeks or until the next pay period. They must leave a signed check for interest and fees that can be cashed on the next payday.

The problem is that many of those borrowers cannot pay off the full loan by the next pay period and end up borrowing again just to pay the interest, which is about 400 percent on an annual basis.

Therefore, quick cash loans can sink a family into almost endless debt as the interest continues to roll over and grow, which is why Congress limited the interest rate for uniformed personnel.

Eleven states have effectively outlawed payday loans and several others, including Texas, have attempted to curb the predatory aspects of the practice.

Texas limits interest payments to 10 percent on most consumer loans, but cash advance loan lenders have found escape clauses that allow them to charge high fees and higher interest rates.

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Not that being a pawn broker is a dying industry, but making short-term cash advances - commonly referred to as payday loans - just happens to be more profitable.

So states an article by The Motel Fool, an online financial publication.

It’s the reason why companies that operated primarily (even wholly) as pawn brokers just a few years ago, such as like Cash America and EZ Corp, are now moving more broadly into making payday loans.

Yet those profits have also drawn the attention of regulators and industry critics, which has caused a backlash to develop and have them seek to limit payday cash advance lenders, if not drive them out of business altogether.

Challenges for 2007
Cash America was once predominantly an operator of a slew of pawn shops that accouned for more than 93% of revenues as late as 2003. Steadily, though, as the profit potential of payday loans became more apparent, the company began branching out and opening a series of stores that catered to the same “unbanked” consumer population.

By 2005, pawn operations had accounted for just 81% of revenues, and in the third fiscal quarter of 2006, it had dropped to 76% of revenues.

But even as Cash America was making that transition, the regulatory playing field was changing. The FDIC essentially put the typical online payday loan lending business model out of business, requiring many operators to operate as “credit services” companies.

State regulators also prompted action, and many lenders had to close up shop in states like North Carolina, Georgia, and Pennsylvania.

Pawn brokers are heavily dependent upon the price of gold, since jewelry happens to be the merchandise most often pawned for a cash advance. While Cash America has to pay a higher price to the customer to acquire the merchandise when gold is high, it’s also able to sell the jewelry at higher prices, increasing its profit margins.

Yet the price of gold has eased back lately, which could impact the company’s profits.

Payday loans that click
To spread its risk out more evenly in the market, Cash America is having fast cash advance services account for more of its revenues. While it’s not giving up on being a pawn broker, there are opportunities to advance its profits further by reaching more of the target consumer who might never walk into a pawn shop, but who aren’t as reluctant to frequent a payday loan center.

Even so, being able to acquire cheap payday loans anonymously without having to physically enter a brick-and-mortar office also holds an attraction to leery consumers. Cash America has acquired CashNetUSA, a privately held online payday lender with customers in 27 states, for $35 million.

The transaction, completed in September, was immediately accretive to earnings and allowed the pawn broker to raise guidance for 2006 and 2007.

There are a number of other private online lenders catering to the unbanked and under-banked consumer, but even though it was founded just two years ago, CashNetUSA finds itself already profitable. With the marketing capabilities of Cash America now supporting it, the company is expecting earnings growth for the next year of 32% over 2006.

The House of Delegates recently killed legislation aimed at banning payday loan lending, the controversial storefront industry that makes high-interest short-term loans to thousands of Virginians.

But the debate is far from over, The Daily Press reports.

Lawmakers have been bombarded by complaints from consumer activists, pastors and former customers who said the business preyed on the working poor by promising quick money at interest rates that made it difficult or impossible to repay.

Tighter regulations will be considered during the 2007 General Assembly session. One lawmaker has resubmitted the bill that would effectively ban payday loans for good, hoping for a different verdict this time around.

“I think that they are predatory lenders that should be put out of business,” said Del. Jennifer McClellan, D-Richmond.

In 2002, the General Assembly decided to regulate providers of payday advance loans because the firms had moved into Virginia while contracting with out-of-state banks. The arrangement allowed them to charge higher interest rates than state law normally allowed for small lenders.

McClellan’s bill isn’t technically a ban.

It would repeal the 2002 regulations and require payday lenders to cap interest rates at 36 percent, the same as for other small cash loan lenders. Payday industry representatives said that would effectively drive them out of business. The average annual rate on payday loans in Virginia in 2004 was 373 percent.

According to state figures, more than 445,000 Virginians took out more than 3.3 million regular and/or faxless payday loans in 2005. The amount nearly topped $1.2 billion. The average customer takes out about seven loans a year, according to one estimate.

But formal complaints are relatively rare: 56 in 2005 and 33 through mid-August of this year.

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Interested in playing the stock market? If so, you ought to be familiar with The Motley Fool. It gauges the performances of various stocks and companies.

Recently, it looked at Advance America and forecasted the future for this payday loan company. Here’s a summary:

Imagine you’re the poster child for all of your industry’s ills. Critics accuse you of taking advantage of the poor. You’re the target of the do-gooders’ ire. And the government - at both the federal and state levels - changes the rules of the game on you so you need to change your business model.

Welcome to the world of Advance America, the country’s leading payday advance loan lender with around 2,750 storefronts in 36 states. The fact that this company has still been able to advance some 18% this year in the face of such challenges shows the resilience and profitability of the service.

Can it make a repeat performance in 2007?

Challenges to overcome
When images of goon squads showing up to break your legs are routinely raised in describing your business, it’s a particularly salty picture. So even though payday cash loan providers are not roughing up their customers, industry critics nonetheless enjoy conjuring up thoughts of them as latter-day loan sharks.

Besides some bad press, let’s look at some of the other hurdles Advance America faces:

• Legacy costs associated with its prior agency business model that was abandoned when the FDIC changed the rules of the game nationally.

Rivals like First Cash Financial, Cash America, and EZ Corp have alternative means of earning revenue outside of bad credit payday loans, such as pawn shops and used car dealerships, or have less exposure to the U.S. market and its onerous regulations.

• Lawsuits from states that don’t appreciate the company’s end run around their regulations by introducing new products

• An economic downturn could play havoc with its customers’ ability to repay the quick cash loans.

A chance to advance
Advance America focuses on making short-term loans to consumers. For that service, it’s paid a fee that’s nominal by itself, though as an annual rate, it can look steep. Over the past year, even in the face of being forced to close down operations in North Carolina at the end of 2005 and Georgia in 2006, there were still a total of almost 150 net new store openings last year.

To continue that growth strategy, Advance America can continue to follow its game plan:

• Grow by opening new regular and faxless payday loan stores. The company is geographically diverse with operations in more than half the states, with only California commanding a large presence and accounting for 11% of company revenues in 2005. There’s still plenty of room to grow.

• Operate on the credit service organization (CSO) model following the FDIC rule change.

• Focus on a single service. Advance America keeps operations streamlined. Management kept a lid on expenses in 2005 and for the first nine months of 2006, they rose a miserly 4% compared to a 6% increase in revenues, which also served to improve gross margins.

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In banking terminology, the west Mesa area is “underbanked.”

By any measure, however, the area is oversaturated with instant payday loan stores.

Therefore, it should come as little surprise that when setting up a handful of new locations for banks in west Mesa during the last year, Washington Mutual ran into an unexpected neighbors:

• Their locations are sharing strip centers, city blocks and even parking lots with payday loan stores.

Due to the glut of payday advance stores occupying busy street corners in west Mesa, it was, in many ways, unavoidable.

The new branch at Dobson and Baseline roads is in the same strip center as a payday loan outlet; the new branch at Dobson and Main Street shares a parking lot with a payday loan store; and the new branch at Southern Avenue and Mesa Drive sits across a busy thoroughfare from a payday loan store.

“I guess that’s just kind of an anomaly. We don’t target or have anything to do with payday loan centers,” said Jim Linker, a vice president and senior regional manager in the Valley for Washington Mutual. “We do a rigorous look at each market that we go into. Those are good communities. They match up well with the products and services that we have available.”

While the banks likely won’t make a dent in the number of fast cash loan providers in west Mesa - an issue the City Council nearly dealt with through regulations this year - their presence could lead to a more market-based solution toward curbing the numbers of so-called predatory lenders in Mesa.

The payday stores typically have customers in search of wire transfers, cheap check cashing service or, for loans, those who have poor credit and can’t or won’t get a long-term loan from a bank and who are willing to pay high interest for a short-term, bad credit payday loan.

There are more than 100 payday loan stores in the city, with the majority concentrated in Mesa’s west side.. There are nearly 200 banks spread throughout the city, but a noticeable dearth in that same area of Mesa.

That’s what drew Washington Mutual to the locations in the first place, Linker said.

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Aaron Medres is on a mission.

Four years years ago, the Chattaroy truck driver took out a $500 payday loan to cover some unexpected repairs to his car. Two weeks later, to pay back the $500 and the $75 fee, he took out another cash loan from a different lender. And then another.

All told, he says, it took him three years and thousands of dollars in fees to pay everything off.

“It was just stupid on our part,” he said to The Spokesman Review.
Now Medres is one of a growing circle of people calling on state lawmakers to restrict the interest rates charged by Washington’s $1.4 billion payday lender industry. Proponents include anti-poverty activists, unions, military leaders and former cash advance payday loan customers.

“Maybe we can get some justice for a lot of these borrowers,” Rep. Sherry Appleton, D-Poulsbo, told a Senate committee earlier this month.

This year, Congress passed a bill that caps the interest rate for such payday loans online at 36 percent a year for military members and their families. Appleton wants to piggyback onto that, extending the cap to everyone. That’s what Oregon lawmakers did in May.

Payday advance lenders say such a cap would drive them out of business.

“I’m here to tell you that is not regulation. That is prohibition,” Darrell Wells, owner of Paycheck Financial Centers stores in Olympia and Aberdeen, told lawmakers.

Wells said the average faxless payday advance lending shop in Washington makes 415 loans a month, grossing about $20,000 in fees. After paying employees, taxes, overhead and benefits, he said, the store nets about $2,000 a month.

“The average person in this business is not making a ton of money,” he said. “If I could offer this product at a lower price, I’d already be doing it. It would be a huge competitive advantage.”

The proposed cap, he said, would reduce the interest to about 10 cents a day on a $100 loan. That’s too little, he said, to keep the business alive.

Dennis Bassford, president of 55-store Money Tree, Inc., closed his one Oregon savings account payday loan shop because of the 36 percent cap.

“Thirty six percent is a ban,” he said. “My company is proof of that.”

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The Free Lance-Star has bought into the falsehoods about payday loans spread by the products’ opponents. So states Lawrence Meyers, a partner in Payday Loan Capital LLC, a firm that helps payday lenders obtain money to grow their businesses.

A recent editorial ["Payday loans are no bargain," Dec. 19] claims that “a payday loan seems like a quick fix. All too often that quick fix becomes a link in a chain that leads to bankruptcy.”

In truth, most payday loans get paid off; the nationwide default rate is 7 percent.

The FLS editorial asserts that “many [payday cash advance] lenders are clustered around military bases.”

However, a June 2006 study by the Consumer Credit Research Foundation found that only 1.3 percent of all payday loans are made to members of the military - and only 13 percent of military members in the immediate vicinity of a payday loan store took out a loan.

The editorial asks, “Why not limit payday lenders to 36 percent?”

The reason is that between a 7 percent average national default rate and a $9,000 average monthly operating expense, providers of no fax payday loans will lose money at that APR. A $14 fee per hundred borrowed is the minimum most lenders can charge and stay in business.

It is not time to shut payday lenders out of the state. If that happens, demand will not vanish. Borrowers will get personal loans on the Internet (which are more expensive) or bounce checks (at $50-$60 per check).

Strangely, the editorial does not come down on banks with their onerous NSF and overdraft fees.

While cash advance loans cost consumers only $4.2 billion last year and they received short-term credit in exchange, the banks made $52 billion on NSF and overdraft fees.

Palm Beach Circuit Judge Elizabeth Maass has ruled that thousands of Florida consumers who took out payday loans can bring their claims through class action arbitration, despite a provision barring that in payday loan contracts.

In an order dated Dec. 12, Maass ruled that class action waivers signed by thousands of people who obtained payday loans through Check ‘n Go of Florida Inc., were unconscionable. She wrote that “the chance that [the named plaintiff] could have obtained competent counsel absent the possibility of class action status … is effectively zero.”

Ted Leopold, a partner at Ricci Leopold of Palm Beach Gardens and one of the plaintiffs attorneys in the case, called the ruling a “sign that everyone who is preyed upon will have their day in court or arbitration. The [faxless cash advance] industry cannot take advantage of disadvantaged people.”

John Hart, attorney for the Cincinnati-based Check ‘n Go, declined to comment on Maass’ ruling other than to say he will appeal before the Jan. 11 deadline. Hart is a partner at Carlton Fields in West Palm Beach. Amy Brown of Squire Sanders & Dempsey’s Washington, D.C., office, is co-counsel in the case.

Check ‘n Go required its customers, including plaintiff Donna Reuter, to sign a contract that mandated binding arbitration and prohibited class actions in the case of disputes. Payday cash loans are typically small. Customers sign the contract and write a personal check for the amount borrowed plus a fee.

Leopold said that sometimes the real interest rate on payday loans can reach 600 percent once rollover fees are added. These fees, he said, violate state usury laws, which prohibit excessive interest rates.

The class attorneys argued that the waiver provisions in the payday loan contracts were procedurally unconscionable because they are embedded in contracts that consumers enter into when they face financial stress. Of the seven companies offering faxless payday loans in Florida in 2000, four required borrowers to sign a class action waiver.

The class attorneys also argued that the waiver was unconscionable because without class status, the consumers wouldn’t be able to hire competent counsel. No skilled, experienced attorney would take an individual case because the fee would be too small to justify the work, Leopold said.

Maass agreed.

“It would be virtually impossible for Ms. Reuter, or anyone in a similar position, to obtain competent individual representation for the types of claims brought here,” she wrote.

Class action arbitration works like regular arbitration, but the attorneys represent a class rather than an individual client. Leopold said the arbitrator will either be someone both sides agreed on or someone assigned to the payday loan case.

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