Payday Loan Times

The Motley Fool presents a business/stock market look at recent payday advance ruling …

We’re only one month into 2007, and already, 19 states have introduced more than 50 separate pieces of legislation regulating the payday loan industry. While some of the current bills are holdovers from last year, state legislators are well on their way toward matching the 65 separate bills introduced last year in 25 states.

You can perhaps understand the animosity towards alcohol and tobacco companies. Yet fast payday advance lenders provide a much-needed service to a large swath of the public that has been completely abandoned by traditional financial institutions.

A short-term bridge over troubled water
Credit counselors charge that the interest on payday loans is usurious. For example, Advance America charges $15 on a 14-day $100 loan; extended out to a year, that’s an annual percentage rate of 391%.

The typical annual percentage rate for a guaranteed payday loan from a Dollar Financial Money Mart store is 456%, while Cash America’s $25 fee per $100 borrowed would be equivalent to a 651% APR. To fiscally prudent people, this is not only outrageous, but predatory.

Yet such arguments distort the nature of these personal loans.

Many of the people who use these services are considered a credit risk by banks, credit unions, and other financial institutions. Those businesses wouldn’t even give these people a bridge loan, let alone charge a rate that wouldn’t be considered usurious. These consumers have become what is known as the “unbanked” or “underbanked.” In fact, they may not even have poor credit histories - they simply don’t have any at all.

Serving the underserved
For a variety of reasons, many of the consumers lack checking or savings accounts, and cannot obtain credit card cash advances. Many cash loan customers are recent immigrants. EZCORP, for example, is based primarily in and around Texas, and has found that many of its customers are Mexican immigrants.

Because the use of payday services in Mexico is not as stigmatized as it is here, it’s even more of a growing business south of the border, and EZCORP has expansion plans there.

While no faxing payday loans are the bread-and-butter of these businesses, they’re often not the sole source of revenue. These lenders often cater to the full range of the underbanked consumer’s needs, and many also operate pawn shops, where merchandise is put up as collateral for a small, short term loan. Some also provide low-limit credit cards and buy-here/pay-here auto dealers.

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Fred Waddell is an associate professor emeritus at Auburn University. He recently wrote an opinion piece for The Roanoke Times …

Do you remember the stories about coal miners and sharecroppers who were slaves to company-owned stores? These impoverished workers labored from sunup to sundown. When it came time to feed their families, the only place they could buy food and other necessities was the company-owned store, which charged prices so high people had nothing left over.

Company stores were also the only ones that would let the workers buy on credit. So, each payday, after paying what they already owed and buying food on credit till the next payday, they remained penniless. They were truly chained, like slaves, to the company store.

We see this today, desperate Virginians chained, like slaves, to predatory easy payday loan lenders.

Consumer protection groups such as the Center for Responsible Lending in Durham, N.C., and the Consumer Federation of America in Washington, D.C., refer to payday loan practices as predatory lending - and payday cash advance lenders are indeed predators.

The Center for Responsible Lending estimates that payday loan fees cost U.S. families at least $3.4 billion a year, with the average borrower paying $800 for a $325 loan.

Research from the University of North Carolina’s Kenan Institute, Ohio State University’s law school and various state agencies and consumer groups across the nation show that these businesses purposely structure their contracts so consumers have a hard time repaying their initial debts, with outrageous interest rates, loan periods restricted to two weeks and refusal to accept partial payments on the principal.

Consumers who can’t pay off the entire debt at once must keep refinancing their faxless payday loans until they can.

State regulators in Illinois, Indiana, Washington and Wisconsin looked at data between 1999 and 2003 and concluded that the average payday loan customer takes out 10 or more loans each year.

Payday lenders take advantage of people who can least afford it.

The Colorado attorney general’s office reports that 7.4 percent of fast cash loan customers in that state are older than 55. Jean Fox of the Consumer Federation of America says that figure underestimates the secondary effect of payday loans on older Americans, because they bail out their adult children and grandchildren when they become victims.

The only way that the poor coal miners and sharecroppers could ever break their chains of slavery was to break free of the company store, just as the only way that Virginians will ever break free from money worries and have a little extra money for things they need is to break free of these company stores now calling themselves payday lenders.

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There’s a new mail campaign urging state lawmakers to leave the check cash advance lending business alone.

The industry has come under attack for how much it charges and now, some lawmakers are questioning how genuine the postcard campaign really is.

We’ve all been told that writing your lawmakers is one of the most powerful things you can do to be heard and enjoy some influence. But some lawmakers are suspicious of this campaign because many of the postcards were addressed in the same handwriting - and there are accusations flying about what savings account payday loan customers were told:

When Anthony Vicari applied a couple weeks ago for a payday loan, he says the workers gave him and other customers in the store the hard sell, telling them to fill out postcards to their state lawmakers.

“They were saying, the Legislature is going to make payday lending illegal, you won’t be able to pay rent or your bills, essentially, you’re going to be dead in a ditch if you don’t do something about it,” he said.

At the state capitol, legislators are getting flooded with the cards. They’re considering a bill that would limit the interest rates on no fax needed payday loans to 36 percent. Right now, the stores charge roughly $15 for every $100 borrowed; that works out to an annual percentage rate closer to 400 percent.

Representative Sherry Appleton is leading the fight to crack down and says the postcard campaign will not persuade her to give up.

“These are desperate people, they are going into get a loan, because they need it. I believe it’s indirect coercion, because I think a lot of people feel, whether it’s true or not, that they’re not going to get their payday loan unless they fill these out,” said Rep. Sherry Appleton, D-Kitsap County.

“It’s like false public comments to your state legislators, saying I love payday lenders, they’re my best friend, when that’s not the case,” said Vicari.

Vicari acknowledges, he did get his bad credit cash loan even though he refused to sign the postcard.

In a letter to lawmakers, Moneytree CEO Dennis Bassford says his company is not coercing anyone to sign the cards, but he is trying to get across his view that the annual interest rate is not relevant because these are short-term loans, typically paid off in two weeks.

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The consumer lending and finance industry last year alone contributed $400,000 to state lawmakers - the bulk went to lawmakers serving on the committees that control the fate of check cash advance lenders.

No wonder then - The Roanoke Times argues - that state senators shamefully ignored evidence that these loans pose an extreme hardship to cash-strapped Virginians.

Members of the Senate’s Commerce and Labor Committee– which includes Roanoke’s John Edwards –received $120,132 from finance companies since 2004, according to the Virginia Public Access Project.

So it should surprise no one that they canned bills that favored consumers over predatory, no fax payday advance lenders.

The full Senate last week passed a payday lending bill that is the equivalent of using a feather duster instead of undiluted bleach to scrub the indelible stain left by the loan-shark industry the General Assembly legalized in 2001.

The senators know payday lenders need some restraints. They certainly heard enough testimonials from borrowers and previous fast payday loan officers that the system sucks people into a cycle of deepening debt. Surely they had information from the Virginia Bureau of Financial Institutions that reports the average interest rate is 386 percent but it can - and has - reached more than 1,000 percent.

If senators still didn’t feel compelled to repeal a law that sanctions usury, they could have at the very least capped the interest rate at 72 percent - twice the legal limit for other types of loans.

But they weren’t even willing to grant that small concession to protect consumers.

Instead, they voted for a bill that industry favored and does little but limit a borrower to juggling three of these payday cash loans at the same time. Nothing in the law prevents lenders from charging them an additional fee of $15 per $100 borrowed every two weeks to keep rolling over the loans.

The industry claims it fills a need by extending credit to people who can’t obtain it elsewhere. With good reason: They can’t afford it.

There is some hope, although slim, that the House will act in consumers’ interest despite the $107,000 the industry has given in the last two years to committee members.

Sen. Walter A. Stosch - author of the 2001 bill that sanctioned payday loans and the largest recipient of the industry’s donations - was one of just two senators voting against the payday cash advance industry this time.

Stosch has since come to rue his legislation. It’s only a matter of time before regret catches up to the others.

The Post and Courier takes a look at all sides of the South Carolina payday loan debate below …

As state lawmakers get to grips with cash advance companies, a report released last week by the Federal Reserve Bank of New York argues that payday cash advances are not predatory lending.

Rather, these loans can “enhance the welfare of consumers by providing them a critical choice for managing short-term financial challenges,” the report says.

This announcement was generally made in the form of a press release from Spartanburg-based Advance America, Cash Advance Centers, the nation’s largest easy payday loan lender.

In the news release, Ken Compton, Advance America’s chief executive, called the study “an important academic perspective on the debate surrounding payday lending.”

The study, written by Donald P. Morgan, a research officer for the Fed in New York, compares the differences in household debt across states that allow payday lending and those that do not.

The report uses data provided by the Consumer Federation of America and other sources. It concludes that payday loans no faxing can enhance the welfare of households by increasing credit. In addition, the report asserts that consumers appear sophisticated enough to seek lower prices for products, and finds that some of those who use payday advances for short-term budgeting do so to avoid missing other payments.

Compton said critics who attack the payday loan industry question the ability of those who use online payday advance loans to look after cash in a responsible way. The study helps shatter some of those misleading stereotypes.

On the other hand …

The Federal Deposit Insurance Corp. last week issued a Supervisory Policy on Predatory Lending that describes certain characteristics of the practice and “reaffirms that such activities are inconsistent with safe and sound lending, and undermine individual, family and community economic well-being.”

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We spend so much time talking about faxless payday loans, we figured it was a good time to stop for a moment and review various details regarding them:

What is a payday advance loan?
Short-term, small, single-payment loans intended to carry the borrower through a temporary cash deficiency. In exchange for the advance, the lender receives a personal check - dated for the borrower’s next payday - for the amount of the loan and the finance charge.

Why such high rates for borrowing?
The structure of payday advance loans makes them costly to originate these short-term loans, whose default rates substantially exceed the customary credit losses at mainstream financial institutions.

What’s the downside?
Consumer groups sharply criticize payday lenders for selling overpriced cash advance loans to people who are already experiencing financial difficulties. Critics further contend that payday borrowers are not well-informed about the true cost of their borrowing, and that lenders engage in deceptive and unfair practices, particularly practices designed to encourage repeated loan rollovers.

What’s the upside?
The payday loan industry claims to provide a valued service to underserved consumers. Industry leaders note that mainstream financial institutions have withdrawn from the market for very small, short-term loans.

Are borrowers chronic?
Apparently. A 2005 FDIC study concluded fewer than half of a typical faxless payday loan store’s customers took out six or fewer loans per year.

Do lenders prey on the poor and minorities?
Numbers vary. A 2001 study of borrower demographics showed more than half of all borrowers had an average annual income of between $25,000 and $49,999. The study also showed 74.4 percent of all borrowers had either a high school diploma or some college education.

A 2003 North Carolina study revealed, however concluded the incidence of payday borrowing is higher among blacks and among individuals recently involved in the welfare system. Also, the study shows that individuals with impaired credit histories are more likely to use payday loans as a source of funds.

Are these businesses regulated?
Yes. Some states have outlawed the practice, but pay day loan lenders still operate in 37 states with varying regulations. In Alabama, borrowers may not have more than $500 in outstanding loans from payday lenders and loans can only be rolled over once. The maximum 14-day fee for a $100 loan is set at $17.50.

Are payday lenders and car title lenders the same?
Not according to the laws regulating them. Car title lenders have different regulations, as do those businesses that cash checks for a fee.

“Usury” is a word you don’t hear too often anymore, at least outside the Department of Medieval Studies. So begins an opinion piece, paraphrased below, in The Bainbridge Review.

Condemned by the 12th century papacy, its practitioners relegated by Dante to the fiery ninth circle of Hell, the practice of lending money at exorbitant interest rates has been morally suspect as long as there have been sheep to fleece.

Our modern, more laissez-faire attitude toward personal economics has taken some of the stigma out of high-interest lending, but a more descriptive term lives on in the vernacular: “loan sharking.”

Hard to imagine what else you might call fast payday advance lenders who charge up to 390 percent annual interest for short-term payday loans.

Thankfully, 23rd District Rep. Sherry Appleton is behind legislation (HB-1020) now making the rounds in Olympia to cap the interest on short-term cash advance lending at 36 percent per annum. This sensible, consumer protection legislation deserves support.

With the easy availability of credit cards, Americans each year sink deeper into the quicksand of consumer debt. Yet the Washington Post reports that a popular conception – that we’re running up high-interest plastic charges to buy wide-screen televisions and bankroll weekends in Vegas – is decreasingly accurate.

The debt culprits these days are unforeseen hospital bills, onerous housing payments and high college tuition. So it’s easy to see how payday loan outfits – who would get no sympathy from Dante – look attractive to those who find themselves suddenly short of cash.

“Can’t pay the bills this month? No problem! Come on down to Moolah Mart and we’ll help you get by until payday – at which time you can pay us back at (cough cough) a modest fee.”

That fee is anything but modest; the Federal Trade Commission reports that patrons of such predatory lenders can end up owing $60 in interest to borrow $100 for mere weeks. Compound that for bigger amounts over more no fax cash loan periods, and it’s a downward financial spiral few could escape.

The issue came to Appleton’s attention thanks to Kitsap military officials, concerned that unwary servicemen and women were being taken advantage of off-base; her legislation would extend protection to all payday loan patrons. Banks, Appleton notes, seem to get by okay doling out credit at much lower rates, so it’s hard to imagine the storefront outfits can’t survive on 36 percent.

By any other name, it’s still usury.

Better still if the state’s 700-odd providers of instant payday loans went away altogether, replaced by credit unions or consumer counseling services. Socially, we’d get a much better rate of return.

According to The Arizona Republic, payday lending just might be one of the best of the unappealing financing options open to cash-strapped individuals.

The practice of extending fairly small, short-term loans secured by a worker’s postdated personal check certainly is controversial. Critics claim the fees, when expressed as an annual interest rate, amount to usury. They also accuse no fax payday advance lenders of targeting vulnerable groups, such as single mothers and military personnel.

However, in some respects, payday loans are better than many other financing alternatives.

“Our industry exists solely because we offer our customers a product that is more desirable than the alternatives,” said Darrin Andersen, president of the Community Financial Services Association of America, an industry group.

His comments came in response to a new government report that provides some exoneration for the fast cash advance industry.

Researcher Donald P. Morgan at the Federal Reserve Bank of New York saw little reason to label the industry as “predatory,” though he also noted it’s hard to define the term. In fact, Morgan found people living in states where payday lending is largely unregulated are less likely to report being turned down for credit, with no greater likelihood of carrying higher debt or missing debt payments.

“The latter result is consistent with claims by defenders of payday lending that some households borrow from payday lenders to avoid missing payments on other debt,” Morgan wrote.

The study also asserts borrowers can get better deals in neighborhoods that count lots of bad credit payday loan lending stores for the simple reason competition drives down fees a bit.

This observation undercuts the argument for restricting payday lenders through regulation. It even paints the clustering of cash loan stores in low-income areas and around military bases as a good thing.

Also, the boom in payday lending appears to have cut into the business of pawnshops, which offer a financing option that arguably is less savory than that of same day payday loans.

The study didn’t delve deeply into other unattractive alternatives, but you can make a case that payday loans aren’t worse, and perhaps better, than taking a cash advance on a credit card, running chronically high credit-card balances, triggering late fees or missing bill payments altogether, especially if such moves result in foreclosure, eviction or damage to your credit score.

“Despite (the) high cost, perhaps payday loans help risky households better manage their finances,” Morgan wrote.

But all this shouldn’t be construed as a reason to run up chronic quick cash loan tabs. The practice is expensive, as Morgan noted in the report.

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Cash Now Corporation, a public payday loan company engaged in the design, manufacturing, marketing and distribution of customized cash advance and check cashing software and white or private label back end systems, Internet based payday loans, and other sub prime financial utility tools, annouced today after the market closed, the completion of the regional training transaction.

The trainee, a Maryland based mortgage broker, plans on adding additional services to their clients via the Internet such as online payday loans and other sub prime financial services made available by Cash Now and its vendors.
Cash Now’s CEO Garr Winters said:

“This is a bit of a different twist from our traditional model, however, as more and more states and provinces change the laws on payday loan lending we are noticing an increase in the media scrutiny and the need for [easy payday loan] and check cashing operators to stay on top of the current laws and regulations that affect our industry.”

Case in point, the recent soon-to-be-released San Francisco Chronicle expose on the payday loan industry that is comparing traditional bank fees to those charged by cash advance payday loan companies. The company confirms that it did contribute to the payday industry support cause, as it did participate with the journalist inquiry.

Mr. Winters continued:

“We are not a bit surprised that most consumers and journalists alike did not realize that in most cases, taking out a short term payday advance is less expensive than the fees charged by some traditional banks.”

In other company news, the company remains concerned about the erosion of its share price. The company plans on issuing a “President’s Message” press release to its shareholders, that will address this and many other frequently asked payday advance loan questions of its shareholders.

The Virginia Senate passed a bill yesterday tightening regulations on instant payday loan lenders - but falling short of changes critics had sought.

The bill, sponsored by Sen. Richard L. Saslaw, D- Fairfax, would still allow lenders to charge up to 391 percent per annum for a two-week loan.

The measure passed the Senate, 35-2, with one senator, whose wife is a lobbyist for the payday-lending industry, abstaining. The dissenters were Sens. Nick Rerras, R-Norfolk, and Walter A. Stosch, R-Henrico. Stosch had introduced a bill that would have placed no fax payday advance lenders under the same 36 percent rate cap facing other makers of small loans, but it failed in committee.

Saslaw’s bill would set up a state database to allow lenders to keep up with limits on payday loans. The bill would restrict the number of cash advances a borrower could have at any one time to three.

Critics of payday cash loans, which include consumer, church and social organizations, say such reforms have been tried and failed in other states. They say payday loans catch borrowers in a debt trap.

Providers of bad credit payday loans, on the other hand, say that they provide a service to borrowers who need money for emergencies and otherwise couldn’t get credit. That was one of the reasons Sen. John S. Edwards, D-Roanoke, gave yesterday for voting for Saslaw’s bill.

Besides Saslaw, Edwards was the only one to speak on the bill yesterday. The day before, efforts on the Senate floor by Edwards and others to tighten the bill and cut allowable interest rates failed.