Payday Loan Times

Despite the state General Assembly’s failure to criminalize high-interest consumer savings account payday loans during the 2007 session, just completed, there is progress on several fronts, according to Hank Klein, founder of Arkansans Against Abusive Payday Lending (AAAPL.)

In the Arkansas House, lawmakers voted overwhelmingly to take not only the interest but also the principal out of cash advance loans. But members of the Arkansas Financial Services Association sandbagged the bill in the Senate Commerce and Banking Subcommittee with a few well-placed $500 campaign contributions.

Payday loans are small loans, usually $100 to $500, made for an average of 14 days, Klein said. According to the Center for Responsible Lending, the average payday borrower pays $800 to borrow $325. A 14-day payday loan typically costs Arkansas borrowers 372 percent to 869 percent annually in interest.

Amendment 60 to the Arkansas Constitution, adopted by voters in 1982, governs usury and limits interest on consumer personal loans to a maximum of 17 percent per year.

Klein said the good news includes a Defense Department initiative, passed by Congress, to make it illegal to make loans to members of the active duty military and their families at interest rates higher than 36 percent annually. Also, the payday lenders failed to push through a bill Klein said was virtually meaningless - “We call it window dressing” - that would have allowed its supporters to pose as doing something to curb abusive loans.

The fast payday loan industry’s bill passed the Senate 30-3, but “we stopped it in the House 57-27,” said Klein. Also, after a slow start, Peggy Matson, director of the Arkansas Board of Collection Agencies, has begun making payday lenders accountable to state law.

Klein said that in the last two weeks, Matson took Dennis Bailey to court and won a $1.3 million judgment against him for an illegal affiliation with a Missouri Bank. One of his “Fast Cash” stores had been operating in Cabot, he said.

Matson will hold a hearing May 21 on a payday advance loan lender operating in Jacksonville, American Cash Advance, located in the old Wal-Mart Center, Klein said. The company allegedly made loans as high as $900 in violation of the $300 loan cap in Arkansas, and the loans are made as a money order, which the company then charges 10 percent to cash.

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A payday advance loan lender who had two offices in White County has lost an appeal of a state ruling that he violated the law.

Dennis Bailey, who operated 13 offices in Arkansas including Searcy Fast Cash, 3205 E. Race, and Beebe Fast Cash, lost his appeal in Pulaski County Circuit Court. The Arkansas State Board of Collection Agencies had previously ruled Bailey had engaged in the check cashing business in violation of the Arkansas Check-Cashers Act, and Judge Marion Humphrey agreed on April 13.

In June, the board ordered Bailey to cease all no fax cash advance operations immediately, fining him $1,317,450. Bailey was fined $562,000, which was $1,000 for each check cashing transaction; $725,250, which was $250 for each deferred presentation transaction; $20,200 for the illegal operation of his Pine Bluff store; and $10,000 in attorney’s fees.

One of Bailey’s major contentions at the appeal hearing was there was not sworn testimony taken at the hearing and that the board’s findings of fact and conclusions of law were based solely on the argument of Peggy Matson, the board’s executive director.

At the board’s hearing last year, Matson presented a five-inch stack of documents as evidence, but did not read them to the board. Humphrey ruled that method of presenting evidence at the board’s hearing was legal.

The board ruled Searcy Fast Cash had been giving out instant payday loans without a license. The businesses’ parent company is BMB Finance Company of West Plains, Mo.

Bailey’s company also operated businesses in Cabot, Little Rock, Bryant, Corning, Harrison, Mountain Home, Sheridan, Walnut Ridge, Fordyce, Camden, Hot Springs, Newport, Pine Bluff and Magnolia.

“All of his stores are closed, and now we’re asking the court to give us a judgment in that case so we can execute against all of his assets,” Matson said. “He will be personally liable.”

Bailey is now attempting to transfer his assets, but they have already been tracked by the state.

“We have another hearing coming up in Faulkner County that is almost the same as the Bailey case,” Matson said.

Every easy payday loan store is audited twice a year by the board. Items which are required include: Posting their license on the wall; showing customers the actual adjusted percentage rate on their particular transactions; holding checks only until their the due date and not beyond; posting fees on the wall; allowing no customer more than one transaction per location; exceeding legal loan limit (checks cannot be more than $400, and the highest amount of a loan is $350).

Matson said Bailey was ordered to refund any fees for cashing checks and making loans to customers, and said customers did not have to repay outstanding loans.

“They owe him no money,” Matson said. “They do not have to repay these loans.”

The equivalent annual percentage rate for loans offered at the Searcy office, which closed last year, was 521 percent.

Bailey had also been found guilty of selling tobacco without a permit by the Arkansas Tobacco Control Board and had violated regulations of the Arkansas Beverage Control.

With the Legislature’s failure to further regulate providers of payday advance loans for the fourth consecutive session, the battle over the constitutionality of the industry’s practices will shift back to the judicial branch this fall.

Legislation to cap check-cashers’ rates at the state usury limit and fine operators who charge more passed the House, but died in the Senate during the recently concluded regular session.

An industry-backed bill that critics said repeated reforms, such as banning rollover Arkansas payday loans, that are already law while doing nothing to limit lenders’ fees passed the Senate but died in the House.

With the stalemate, opponents said they would fall back on a 2003 lawsuit in their fight to end practices they say allow payday lenders to charge triple-digit rates for short-term cash loans, far exceeding the state’s 17 percent usury limit.

“This is such a clear cut, legal black and white issue. You can’t charge people 300 percent for credit in Arkansas under our constitution,” Arkadelphia lawyer Todd Turner, who represents plaintiffs in the lawsuit, said Tuesday.

In November, the state Supreme Court reversed a lower court’s finding that it lacked jurisdiction to decide the constitutionality of the 1999 Arkansas Check Cashers Act and sent the case back to Pulaski County Circuit Court. Circuit Judge Barry A. Sims is scheduled to hear the case again beginning Nov. 20.

“It’s been ripe to be decided since the day we filed the lawsuit,” Turner said.

The suit asks the judge to declare unconstitutional the 1999 act, which specifies that fees charged for pay day loans “shall not be deemed interest.” Charging interest above 17 percent would violate the constitution’s usury limit.

Until the issue is decided, payday advance lenders will continue to operate under the 8-year-old law.

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A bill that would tighten some rules on Arkansas payday loan lenders won the support of a Senate committee Tuesday. But the measure is a weaker version of a bill that had failed earlier.

The bill, by Democratic Senator Terry Smith of Hot Springs, allows those seeking payday cash loans to rescind the checks within a day and says no check-casher can seek a criminal “hot check” charge against a client for extending a loan. The bill also allows for the state Board of Collection Agencies to go after check cashers breaking the state’s laws.

However, the bill does not require check cashers to comply with the 17% usury limit set in the state constitution.

A House bill requiring that was previously voted down by the Senate Insurance and Commerce Committee.

Smith’s bill, which he described as a compromise providing some oversight of the cash advance payday loan industry, now heads to the Senate floor.

A customer making a $350 savings account payday loan in Arkansas would write the check-cashing company a check for $400. The lender would keep the check for about two weeks without cashing it, allowing the customer time to buy back the check.

The $50 charge on the $350 loan for 14 days is the equivalent of 371% annual interest. That is well above Arkansas’ usury limit of 17% per year. The bill does not require compliance with the 17% limit.

A bill to hold Arkansas payday loan lenders to the state usury limit stalled in the Senate Insurance and Commerce Committee when only one of the committee’s eight members voted for it.

The vote followed an hour’s debate on House Bill 1036 by Rep. David Johnson, D-Little Rock.

Johnson said payday lenders charge rates on cash advance loans ranging as high as 600 percent on an annual basis. The state constitution sets the usury rate at 17 percent.

The bill would fine payday lenders $300 each time they charge interest rates that would exceed 17 percent a year if applied throughout the year. For instance, if a loan lasted one month but charged 10 percent in that month, that would exceed the limit under the bill.

Sen. Jim Argue, D-Little Rock, voted for the measure. Two other members were not present when the vote was taken.

Sen. Percy Malone, D-Arkadelphia, was one of the five members present who did not vote. He said in an interview afterward that a state Supreme Court case was pending to decide whether the usury provision of the Arkansas Constitution applies to short-term, no faxing payday loans of between six and 30 days.

Malone also said the state has regulatory powers that apply to payday lending.

“We are going to make some effort to increase the regulation of payday, hopefully in this session,” he said.

Malone said there were few sources of loans for high-risk borrows in short-term financial difficulty. If a customer needed a quick cash loan of $100 for one week, for instance, “nobody’s going to give it for interest that amounts to 75 cents,” Malone said.

The argument that payday loans are an avenue for people without credit ignores the facts, Mayor Patrick Henry Hays of North Little Rock told the committee.

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A bill to severely limit interest rates charged for payday loans overwhelmingly passed the Arkansas House of Representatives on Thursday, marking the biggest threat to the practice in the eight years that it has been legal in the state.

The vote was 90-3, with two lawmakers voting present. Now the bill goes to the Senate.

“I think we’re going to have a job to do in the Senate,” said Rep. David Johnson, D-Little Rock, the primary sponsor of the bill. “We’ll be starting over again; we’re halfway done. I’m excited and happy about the result, and I hope that gives us some momentum going into the Senate.”

Interest on instant cash loans can amount to several hundred percent on an annual basis.

The vote was no surprise, said Bradley Rogers of Stuttgart, president of the Arkansas Financial Services Association, an organization of payday lenders.

“As many sponsors as they had for the bill, we expected that,” Rogers said.

If the bill passes in the Senate and is signed by Gov. Mike Beebe, it will become law immediately, according to a provision in the bill.

Beebe will sign the faxless payday advance bill if it reaches his desk, said Matt De-Cample, Beebe’s spokesman.

“As far as this first step [of passing in the House ], this is a good move to protect some of our poorest citizens,” DeCample said.

An Arkansas payday loan works like this: A customer writes a check for $ 400, for example, and receives $ 350 in cash. The lender normally keeps the check for two weeks without cashing it.

A $ 50 charge on a $ 350 loan for 14 days is the equivalent of 371 percent in annual interest. If the borrower cannot pay the loan in two weeks, he writes another check, pays another fee and the loan is extended for two more weeks. The process often continues for months.

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Market demand for short-term, bad credit payday loans could be the saving grace for Arkansas’ payday lenders, but the industry likely will not escape the legislative session without enduring tougher regulations, a legislator said Tuesday.

“I have concerns that if we totally shut the payday lenders down that there will be a void that may be filled by some of the Internet payday lenders that may be more abusive and harder to regulate,” said Rep. Bruce Maloch, D-Magnolia, a banker and attorney.

Some lawmakers are looking at draft legislation that offers an alternative to House Bill 1036, which would cap interest rates for payday cash loans and make it a criminal offense to exceed the cap.

The House committee on Insurance and Commerce held a hearing on the issue last week and is scheduled to take up House Bill 1036 by Rep. David Johnson, D-Little Rock, again today.

Under consideration as alternatives are proposals to prevent lenders from harassing borrowers for payment and provide borrowers with more information about terms of the loans.

Opponents of no fax payday advance lending have said lenders target a demographic that does not always understand the terms of the loans. Many of the would-be regulations were proposed by the payday lending industry, its lobbyist, Don Tilton, said.

“Our coaltion would be totally against that,” said H.C. “Hank” Klein, founder of Arkansans Against Abusive Payday Lenders.

“All this talk of putting more teeth in the law is window dressing,” Klein said. “All we’re asking is the Legislature to pass a law to enforce the 17 percent limit in the constitution.”

Other proposals include restricting lenders’ access to areas near military bases and creating an extended pay plan that would not assess borrowers additional fees or interest if an easy payday loan was not paid back in the initially agreed upon time frame.

“If whatever we do leaves payday lenders in business, I think it would certainly add to our law to add some of those provisions,” Maloch said.

He suggested Johnson’s bill could be amended to include additional regulatory provisions, including one that would require that borrowers certify they have only one outstanding cash advance payday loan and that they wait 30 days before taking out another to stop any rollover problems that lead to debt traps.

Current regulations cap loan length and amount, require borrowers and employees to be informed of the regulations and prohibit borrowers from having more than one loan per store, among other things.

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Never have lamentations about the plight of the poor been so loud at the state Capitol, and The Arkansas Leader predicts that never will so much harm be done in their name.

The clearest evidence is the working over given a good bill (HB 1036) to halt the depredations of the Arkansas payday loan lending industry, which typically charges poor people from 372 to 869 percent annualized interest on cash loans.

The bill repeals a section of the current law that allows the lenders to count interest charges as “fees” rather than interest, and it would fine a lender $300 each time it charges a person more than 17 percent interest, which is the maximum allowed by the Arkansas Constitution.

If you haven’t been in need of a quick payday advance, here is how it works: In a typical transaction, a worker writes the lender a check for $400 and the lender hands the worker $350 in cash and holds the check for 14 days.

If the person can’t pay off the loan in that time he writes the lender another check for $400, and the process can continue ad infinitum. The huge charges clearly violate the state Constitution under long-established doctrines of the Arkansas Supreme Court, but somehow no one seems able to get a definitive ruling from the court.

So legislation is the best answer.

Rep. David Johnson, D-Little Rock, is the chief sponsor of the faxless payday advance bill and 11 members — a bare majority — of the House Committee on Insurance and Commerce told Johnson they favored it, but he can’t get the committee to vote. By way of history, the Insurance and Commerce Committees of the House of Representatives have traditionally been the Bermuda Triangle where all consumer legislation gets lost. Industry-sensitive lawmakers crowd on to those committees.

At another hearing Wednesday, members worried that if the payday lenders were subjected to too much regulation or, God forbid, went out of business, poor people would have nowhere to turn to get some quick cash before their next paycheck.

And it is expensive, they said, for a business to service these desperate people. (Most people with bank accounts also have a credit card, where a payday cash loan will cost only a small fraction of the payday lenders’ charge.)

Other legislators were opposed to the bill, or so they said, because it exempted pawnshops from the interest limits. Johnson said they were exempted because he did not have the strength to fight the pawnshops, too. Providers of pay day loans are formidable enough. They contribute heavily to the campaign funds of legislators.

No legislator will come out and say that he is for protecting the privilege of the payday lenders to make big profits from capitalizing on the predicaments of the working poor. They always say they are fighting for the poor. So has it always been.

The head of an association fighting to outlaw the payday lenders’ practices was dismayed Wednesday at the trouble sponsors had even getting the bill out of committee. The case for acting is so compelling that he thought passing the bill would be easy. You will not go broke underestimating the General Assembly.

Hundreds of AARP Arkansas members dressed in red filled the Capitol rotunda Wednesday to rally support for legislation to create a program to counsel and inform long-term care seekers of their options.

The group also lobbied for a proposal to penalize payday advance loan lenders who charge interest rates above the state limit.

“If you dedicate yourselves to getting these two pieces of legislation passed this session, I will tell you this: It will happen,” new Lt. Gov. Bill Halter told members of the group before heading to the Senate to gavel the chamber into session for the first time.

About 355,000 AARP members live in Arkansas.

The group distributed draft legislation by Rep. Sandra Prater, D-Jacksonville, that would create the Arkansas Options Counseling for Long Term Care Program. Payday cash advances would be just one focus of the plan.

It would require that those looking for long-term care services and providers in Arkansas be provided unbiased information on their options and on factors to consider when planning long-term care.

More than 85 percent of AARP members in the state want such information, and 75 percent support a law requiring options counseling, according to AARP research the group said it would provide to each legislator.

“I hate to see people not be able to take care of themselves and have to go to a nursing home because they’re in debt,” said Gladys Griggs, who came from Jacksonville with more than two dozen members of her local AARP chapter.

While more than 90 percent of the group’s members said they support using Medicaid long-term care funds to help people stay in their own homes and communities, 55 percent of Arkansas’ Medicaid long-term care budget was spent on nursing home care, according to the 2005 Medstat Report on Medicaid Long Term Care Expenditures.

AARP-Arkansas contends an institutional bias in the system forces many Arkansans into nursing homes.

“More Arkansans will be able to choose to live with their families or near them and remain in their communities as they age,” if the bill passes, AARP-Arkansas President Billie Ann Myers said.

She said the organization also will oppose any legislation to shield nursing homes from liability for abuse and neglect, if any surfaces.

As part of the Arkansans Against Abusive Payday Lending coalition, AARP-Arkansas pledged support for a bill that would fine no credit check payday loan lenders found guilty of charging consumers more than the 17 percent consumer interest limit set by the state constitution.

“It takes that constitutional provision of 17 percent and it puts an enforcement mechanism in it, it puts some teeth in the law and allows a fine of up to $300 per transaction,” said Sen. Shawn Womack, R-Mountain Home, one of the sponsors of House Bill 1036.

The bill is intended to maintain access to short-term credit for people with low income, but also protect them from fast cash advance abuse, Womack said.

“I don’t know what I know about payday loans,” Griggs said.

She said she never got one and does not know anyone who has.

She and fellow member Eunice Stiles attended the rally primarily to support the care options bill and “just to show we’ve got some muscle,” Stiles said.

“So everybody better listen to us,” Griggs said. “We’ll make a racket.”

Legislation introduced Thursday morning in the Arkansas House of Representatives would make payday advance lending with high interest rates a crime.

House Bill 1036 creates a criminal offense of making unlawful consumer loans and levies a $300 fine for each violation. The bill defines an unlawful consumer loan as one charging an effective annual interest rate greater than 17 percent, as prohibited by the Arkansas Constitution.

The measure would allow citizens to make complaints for police officials to investigate and prosecuting attorneys to take action. Lawmakers will consider the quick payday loan bill when the legislative session begins in January.

Rep. David Johnson, D-Little Rock, and Sen. Shawn Womack, R-Mountain Home, are the bill’s lead sponsors. They are joined by 14 co-sponsors in the general assembly.

Both legislators spoke at a news conference at the state Capitol in the old State Supreme Court Room.

Johnson said it’s time to put a stop to abusive cash advance lenders taking advantage of financially distressed consumers with small, high-interest loans masquerading as short-term solutions.

“In truth, it turns into a debt trap they can’t escape,” he said. “It’s not uncommon for people to incur hundreds if not thousands of dollars of debt on a small loan.”

Military payday loan effect: Womack said it is time to stop lenders from ensnaring low-income borrowers in an endless cycle of debt that creates an added barrier to entering the middle class. Reasonably priced credit should be available, even for small loans, he added.

“The goal here is to have the appropriate balance,” Womack said.

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