Payday Loan Times

Two of Charlotte’s economic giants, Bank of America and Wachovia, bankroll some payday advance loan lenders - the same lenders whose operations high-ranking officials found so distasteful that they drove them from the state.

These economic ties are no secret - they’re disclosed deep in federal Securities and Exchange Commission filings - but the relationship is unknown to many consumers, some of whom would doubtless be surprised by the industry ties.

“Those are the types of loans that they won’t show in their commercials or glossy advertisements,” says Rick Jurgens, consumer advocate for National Consumer Law Center.

Jurgens first noticed the ties when he was researching some states’ public utilities relationship with the quick payday loan industry. What he found was surprising.

Advance America, the industry heavyweight, got a $265 million line of credit funded by several banks in 2004 - well after public opinion began turning against high-interest, short-term loans. The banks included Wachovia, Wells Fargo, BB&T and Carolina First Bank. Another lender and administrative agent? Bank of America.

As recently as March, according to SEC documents, the company still had access to the cash.

“Payday lenders are often not highly capitalized companies,” Jurgens says. “That’s why they use lines of credit, which is essentially like a credit card with a relatively low interest rate, to do day-to-day lending.”

Inner City Press, a New York advocacy group, found Wachovia has “an unspecified portfolio of [bad credit cash loan] lending clients,” according to the organization’s Web site. The group is also opposing Bank of America’s application to acquire LaSalle Bank, due in part to its ties to payday firms.

Wachovia spokeswoman Iris Cumberbatch would only say the bank has “a very limited number of relationships” with payday lenders. “Beyond that, I can’t say anything specific because it would violate our privacy policy,” Cumberbatch says.

Bank of America representatives didn’t return calls seeking comment.

Payday lenders haven’t operated in North Carolina since 2005, when state Commissioner of Banks Joseph Smith ruled the practices of Advance America were illegal. The state had prohibited payday lending since 2001, when a law authorizing the practice expired.

But in practice, lenders flourished by making loans through out-of-state banks, a practice often derisively termed the “rent-a-bank” model. In 2005, for instance, no fax payday loans cost N.C. residents more than $74 million, according to the Center for Responsible Lending, an industry opponent based in Durham.

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A new report from the Department of Defense praises North Carolina as one of the strongest states in the country in protecting military members from predatory payday advance lending.

But it also says Congress and individual states could do more to prevent the practice of targeting troops.

The report, released this month, was requested last year by U.S. Sen. Elizabeth Dole, a Salisbury Republican and member of the Senate Armed Services Committee.

Predatory lending includes practices such as no faxing payday loans, car loans, rent-to-own programs and other temporary loans that can charge service members triple-digit annual percentage rates.

In 2001, North Carolina became one of a few states to prohibit payday lending companies, the report said. The report said the armed services should do more to educate service members about predatory cash advance loan lending practices.

But, it added, “education does not trump the marketing of these loans and the easy availability of quick cash with few questions asked.”

The report recommends that Congress and individual states put caps on annual percentage rates, require more disclosure, force easy payday loan lenders to consider borrowers’ ability to pay and allow service members legal recourse in disputed cases.

Dole said she will look closely at the report’s recommendations.

“This report presents a powerful picture of the extensive problems brought about by predatory lenders that target military families,” she said in a release.

Dole said she plans to introduce legislation based on the department’s report. The chairman of the Senate’s banking committee, of which Dole is a member, has pledged to hold a hearing on the issue.

North Carolina Treasurer Richard Moore’s office has asked companies that manage the state’s pension funds to make sure that they don’t hold stock in payday advance loan lending companies.

The Charlotte Observer reported this week that the pension fund last year may have invested nearly $11 million in as many as five payday-lending companies - at the same time that Moore was leveling criticism at the companies.

The newspaper reported yesterday that the pension fund’s chief investment officer wrote to the state’s outside managers this week, asking them to sell shares in any such payday loan company. The order applies to funds that pick their own stocks, not those that follow a certain index, such as the S&P 500.

The law allowing payday lending in North Carolina expired in 2001, but some companies continued to do business here until last year, when state officials closed a loophole that allowed them to stay. Moore criticized the check cash advance lenders last year for giving short-term loans with the equivalent of annual interest rates of more than 500 percent.

“A civilized society does not allow these kinds of interest charges,” he said in May.

Earlier this week, Moore’s office said that the fund sold its shares in four of the payday-lending companies identified by the Observer and were reviewing the fifth.

The pension fund has a total value of about $70 billion and owns shares in about 7,000 companies.

Moore wrote a letter Thursday encouraging companies that devise stock indices to remove providers of payday cash loans from their benchmarks. He said he has a duty to “promote responsible and solid corporate governance with the goal of fostering healthier companies that ultimately will yield stronger returns.”

The pension fund has asked the nonprofit Community Reinvestment Association of North Carolina to come up with a list of guranteed payday loan lenders to share with its managers. Executive director Peter Skillern said that the group also will develop guidelines by which companies can be judged in the future.

At the same time that N.C. Treasurer Richard Moore (pictured) sharply criticized payday advance loan lenders last year, he managed a state pension fund with holdings in as many as five companies in the industry.

The North Carolina pension fund that Moore runs may have invested nearly $11 million in payday loan lending companies, according to The Charlotte Observer. The fund has a total value of about $70 billion.

Moore’s office said that the fund has since sold its shares in four of the companies after finding them during a “routine review.” The treasurer’s office is now reviewing a fifth company, CompuCredit Corp., based in Atlanta, which operates one of three instant cash loan lending chains that agreed last year to stop making loans in North Carolina.

Sara Lang, a spokeswoman for the treasurer’s office, said that it’s difficult for the office to track every bad credit payday loan lender. The pension fund owns shares in about 7,000 companies. Lang added that Moore and his staff had for several years instructed the pension fund’s outside investment firms to not invest in payday lenders.

Payday lending has been illegal in North Carolina since 2001, but state officials last year closed a loophole that had allowed some companies to continue doing business here.

At the time, Moore criticized the cash advance lenders for giving short-term loans with the equivalent of annual interest rates of more than 500 percent.

“A civilized society does not allow these kinds of interest charges,” Moore said last May.

Paul L. Burnley retired after 23 years of newspaper work in Chicago and St. Louis. He now lives in Fayetteville and recently wrote the following, paraphrased letter to The Fayetteville Observer …

I remember times while growing up in St. Louis and Chicago when some people didn’t have enough money to last from paycheck to paycheck.

Some turned to the neighborhood pawnshops to help get them through. These were the older equilvalent of today's cash advance stores.

There were men who would pawn their Sunday suits for $10, just enough to last them until payday on Friday. On Saturday, they returned to redeem their suit by paying the $10 plus a $1.50 charge.

Most looked upon this as a service to the community. No one felt the pawnbroker was making a large profit from these transactions and welcomed the help.

In the ’60s and ’70s, many companies saw this practice as a way to exploit low-income people or those who were unable to obtain loans from banks. Sound familiar? Sound like critiques levied against providers of regular or online payday loans?

They understood that the $1.50 interest on a $10 loan for a week or two could amount to a large rate of interest, compounded over a year. If the loans were larger, and extended over a longer period, the interest would grow as well. In some cases, the annual interest rate on some of these short-term loans could run as high as 400 percent.

Today, this practice has grown into a $3.4 billion-a-year industry. The average borrower is paying $800 for a $325 payday cash advance. These companies are so widespread that in California there are more payday loan outlets than McDonald’s and Burger King restaurants combined.

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North Carolina is often prasied for its strict treatment of various kinds of payday loans; such resources are basically eliminated from the state. How come?

"You get in a cycle of debt where you can't get that repaid,” said David Elliott, the President and CEO of Fort Bragg Federal Credit Union.

Just a couple years ago, cash loan providers were found near major cities such as Raleigh and Charlotte. studies have shown that companies target areas with a military presence, as well. In 2005, Wayne County, which is home to Seymour Johnson Air Force Base, had the state’s highest concentration of lenders.

A concern for those that backed this industry, however, was what troubled consumers would do without the chance to apply for faxless online payday loans. That's where credit unions come into play.

“If you're going to try to do away with something, you have to have a product out there to take its place,” Elliott said.

Fort Bragg Federal and Pentagon Federal Credit Union offer ARK loans, which stands for Asset Recovery Kit. It’s a no-interest personal loan of up to $500, and there’s a one-time $6 fee. If someone takes out more than one loan, they have to go to credit counseling.

"99% of the people who come see us, the primary reason for their problem is a lack of having a spending plan or a budget," said Tom Luzon, who works with Consumer Credit Counseling Services, which has partnered with the credit unions.

Luzon said no one has defaulted on a loan since the program started in February. It's good news for those that feared an increase in debt once payday advance loans were taken off the table.

As president of Community Financial Services Association of America, Darrin Andersen feels strongly about instant payday loans. He takes exception the reports that cash advance companies are preying on our troops.

He expressed as much in the paraphrased letter to The Citizen-Times below …

Instead of working towards real solutions, the Pentagon turned to activist groups that have a stated agenda of putting the payday advance industry out of business. Activists worked so closely with the Pentagon that one group publicized the report the day before it was even delivered to Congress.

The allegation that payday lenders target members of the military is simply false. In fact, their own report shows that less than 1.3 percent of total industry revenues comes from military customers. Among the recommendations is a rate cap of 36 percent APR on loans to military customers.

At a 36 percent APR, the total fee charged on a $100, two-week faxless payday loan would be $1.38. Payday advance lenders couldn't cover the cost of originating a loan, let alone meet employee payroll and other fixed business expenses. Meanwhile, storefront payday lenders would be prohibited from offering payday advances to members of the military.

But eliminating payday loans as an option will not eliminate the need for short-term credit. Borrowers will be driven to unregulated offshore Internet lenders who specialize in online payday loans - or forced to choose between more expensive alternatives such as bounced check or overdraft protection fees, or late bill payment fees.

Congress should support legislation that has already passed the House and incorporates protections such as those in CFSA’s Military Best Practices. Doing so would protect service members from ALL predatory lenders, including loan companies that target only the military, as well as any bad actors in our own industry.

Military customers would be protected … and reputable fast payday loan lenders allowed to stay in business and service growing demand for this credit option.

We reported earlier this summer that Mark Pearce, the former president of the Center for Responsible Lending and a major opponent of payday loans, had been hired as a deputy state banking commissioner for the N.C. Commissioner of Banks.

The appointment arrived at a time when some no faxing payday loan lenders are contemplating a re-entry into North Carolina. Pearce took time out to talk about his new job with The Winston-Salem Journal:

The Center for Responsible Lending has a reputation for being a left-leaning consumer-advocacy group. Do you have any concerns about that reputation affecting your ability to do your new job?

I have never thought of the center as left-leaning, as the center found common ground with both conservatives and liberals, Democrats and Republicans, on many issues. Almost everyone is against abusive [payday advance] lending practices, and I would expect the center's reputation as a strong, fact-based research and policy organization will only help me in my new role.

What do you think your hiring says about the direction of the Commissioner of Banks' office?

The Office of the Commissioner of Banks is well respected as a leader in state financial regulation. I think my hiring highlights that the regulation of nonbank entities, those that specialize in a particular set of loan products, is an increasingly important area to the borrowing public.

What expertise do you believe you will bring to the office that was lacking?

I hope I will supplement the existing expertise at the Office of the Commissioner of Banks, probably most directly with my experience with predatory mortgage lending and small short-term, [same day payday loans]. I also hope I can support efforts to protect North Carolina's ability to protect its citizens and local lenders from out-of-state lenders that abuse federal law to offer products not allowed in North Carolina.

Do you believe you can be more effective operating from within the commissioner's office than as a voice outside it?

I think both roles are important. I am excited about the opportunity to participate directly in the regulation of lending here in North Carolina.

Will there be a direct link between the commissioner's office and Center for Responsible Lending, or will there be a clear, transparent separation required?

To be a good regulator, you have to talk with everyone - lenders, advocates, the public and other interested people. I think to make good decisions on almost any issue, you need to consider all sides of an equation.

What will be your focus in your new job?

I think one of the exciting things at the Office of the Commissioner of Banks is our effort to combat mortgage fraud. North Carolina has a great number of high-quality lenders and brokers. But unfortunately, there are still some scam artists out there that do not comply with North Carolina's law.

Those bad operators hurt not only the individual homeowners and families, but also tarnish the reputation of the lenders and brokers that do good business for people. Another project that I am excited about is the opportunity to promote increased participation in our banking system among people that don't have banking accounts. (And, therefore, would not quality for any sort of pay day loan.)

In today's world, small decisions about financial matters can have a large impact on your ability to get loans on the best terms. I hope we can assist in improving financial literacy.

As the Department of Defense focuses on the issue of military payday loans across the country, one state has been cited as providing ample protection for armed forces members from these cash advances:

North Carolina. 

At the same time, the department says Congress and individual states could do more to prevent the practice of targeting troops with such faxless payday loans and regular payday loans.

The report, released this month, was requested last year by U.S. Sen. Elizabeth Dole, a Salisbury Republican and member of the Senate Armed Services Committee. Predatory lending includes practices such as bad credit payday loans, car loans, rent-to-own programs and other temporary loans that can charge service members triple-digit annual percentage rates.

But in 2001, North Carolina became one of a few states to prohibit payday advance lending companies. The study said the armed services should do more to educate service members about predatory lending practices.

It added that"education does not trump the marketing of these loans and the easy availability of quick cash with few questions asked." The report recommends that Congress and individual states put caps on annual percentage rates, require more disclosure, force lenders to consider borrowers' ability to pay and allow service members legal recourse in disputed cases.

Dole said she will look closely at the report's recommendations.

"This report presents a powerful picture of the extensive problems brought about by predatory lenders that target military families," she stated.

The senator said she plans to introduce legislation based on the department's report. The chairman of the Senate's banking committee, of which Dole is a member, has pledged to hold a hearing on the issue of military cash loans.

Need cash groceries, but can't pay right now?

According to the Charlotte Observer, the Bi-Lo supermarket chain is rolling out a new store credit card that lets customers with a checking account and photo identification buy now and pay later. Advocates for lower-income consumers worry, however, that the program is too similar to predatory payday loans.

Officials with the company say BonusPay, introduced in all South Carolina Bi-Lo stores last week, is a way to help cash-strapped shoppers avoid fees associated with revolving credit or bounced checks. Bi-Lo operates more than 300 supermarkets in the Carolinas, Georgia, Tennessee, Alabama and Florida.

With BonusPay, shoppers are given a credit line of $50-200 and are charged $3-5 each time they use the card at the checkout, plus $4.99 for each month they use the card. The balance and fees are deducted from their checking account when they get their paychecks.

Like faxless payday loans, no credit check is required, nor is proof of income. In comparison, fees for bounced checks range from $30-70, depending on financial institution.

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