Payday Loan Times

The following is a Letter to the Editor of the Virginia Daily-Press…

Reference “Let’s develop alternatives to payday loans,” June 23, by Ward Scull and Mike Lane. Far from “trapping” customers, payday advance companies each year help thousands of Virginia families overcome unexpected financial circumstances.

When an air conditioner breaks or a car battery dies, payday lenders provide convenient access to small amounts of money to cover those costs. Banks don’t - they instead make billions on bounced checks, “overdraft protection” and other fees. Faxless payday loan customers wisely avoid these more costly alternatives.

While critics, including Scull and Lane, have rushed to label payday lending as “predatory” without ever having defined what “predatory” means, recent studies show that by extending credit where there would otherwise be none, payday loans are not predatory but instead actually help the households they serve.

Further regulation of personal cash loan lending has the adverse and unintended consequence of reducing credit options for those who may have few alternatives.

Policymakers should encourage competition in the small loan market as competition controls prices. The vast majority of payday loan customers pay their loans back on time. For the small minority of customers who find difficulty meeting their loan terms, responsible lenders offer extended payment plans that provide more time to repay their loans at no extra cost.

Let’s give reasonable, hard-working Virginia consumers access to a variety of regulated credit options and trust them to make financial decisions based on what’s best for their families.

Tom Weilandt
Chesapeake

The only faxless payday advance lender left in West Virginia settled with Attorney General Darrell McGraw Wednesday.

McGraw says he has reached an agreement with Valued Services of West Virginia, doing business as First American Cash Advance, resolving his investigation of its payday lending practices. He says First American is the state’s last fast payday loan lender.

Approximately $616,000 in loans allegedly owned by 2,700 West Virginians will be forgiven, and FACA will pay $200,500 to the state for “consumer protection purposes,” McGraw’s office said.

Also, $22,000 will be paid to distribute to approximately 400 consumers who paid interest charges on pay day loans after May 31, 2006.

Payday loans are short-term loans, typically for 14 days, that are secured by a post-dated check or by an agreement authorizing an electronic debit for the full loan amount, plus fees, from the consumer’s account.

“My office has long been concerned about the spiral of debt that often results when already cash-strapped consumers turn to payday lenders for help,” McGraw said. “Consequently, I am pleased that FACA has decided to discontinue operations in West Virginia. I also commend FACA for acknowledging our concerns about [payday cash loan] lending and for its cooperation with our office.”

FACA had 11 locations in West Virginia before shutting down in July 2006.

Also settling with McGraw was Community State Bank of South Dakota, which charged interest rates that were permissible in the state it was headquartered, South Dakota. Those rates were not legal in West Virginia.

When the Federal Deposit Insurance Corp. decided it would not allow that to take place, the bank decided it would no longer issue bad credit cash loans through FACA at its West Virginia locations, resulting in FACA’s closure.

A Kanawha County Circuit Court judge has ordered 10 online payday loan lenders to produce documents subpoenaed by state Attorney General Darrell McGraw’s office.

Judge Paul Zakaib also ordered the lenders to stop making or collecting no fax payday loans in West Virginia until further notice.

Payday loans are short-term loans or cash advances, typically for 14 days, with high interest rates. Internet payday loans are secured by the consumer giving the lender permission to electronically debit the full amount owed, plus interest, from a personal checking account.

McGraw’s Consumer Protection Division began investigating these loan practices in 2005 after hearing that some companies were sidestepping West Virginia usury laws by providing loans online.

Agency officials say in some cases, consumers were charged annual percentage rates ranging from 600 percent to 800 percent, which is more than 44 times the maximum allowable rate of 18 percent APR for similar consumer loans in West Virginia.

Since the office began its investigation, it has reached settlement agreements with at least 17 Internet providers of payday advances. Agency officials say these settlements have resulted in $225,000 in refunds and canceled debts for more than 1,600 West Virginia consumers.

Assistant Attorney General Norman Googel said Zakaib granted the Attorney General’s petition in February, but there was a delay in getting it entered in writing.

The nation’s largest payday loan lender and the West Virginia attorney general’s office have reached an agreement that prevents the company from performing certain collection practices in the state, Darrell McGraw’s office announced Tuesday.

Advance America, Cash Advance Centers Inc., a Spartanburg, S.C.-based regular and bad credit cash loan lender, agreed to discontinue contacting consumers at their homes and leaving door hangers for consumers when attempting to collect alleged debts, McGraw said.

Also, the company will no longer contact third parties, normally listed references on the loan applications, unless the company thinks the person has moved.

The company will also close the zero-balance accounts of the consumers who complained to the attorney general.

Payday loans online are short-term loans or cash advances, which are secured with a postdated check for the full loan amount plus interest and fees. These loans typically have triple-digit interest rates and are illegal in West Virginia.

Advance American affiliates that signed the agreement have offices in Kentucky, Ohio, Pennsylvania and Virginia, each within 50 miles of the West Virginia border. Consumers often travel to these locations to obtain the no fax cash advance loans.

McGraw’s investigation began after the consumer protection division received complaints alleging that Advance America attempted to coerce payment by threatening criminal charges, making unauthorized collection calls to third parties and making personal visits to consumers’ homes in West Virginia, the attorney general’s office said.

Consumer advocates don’t plan to lobby lawmakers this session for a bill targeting personal cash loan lenders. They say they don’t need to, thanks to a recent decision by federal regulators.

Payday lending foes are heralding a standard adopted by the Federal Deposit Insurance Corporation, discouraging such lending to anyone who has had such a loan outstanding in three out of the 12 previous months.

“When that happened, they left West Virginia,” Dave McMahon, a lobbyist and lawyer for low-income consumers told The Herald-Dispatch.

A lobbyist for payday lenders discounted the FDIC standard cited by McMahon, but agreed that the topic would not arise this session.

“The industry is devoting more attention and effort to other jurisdictions,” lobbyist Phil Reale said.

But McMahon said the death of the issue, at least for now, suggests the industry had relied on repeat customers as consumer advocates have alleged. He cited national statistics estimating that these borrowers provide 60 percent of online payday advance lending revenue, though they account for only 40 percent of all customers.

“It really was not about short-term, occasional loans,” McMahon said. “What they really make their money on is when people get trapped into a cycle of debt to these people and they can’t get out.”

Payday lenders offer cash advances to people who surrender postdated checks. The lender holds the check until the borrower’s next payday, when the loan is either paid off or the lender cashes the check.

The fees charged for this short-term loan exceed the 38 percent interest rate cap set by West Virginia law. Payday lenders had lobbied the Legislature in recent years to license and regulate these kinds of loans. But one lender, First American Cash Advance, operated in the state by aligning itself with federally chartered, out-of-state banks.

McMahon and such groups as AARP had opposed instant payday loan lending legislation, and proposed measures targeting companies like First American. The FDIC standard has changed the playing field, McMahon said Wednesday.

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Despite the efforts of consumer advocates around the nation, the cash advance business has not seen much of a slowdown. A major reason for the continued popularity?

The extension of these resources beyond mere storefronts. Now, thanks to online payday loans, anyone with access to a computer can apply for quick money.

A number of states have passed laws trying to regulate payday lenders, who charge their customers exorbitant interest rates, by forbidding them from doing business in their states. The online lenders, however, seek out clever loopholes.

“All aspects and transactions on this site will be deemed to have taken place in our office in the State of Delaware, regardless of where you may be viewing or accessing this site,” reads the disclosure language on APPLE Fast Cash Personal Loans’ Web site.

“Borrower is responsible for complying with any local statutory obligations that may exist in their state or area with respect to any transactions with APPLE Fast Cash Personal Loans.”

Recently, West Virginia Attorney General McGraw filed suit to enforce investigative subpoenas against 14 Internet payday lenders and to enjoin their usurious lending activities in his state.

McGraw also announced that his office has reached formal settlement agreements with 18 other online payday loan lenders in which they promised to permanently discontinue their payday loans here and to refund all unlawful fees and charges collected from West Virginia consumers.

McGraw said the latter agreement will result in tens of thousands of refunds and canceled debts for hundreds of West Virginia consumers.

McGraw said the 14 Internet lenders made payday advances to consumers in their homes via interactive web sites and have claimed that states, including West Virginia, cannot regulate their lending activities. The state, he says, sees it differently. The defendants require payment of interest with Annual Percent Rates (”APR”) ranging from 600 to 800 percent APR.

The State of West Virginia has a maximum allowable rate of 18 percent APR for consumer loans.

West Virginia Attorney General Darrell McGraw has stopped 18 online payday loan lenders from doing business in the state. He’s also in the midst of suing 14 others that he says charge consumers annual percentage rates of between 600 and 800.

In the lawsuit filed Monday in Kanawha County Circuit Court, reports the Herald-Dispatch, McDowell lists 14 out-of-state companies that he says violate a West Virginia law that limits the annual rate to a maximum of 18 percent.

He wants to force them to do what the 18 other Internet payday advance loan lenders already have done. They agreed to stop offering payday loans in the state and to refund tens of thousands of dollars worth of illegal fees and charges collected from West Virginians.

Of course, payday loans are short-term loans or cash advances secured by postdated checks or by giving the lender authorization to debit the amount of the loan plus interest from the consumer’s bank account.

“Last year we launched a major initiative to combat companies that were using the Internet to circumvent the laws of West Virginia intended to protect consumers from usurious loans,” McGraw said in a prepared statement.

“Today we have sent a message that [payday cash loans] made to West Virginia consumers over the Internet must comply with our laws.”

The only payday loan lender in West Virginia has left the state.

Indeed, First American Cash Advance - whose five-year history in West Virginia was filled with controversy - pulled out of the area sometime in July, Deputy Attorney General Jill Miles said today.

The payday loan company opened storefronts in South Charleston and St. Albans in 2001, quickly growing. Earlier this year, it was operating 11 storefronts throughout West Virginia. All seemed to be a success.

According to The Charlestown Daily Mail, shortly after First American came to West Virginia, Larry Kugler said the company's typical loan was for about 15 days, with the annual percentage rate 425 percent. At the time Kugler was president of First American Holding Co., which was the corporate parent of First American Cash Advance.

First American was making payday loans as an agent for the First National Bank in Brookings, S.D.

"All we do is market a product and service a product," he said.

Evolution of a payday advance firm: In 2002, seven months after First American began operating in West Virginia, 15 state senators introduced a bill that would have outlawed payday cash loans in West Virginia by preventing lenders from using checks as security for cash advances.

Larry Stark, state banking commissioner, said at the time that First American wasn't regulated by the state Division of Banking because of the firm's affiliation with an out-of-state bank. Meanwhile, West Virginia Deputy Attorney General Fran Hughes said that Attorney General Darrell McGraw supported the Senate bill.

"We don't think it does enough, but we're happy to see something done in this area," she said.

Doug Maddy, who was executive director of the West Virginia Bankers Association at the time, said the association's board of directors voted to remain neutral on the proposed cash advance loan legislation.

"Our basic attitude is, ‘That's not us. We don't have a dog in that fight. Let's stay neutral on it," Maddy said.

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