Off topic again - "Payday lending" at outrageous interest rates.
(I would not post this on a busy weekday; and no one is forcing anyone to read the whole article ...)
January 9, 1999
More Triple-Digit Loan Fees Allowed
Filed at 10:57 a.m. EST
By The Associated Press
CLEVELAND, Tenn. (AP) -- It's a financier's dream: Lend money to workers
with steady jobs and short-term cash problems -- at up to 800 percent
interest.
That vision is now a lucrative reality for a group of street-corner bankers who
have made ''payday lending'' one of the nation's fastest-growing industries. A
borrower writes a postdated check to the lender, to be cashed on her next
payday, and walks out with cash. The loan can be renewed as often as the
borrower likes.
In less than a decade, payday lenders have created a new industry and
overcome challenges by lawsuits and states that called their triple-digit interest
rates illegal. They've succeeded by redefining the word ''loan'' and persuading
lawmakers in 19 states to exempt them from laws that limit interest rates.
Now they're working on changing the law in states that still consider them
outlaws.
Janet Delaney found out how payday loans work when she needed $200 to
pay her bills.
A friend told the hospital food service worker about a new storefront loan
office called ''Check Into Cash.'' The store let her write a check she couldn't
cover and gave her $200 on the spot. They agreed not to cash it until her next
payday -- for a $38 fee.
When payday came, the $16,000-a-year worker didn't have $200 to spare.
Fine, the payday lender said, pay another $38 and you're off the hook until
next payday. A year later she had paid $1,220 in fees. And she still owed the
$200.
''I had to write a check to pay my light bill, my phone bill. That's the way it
went every two weeks,'' said Ms. Delaney, who lives with her daughter,
son-in-law and newborn granddaughter in a rented two-bedroom apartment in
Cleveland, Tenn. ''I never dreamed it could get to be such a mess.''
Fees like hers have created a profitable and fast-growing industry that didn't
exist a decade ago.
W. Allan Jones opened his first Check Into Cash office, the one Delaney
visited, in 1993. Now he lends to the masses at 270 storefronts from
California to the Carolinas. His company had $21.4 million in revenue in 1997
and is opening 15 stores a month. Now he's preparing to sell shares in his
company, the first stand-alone payday lender to go public.
''People are willing to pay for convenience,'' Jones said. ''I'm just lucky. I hit
on something that's very popular with consumers.''
His is the most dramatic of many stories of newfound wealth made on payday
loans.
The number of check-cashing outlets -- many of which offer payday loans --
has doubled to 6,000 since 1990, according to the National Check Cashers
Association. Another 2,000 offices do nothing but payday loans, said Bob
Rochford, deputy counsel for the association. One of them, Advance America
Cash Centers, was founded by former Blockbuster Entertainment executive
George D. Johnson, who has expanded the chain to nearly 500 stores.
''There is an obvious need,'' Rochford said, ''and it is a very popular service.''
The burgeoning industry has its epicenter in the unlikely Appalachian town of
Cleveland, Tenn., home of two of the nation's largest payday lenders, Jones'
Check Into Cash and rival National Cash Advance.
Cleveland, population 30,000, is wedged between the hills of rural Tennessee,
where downtown shoppers say hello, drivers leave the keys in their cars, and
local mogul Jones invites the whole town to his annual Halloween party.
Along a five-mile stretch of Keith Street, past the roadside church sign that
says, ''God is God and he don't ever change,'' is where most of the town's 15
storefront payday lenders operate. Many bear stylish neon signs and look like
auto rental agencies. Others, sometimes next door, are no more than a
carpeted storefront and desk. They prosper on the short-term money troubles
endemic to the blue-collar machine operators who keep the town's Coca-Cola,
Maytag and Rubbermaid plants running.
A number of Cleveland-area borrowers banded together and filed a
class-action lawsuit against Check Into Cash. It cost the company $2.2
million to settle last year. More than a dozen class-action suits against payday
lenders in Tennessee, Kentucky, Alabama and Florida are ongoing.
By the time he settled with borrowers in Tennessee, Jones and his colleagues
had already persuaded state legislators to pass a 1997 law permitting payday
lending, with some limits. Along the way, he made more than $23,000 in
political donations.
Since 1990, payday lenders have persuaded lawmakers in 19 states to change
the law to exempt them from limits on interest rates.
''It is due in part to lobbying by members of our organization,'' Rochford said.
Another 13 states allow payday loans by setting no limits on rates or, in the
case of Indiana, by setting a maximum annual rate but allowing a $33 per loan
finance charge.
The remaining 18 states and the District of Columbia have ''usury'' laws that
cap interest charges with no payday loan exemptions -- at rates ranging from
17 percent a year in Arkansas to 57.68 percent in Georgia.
Payday lenders are now trying to change the law in those states.
''We're going to be talking to some other legislatures about looking at that,''
said Sam Choate, general counsel of Check Into Cash. ''We think that
Virginia, for example, is a place where the market is being underserved.''
Underserved, perhaps, but not unserved. Because federally chartered banks
aren't bound by state laws, they can offer payday loans even in states that ban
them. Eagle National Bank of Upper Darby, Pa., for instance, makes payday
loans through its Dollar Financial Group in Virginia, which outlaws loans over
an annual percentage rate of 36 percent.
Some payday lenders that are bound by state laws do business in states with
usury laws. Their reasoning rests on a hairsplitting definition of ''interest.''
When lenders linked with the Gambino family Mafia charged 3 to 5 percent
per week for illegal loans made out of a South Florida check cashing office,
no one argued that it wasn't interest. Payday lenders call their charges ''fees,''
not interest. Therefore, they reason, the charges don't violate state interest
rate caps.
Although they lend smaller sums than loan sharks -- usually $100 to $500 --
payday lenders often charge similar amounts. A typical rate, 20 percent every
two weeks, adds up to an annual percentage rate of 520 percent for
borrowers who keep renewing their loans.
''The interest rates charged by these people would make the Gambino family
blush,'' said Birmingham, Ala., lawyer Lang Clark, who has reached tentative
settlements with several Alabama payday lenders in recent weeks.
Redefining interest hasn't always worked. The attorneys general of several of
the 18 states with usury laws -- including Alabama, Georgia, Michigan,
Pennsylvania and Virginia -- have declared payday loans illegal.
The new spate of laws in states like Tennessee that specifically allow payday
lending, typically require lenders to disclose APR and set limits on rates and
loan renewals. In Tennessee, for example, the maximum rate is 15 percent
every two weeks, or 390 percent APR. Check Into Cash lowered its rate in
the state after the law was passed.
Payday lenders argue that APR is a poor measure of payday loans because
most borrowers repay them in weeks, not years. The average loan in
Colorado was for 17 days, and only 58,000 of the 374,477 payday loans made
in 1997 were renewed, according to state figures.
''We have never been able to identify a consumer who paid 400 percent
interest,'' said Gerald Goldman, general counsel for the National Check
Cashers Association.
He's never met Ms. Delaney.
She paid 610 percent, returning to a Check Into Cash storefront 32 times
from August 1994 to July 1995 and borrowing from two other payday lenders
just to make the fee payments.
She's not typical, Jones said.
''Our typical customer is a female schoolteacher who's had a car repair
problem,'' Jones said.
Critics argue that offers promising easy money today at high rates to be paid
another day are like loan sharks' come-ons, an unreasonable temptation for
desperate people.
The main way borrowers get in over their heads is through revolving loans.
The new laws in Tennessee and other states technically prohibit borrowers
from renewing loans. Borrowers must come in on payday and put money on
the counter instead of just paying another fee. But they can immediately write
another check and pick up the very same cash they placed on the counter.
The lenders call it a new loan.
''They still walk out with the same $200,'' said Richard Fisher, who has
pursued class-action suits against Check Into Cash and other lenders in
Tennessee, Kentucky and Alabama. ''It's a shell game.''
Gertrude Thompson returned to Check Into Cash 19 times. After the
Cleveland factory worker paid $542 in fees to borrow $200, she lost her
telephone and fell four months behind on her house payments. As money
grew tighter, she went to 16 different payday lenders every two weeks to
juggle the debt.
''Nobody forced me to go there,'' said Mrs. Thompson, as her 3-year-old
live-in grandson, Matthew, tugged at her sleeve. ''But they made it so easy. ...
What am I going to do now?''
A ban is no answer, said Check Into Cash's Choate.
''That's sort of like saying: Let's close Las Vegas or Atlantic City down,
because some people have problems with gambling,'' he said. ''It's not the
rates that got Gertrude Thompson in trouble. It's her inability to discipline her
own spending habits.''
Alabama class-action lawyer Clark counters: ''A drug dealer never forced a
guy to smoke crack, and we've got laws against that.''
Payday lenders have been accused of abuses beyond mere high rates.
Treasure Coast Cash of Stuart, Fla., used bogus Martin County Sheriff's
Office stationery to threaten delinquent borrowers, according to the Florida
comptroller's office. Another lender, Cash 2 U, prosecuted late payers under
the state's bad check law and got treble damages -- even though the law
doesn't apply to postdated checks, said John Willard, head investigator for the
comptroller's West Palm Beach office.
''I find it pretty unconscionable,'' Willard said.
Lynn Knight called to warn a Hanceville, Ala., check casher she'd be late in
repaying the $200 she borrowed at 520 percent APR. It did little good. The
19-year-old nursing home worker had to bail herself out of jail to care for her
6-month-old daughter.
Her father, Clayton Lee Finley, says her payday lender used the threat of jail
just as a loan shark might have used the threat of physical violence.
''They used to have the men come out and break your legs,'' he said. ''Now
these companies are using the justice system to collect outrageous amounts of
interest from desperate people.''
Copyright 1999 The New York Times Company |
