Five hundred percent interest rates, and higher, are fueling a lucrative and controversial new financial service: one-week loans to desperate people with steady jobs and bad credit.
Check-cashing companies have found a profitable sideline cashing postdated personal checks for hefty fees. Other companies have sprung up to do nothing but make short-term cash advances, also known as payday loans.
Consumer advocates call it old-fashioned loan sharking, and state banking officials say many of the companies are breaking the law.
“It’s not just lending; it’s predatory lending,” said John Willard, who has pursued several of the companies as manager of investigations for the Florida Comptroller’s southeast Florida office. One company was bold enough to use phony Martin County Sheriff’s Office stationery to threaten borrowers who didn’t pay their debts.
Other companies defend their practices as legal, even if some in the industry break the laws. They figure their one- or two-week loans help people pay their bills when banks won’t make loans.
“A customer who needs $200 or $300 in emergency cash can access it on his signature in a matter of a few minutes,” said Eric Norrington, vice president of Ace Cash Express Inc., a Irving, Texas, check-cashing chain with 824 stores, including 28 in the Tampa Bay area. “These tend to be people at the bottom of the middle-class structure in this country and they need access to cash. Things happen in their lives that require it, and we’re able to provide that service.”
Payday lending in the United States dates to at least the turn of the century when “salary lenders” would loan a worker $5 Monday and collect $6 Friday, according to the Consumer Federation of America, a Washington advocacy group. Many states made loans like that illegal by adopting anti-usury laws prohibiting excessive interest rates. But payday lending has made a huge comeback in the 1990s as companies challenge or find creative ways to get around or operate within the laws.
Ace got into short-term lending five years ago, and it quickly became one of the fastest-growing segments of the public company’s business. Loan fees brought in $10.1-million in the 1998 fiscal year, up from $5.7-million the year before. Ace is now opening stores inside Wal-Mart Supercenters, offering its full range of services.
“There is a huge market for payday loans for temporary needs,” said Arvind Bhatia, an analyst with Southwest Securities in Dallas. “And if you consider recession as a potential scenario, you’re going to see more people who become part of their customer base.”
And more competitors. Payday lending is attracting executives from the fast food, financial services and rent-to-own industries, as well as a large assortment of mom-and-pop entrepreneurs. The size of the industry is tough to gauge because it is so new and so fast-growing.
Take Advance America Cash Advance Centers Inc., for example. The Spartanburg, S.C., company opened its first store in November and expects to have 500 by the end of the year, including 14 in the Tampa Bay area and 77 statewide. All of them do nothing but payday lending.
The company, founded by former Blockbuster Entertainment executive George D. Johnson and others, eschews seedy neighborhoods and puts its stores in shopping centers that have a grocery store or other anchor tenant to attract middle-class customers. It targets people aged 25 to 54 with household incomes of $25,000 to $45,000 a year.
Although default rates are high — analyst Bhatia estimates them at 20 percent — even bad loans may be profitable because some customers pay for months before giving up.
When Carmela Barbour couldn’t make her mortgage payment in February, the Port St. Lucie woman turned to payday lender Cash-2-U Inc. She wrote Cash-2-U a postdated check for $500 and walked out of the store with $445.
Her short-term solution quickly became the source of long-term pain. A week later, Cash-2-U had the right to deposit her check, but there still wasn’t enough money in Barbour’s checking account to cover it. She says the commission she expected from her telemarketing job didn’t come on time and not long after that, she lost her job.
Barbour says she thought she had no choice but to go back to Cash-2-U, hand over $55 in cash and write a second postdated check to replace the first.
“I wasn’t making the money I needed to and I got myself in a pickle,” Barbour said. “I had one credit card and it was charged up. I had in the past looked into trying to get a loan, like an equity loan on my home or a consolidation loan and I could not find anyone who would help me anywhere.”
The trips to Cash-2-U became a weekly ritual as Barbour had her car repossessed and fell behind on her mortgage payments. She says she paid about $800 to Cash-2-U over four months without making a dent in the principal. When she stopped paying, the company sued her for $1,956.
Barbour turned to Fort Pierce lawyer E. Clayton Yates, who used her case and others to file class-action lawsuits last month against Cash-2-U and another payday company, Treasure Coast Cash Co. The suits accuse the companies of charging illegal interest and attempting to collect illegal debts.
“They call it a check-cashing charge, which is permitted under the statute, but they’re not actually cashing the check,” Yates said. “It doesn’t matter what they call it. If in reality it amounts to a loan, that is how the law is going to look at it.”
He said most people who go to payday lenders are already over their heads in debt and the loan makes their situation worse.
“It is extremely expensive credit,” said Jean Ann Fox, director of consumer protection for the Consumer Federation of America. While 10 percent a week works out to 520 percent a year, Fox said some payday lenders charge effective annual percentage rates close to 2,000 percent. She says some consumers end up borrowing from one lender to pay another.
“It’s really quicksand credit, but it looks so easy to start with,” she said.
Cash-2-U president Kevin Walker said the company is providing a needed service and indeed a grateful customer once brought him brownies.
“We don’t force anybody to come in here,” he said. “Sometimes people’s lights are getting cut off and we’re able to help.”
A former insurance agent, Walker said he saw an opportunity in payday lending and his Stuart-based company has grown to 12 stores, including one in Largo. Walker said the business prospers partly because of high bank and merchant fees for writing bad checks.
“You could end up paying $50 or $60 for that bounced check,” he said.
An Advance America brochure calls its lending “overdraft protection” and a “fast, courteous and professional alternative to bouncing a check.”
The controversy over payday lending is likely to become a hot political topic in Florida next year. Payday lenders now operate under the check-cashing law, which did not anticipate check cashers lending money. If they are classified as lenders, they would be subject to the usury law, which makes most annual interest rates over 18 percent a civil infraction and rates over 25 percent a criminal offense. Existing exemptions allow consumer finance companies to charge up to 30 percent and title lenders, which hold a car’s title as security, to charge up to 265 percent.
The industry is mapping plans to convince the Legislature to give payday lenders their own exemption. In the meantime, some lenders claim Florida law is ambiguous and state regulators have done little to clarify it.
Douglas Johnson, assistant director of the state’s Division of Banking, warned check-cashing companies against rolling over or renewing a check they are holding as a payday loan. He said any renewal fee might be considered interest, which would be legally capped at the 18 percent annual rate.
But some companies contend the warning does not apply to them so long as a customer writes a new check for each transaction, effectively buying back the old check.
Other companies say they have stopped rolling over loans in Florida and will require customers to pay in full at the end of the one-week or two-week loan period until they can get the law changed.
“We thought maybe even though it (the second check) is a new item, someone might interpret it to be an extension of the initial item,” said Ron Schmitt, regional vice president for Ace Cash Express in Tampa. But the limit hurts the company. “We know customers are doing it anyway. If they can’t get it from me, they’re going to go next door to our competitor and get it from him.”
Schmitt said he thinks Florida law should allow a customer to roll over the loan once or twice.
One point that is sure to draw debate is where the interest rate cap should be set. Although current Florida law limits check-cashing fees to $5 plus 10 percent of the check amount, some states allow a payday lender to charge 15 percent and some companies advertising in the St. Petersburg Yellow Pages say they charge 25 percent. On an annual basis, the fees often are well over 500 percent.
One of the more unusual lending structures belongs to Pinnacle Business Management Inc. of Clearwater and its Fast Paycheck Advance division.
The company’s Web site says a customer who wants to borrow $200 must write a check for $300. The check can be redeemed in one to two weeks for $225, but if the borrower fails to come back, the company deposits the $300 check. Taking $300 for a $200 loan effectively works out to a 2,600 percent annual interest rate on a one-week loan or 1,300 percent on a two-week loan. Pinnacle officials did not return telephone calls.
Hefty interest rates are just one complaint consumer advocates have about the industry. Heavy-handed collection techniques are another.
“In some cases, lenders threaten to bring criminal bad check charges; it’s very coercive,” said Fox of the Consumer Federation of America. “I’ve had state regulators tell me about consumers who say they (lenders) call and threaten to throw them not only in jail, but under the jail.”
Treasure Coast Cash Co. of Stuart mailed its delinquent customers “worthless check prosecution” notices on phony Martin County Sheriff’s Office stationery, according to a complaint the Florida Department of Banking and Finance filed against the company this year.
“I was terrified,” said Helen Gladishev of Port St. Lucie, who got one of the letters. She said in an affidavit that a company official told her he would have her arrested if she did not pay in two days.
Some of the payday companies take delinquent borrowers to court and ask for the treble damages allowed under bad check laws, state investigator Willard said.
“They lead the courts to believe that these are worthless checks,” he said. “But there is no remedy if you take a check knowing it’s worthless.”
The state got a cease-and-desist order against Treasure Coast Cash, which the company is appealing. Willard said he also has brought a case against a second company and is investigating a third. However, Willard said he knows he has just scratched the surface of the problem.
“I can only allocate one investigator and one examiner,” he said.
Payday lending has generated a wide variety of responses from legislators in other states. Some states have outlawed it entirely, while others have legalized it with limits on interest rates or the number of times a loan can be rolled over.
Regardless of legislation, demand remains from a broad market.
“Everybody’s living above their means,” said Walker of Cash-2-U. “Our customers are not poor. They make $30,000 to $50,000. They just spend $40,000 to $80,000.”
HOW A PAYDAY LOAN WORKS: Qualifying is the first step. The essentials are a job and a checking account. No credit check is involved. Typical requirements are a photo ID, bank account statements, pay stubs and proof of residence such as a utility bill.
The borrower writes the company a personal check, dated seven to 14 days in the future. A typical check is for $200 to $500.
The borrower walks out with cash representing what is left after subtracting a $5 fee and 10 percent of the face value of the check. Some companies take 25 percent or more, although this is illegal under Florida’s check-cashing law.
The borrower comes in and pays off the loan or the company deposits the check on the due date. Many companies extend time to pay. In that case, the buyer typically pays the fees in cash and writes a new check for the same amount as the old one.
If the borrower fails to pay off the loan and the check bounces when the company deposits it, many companies will sue the borrower for having presented a worthless check. However, the company knows the check is worthless when it accepts it, so some people say the debt is not legally enforceable.