Payday loans -- an
for borrowers with no options
Four hours south of San Antonio, Texas, sits
"The Border," a string of towns that teeter on the Mexican border,
maintained by industry and agriculture.
It's here in the sister cities of Brownsville,
McAllen and Harlingen that some of the townsfolk are getting by
from paycheck to paycheck.
So being able to get money -- in a hurry --
often means the difference between eating and going without. The
solution, lately, is borrowing money on time though a payday loan.
Called everything from "payroll advance" to
"deferred deposit," this $1 billion industry has raised charges
of gouging the poor from consumer advocacy groups.
over their heads
As examples, they cite people like John Ventura's clients,
who have gotten into situations where they owe more than they can
pay. It's a diverse mix: the shrimpers who net and trap seafood
to eke out a living, the garment workers who cut and sew on the
production lines at Levi Strauss and Hanes factories, and the year-round
fruit and vegetable pickers.
As an attorney who assists with personal debt,
bankruptcy and injury cases, Ventura worries not so much about payday
loans but how they are just another facet of desperate living.
"A lot of people who live in this area are spending
to get by," Ventura says. "They're limited by geography, skin color
and racism. There's not a lot of opportunities to make extra money."
Further north in Virginia, Jean Ann Fox, director
of consumer protection at the Consumer Federation of America, had
her hands full a few weeks ago when the agency released its second
payday loan study.
Between fielding press phone calls and attending
conventions from coast to coast (including the National Check Cashers
Association's confab in October), she had some time to put the whole
payday loan blitz in perspective: "The rapid growth of this business
tells us a lot about how a segment of people who, because they aren't
able to make it from payday to payday, are overextending themselves."
The number of check-cashing stores has doubled to roughly
5,600 since 1986, according to the U.S. Treasury Department. Industry
estimates predict a 600 percent growth during the next decade.
Some economists call the core users of check
cashing stores the "nonbank financial industry," or simply, the
"unbanked." Despite being overlooked by large banks, they account
for approximately $200 billion in transactions, with check cashing
being the most profitable, according to the Treasury Department.
Ace Cash Express Inc., based in Irving, Texas,
is the largest chain of check cashing outlets in the nation, operating
725 company-owned stores and 100 franchise stores in 29 states.
Ace's 1997 payday loan revenue of $10.1 million was double the volume
of business in 1996.
The way the typical payday loan works is that
a consumer will write a personal check for, say, $115 to borrow
$100 for up to 14 days. The payday lender agrees to hold the check
until the next payday. When payday comes the consumer can redeem
the $115 by paying it in cash, allow the check-casher to deposit
the check or write another post-dated check in the amount of the
original check plus a new loan fee.
Check-cashing outlets require consumers to have
a checking account and verifiable employment. As further collateral,
some will ask for a copy of a car's registration. Payday lenders
use database companies, such as TeleCheck Recovery Services, to
screen out risky borrowers.
Besides cashing checks, these flashy, often
neon-emblazoned stores sell money orders, stamps, lottery tickets,
issue wire transfers and pawn car titles; some even act as host
stations for walk-in utility and telephone bill payments.
Their growth is so phenomenal that the U.S.
Attorney General's Office has requested copies of the Consumer Federation's
report for a possible probe. State regulators are reviewing legislation
that may deem the outfits illegal. Consumers backed by savvy
attorneys are filing class-action lawsuits.
Payday lenders have won state laws exempting them from
usury laws or small loan interest caps in 19 states and the District
of Columbia. Another 12 states set no limits on small loan interest
rates or set a minimum fee that permits payday lending to operate
Some check-cashing trade groups aggressively
defend their service, saying they serve people who otherwise would
have a hard time getting access to quick cash. They point out that
the debt starts to spiral only when consumers themselves take out
loans at more than one store or roll over "loans" each payday.
But banning rollovers would be like "telling
the consumer you can't help them should an emergency arise," points
out Robert Rochford, deputy counsel with the National Check Cashers
Association. "One of the reasons we don't advocate a complete prohibition
of rollovers is if you have a consumer who gets paid $800 every
two weeks but they all of a sudden need $250 for car repairs so
they will have a means to go to work. Then, a week and a half later,
they need another $150 to buy medicine for their sick child -- it's
like telling the consumer you can't help with that second need."
In Florida and some other states, a check-cashing
law was enacted before payday lending was offered. The 10 percent
cap these states apply to check-cashing fees has been applied to
payday lending, as long as the loan is not renewed or "rolled over"
to the next payday.
This summer, the Florida Comptroller's department
of banking and finance sought a cease-and-desist order against Treasure
Coast Cash Inc., an unlicensed Stuart, Fla., payday lender. As a
means of strong-arm collection tactics, Treasure Coast Cash used
fake Martin County Sheriff's Office letterhead.
"The real issue is there are laws on the books
that regulate payday lending practices, but the check-cashing industry
is finding ways to skirt the law," says Mark Ferrulo, director of
Public Interest Research Group and a co-author of the Consumer
Federation report. "These laws were put in place to protect the
consumer from loan-sharking and predatory lending."
Ferrulo said his office called 19 check-cashing
stores in Florida and found that 10 had rates in excess of the 10
percent cap. In the past three years, the number of check-cashing
companies registered with the state has increased 90 percent to
297, according to the state's division of banking.
Elsewhere, some banks have turned keen eyes to this burgeoning
industry as they recognize a segment of the population that is outside
the financial mainstream.
For instance, Pennsylvania-based Eagle
National Bank makes "Cash Till Payday" loans of up to $500 through
Dollar Financial Group's check cashers in several states.
With less than a month to go until the federal
government restricts Social Security and other benefit checks to
direct electronic deposit, some check-cashing outfits have formed
seamless links with major banks.
In Illinois, the SecureCheck program, run by
that state's check-cashers association, has set up special accounts
for customers nationwide at Chicago-based Corus
Bank. Once the money is wired from the government to the account,
the check-cashing store has the authority to print a check for the
recipient, then cash it. In addition to the regular check-cashing
fee, customers also must pay a "bank handling" fee of approximately
$1.10 if the check-casher is in Illinois, $1.60 if the store is
In New Jersey, check-cashing companies will
provide their customers with ATM-like cards to withdraw money from
bank accounts controlled by Citibank.
Even though the cardholders will not have traditional bank accounts,
they can use ATM machines or check-cashing companies and withdraw
money for a fee. Fees will vary from state to state, but could go
as high as $1.50 per withdrawal.
There also might be restrictions on how much
money a person can withdraw at any one time. Consumer groups warn
this would allow banks and check cashers to reap additional profits
through the use of the money without paying interest to the customers.
"People are going to be more easily preyed upon,"
said Charles Stith, president of Organization for a New Equality,
a Washington nonprofit group that assists the poor, women and minorities.
"There are going to be institutions that will see this as a chance
to make a lot of money without putting forth a lot of effort."
In the long run, banks beat out check-cashing stores significantly,
according to a study by New Equality. The study said a person who
makes $1,050 after taxes each month and uses a typical check-cashing
store will pay an average of $219.24 in fees a year, compared with
$30 a year for a typical basic checking account.
John Caskey, an economics professor at Swarthmore
College in Swarthmore, Pennsylvania, and author of Fringe Banking:
Check-Cashing Outlets, Pawnshops, and the Poor, said industry
and consumer groups can argue "until they're blue in the face,"
but in the end, "it's not really clear whether the industry is doing
customers a favor."
"It's expensive credit and generally people
with impaired credit history are turning to payday loans," Caskey
said. "Toward the end of the month, it's what I call constant financial
pressure -- it's when you need money to carry you over until the
next payday. So, it's not just people who are necessarily poor,
it's the ones that are desperate for money."
-- Posted: Jan. 11, 2001