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Payday loans -- an expensive choice
for borrowers with no options

Payday loans 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.

In 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.

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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."

Rapid growth
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.

Statehouse support
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 legally.

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 the Florida 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.

Banks enticed
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 out-of-state.

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."

A better deal
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

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