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Payday Loan Industry NewsletterSubject: Future of the Payday Loan Industry
From: Trihouse Enterprises, Inc
This month's Newsletter will discuss the existing environment for the payday loan product and what the future may hold for all of us. If you are currently involved in our industry or are contemplating your entrance into it you will find this article critical to your planning. Sorry about it's length! But our readers have requested "in-depth" articles focused on a single topic.****************************************************************
Read our PREVIOUS Newsletter here if you missed it. The focus of
our last Newsletter was the National Bank Model.
Because of the dynamic nature of the payday advance legal environment, we have updated our Training materials again. Below is a summary of our findings. Our new and updated information is based on industry research papers, discussions with various state legislators and industry lobbyists, correspondence with representatives of the national organization, consulting assignments with our clients and results of analysis of our own payday loan locations.
The one glaring conclusion from all our research is this: Demand for the payday loan product in the U.S., Canada, England and Australia is unquenchable! Additionally, South Korea, New Zealand, the Bahamas, the Virgin Islands, England, and many others are opening up! Yesterday we received an inquiry from Casablanca (Morocco). Consumers are clamoring for payday loans.*****************************************************************
PLEASE! We welcome your comments!! And, if you have appropriate content for the payday loan industry, we welcome your contribution. Finally, if you require definitive payday loan startup or operational improvements, please consider the purchase of our Payday Loan Startup & Training Manual. Our complete "How to Successfully Start and Operate a Payday Loan Business in a Store or the Internet".
As we all know, many states/provinces have solid enabling legislation currently in place. Those of us active in these states can generally sleep well as we can be relatively certain our investments in our payday advance businesses are secure. When new legislation is enacted it generally places a few more burdens on us regarding rollovers, document retention and consumer protection. Nothing we cannot handle and still continue to achieve significant return on our investments. Even better, our potential competitors perceive our industry as being too difficult to enter :)
The real action today is in the states which, in the past, presented us with various impediments. Well, we have come to the conclusion that these impediments are coming down! Fast!! The reasons are varied but simple. Legislators, through the actions of lobbyists, consumer comment, small business interests within their state and the need for additional state revenues, are waking up to the fact that their constituents WANT OUR PRODUCT! Also, these same legislators are realizing if our payday advance product is not available in their state or province, the consumer will simply pick up the telephone or log online and get a payday advance from a company in another state or even offshore. We have personal knowledge that residents of New Jersey, New York, Manitoba and many, many more are securing payday advances by the thousands every month from companies based in Florida, California, Canada, Costa Rica, Belize and more!
The result of feeble attempts by legislators to impede our payday loan product simply precludes the small business person in their state/province from participating in our industry. Further, by blocking the payday loan product, the state losses the opportunity to protect its residents, generate significant licensing and oversight fees, and finally precludes employment in our industry by residents of the state/province! Of course, the wages, state taxes and sales taxes, spending and all the other related expenditures and revenues by payday loan store employees and business owners are not enjoyed by those states/provinces that enforce ridiculously low (in comparison to our risk) usury rates.
Just a few examples of states that are beginning to realize the benefits of allowing the payday loan product to exist within their jurisdiction are:
NOTE: Although your state may not be included below, we are certain
you will find the following very informative. Additionally, portions of
the material below relates to industry trends and developments. The
newly updated 2004 Payday Loan Training Manual is available here:
PLEASE be certain to read the section below related to Washington. We are certain you will find it not only interesting but, more importantly, provide you with a better understanding of all sides to the payday loan issue!
Finally, next month's Payday Loan Newsletter will cover a new topic and continue our state/province legislative coverage.*****************************************************************
The last day of lawmakers' regular session was a flurry of action, as members scrambled to finish work that had fallen by the wayside during a contentious session.
Among the bills was one to legalize and regulate high-interest, short-term money lending operations, collectively called the "payday loan" industry. The House earlier in the session had passed a version of the bill, which has been debated for at least four years, that was fashioned from a compromise among legislators, industry lobbyists and consumer advocates.
A different version passed a Senate committee.
Late Monday evening, a third version appeared on the Senate floor as a "substitute" -- a legal practice under the Alabama Legislature's rules. (Some states require the same version of a bill to clear committees in both houses.)
Sen. Gerald Dial , D-Lineville, introduced the substitute and described to his colleagues how the regulations would work. Minutes later, the Senate adopted the bill unanimously.
Because it was different from the House version, the measure then went before the lower chamber for another vote there. House members eventually gave the bill their blessing in a divided vote cast less than an hour before the session ended at midnight.
Along the way, though, industry lobbyists and consumer advocates realized that the bill Dial described on the Senate floor wasn't the proposal senators and House members passed.
"That was last year's bill," said one lobbyist.
Gov. Bob Riley on Friday afternoon signed the bill lawmakers passed.
This information from: "The Political Skinny" is an inside look at Alabama politics prepared by the staff of the Mobile Register. The column is compiled by Political Editor Jim Van Anglen.*****************************************************************
For three years, Georgia lawmakers have struggled with a choice: Regulate payday lending or run it out of the state.
Powerful legislators, as well as some of the state's most prominent lobbyists, weighed in on the side of the payday-loan industry. Consumer advocates, Georgia's licensed small-loan companies and their legislative allies opposed it.
The debate is unfolding in a state that historically has been friendly to small lenders who charge high interest. Georgia's usury law permits up to 60 percent in annual interest charges. That compares with 25 percent in New York and 30 percent in New Jersey.
In the meantime, the payday-loan industry - which Georgia regulatory officials deem illegal - is flourishing in the open, unlicensed and unregulated. Customers routinely pay fees that translate into annual interest rates of 400 percent and more, far higher than Georgia's usury threshold.
Before anything else happens in the Legislature, the committee chairman said he wants to hear what Georgians think about payday lending.
Rep. Johnny Floyd, a Cordele Democrat, will hold a series of hearings around the state this summer on payday lending as well as the state's growing title pawn business. His stated purpose: to "protect the public from unscrupulous and predatory lending practices."
Floyd, who chairs a bank board in Cordele, said he once opposed payday lending altogether but now is open-minded on the subject.
"I opposed them operating, years ago," Floyd said. "I thought we needed to put 'em out back then."
Now, he sees all the jobs that have sprung up at hundreds of payday loan offices.
"During our economic downturn, we don't need to put maybe 1,800 people out of work," he said.
The shifting attitudes in the Legislature - as well as the attempt to pass the payday-loan industry's own version of a regulatory bill - may reflect the effectiveness of the industry's lobbying effort.
At least three of the Capitol's best-known lobbyists work for payday lenders.
Jet Toney represents the Georgia Community Financial Services Association, a collection of independent companies. Former state Sen. Arthur "Skin" Edge lobbies for Cash America International Inc., based in Fort Worth, Texas. Mo Thrash represents the Community Financial Services Association of America, the payday-advance industry's national trade group.
"We've been trying for five years to get regulated," Toney said "What we want is model legislation that's being used in 30-plus states."
Toney said the problem isn't the payday-loan business itself. Rather, he said, it is unlicensed, unregulated companies that commit all kinds of abuses in the absence of state oversight.
Regulation, he said, "would create an environment that exists in 30-plus other states where the customer knows going in, or would be exposed to the restrictions or the guidelines for each loan. Regardless of where they went, they would know this is the Georgia law, this is the percentage, this is the limit on the rollovers, this is the limit on the length of the loan, and these are your rights."
Meeting a financial need
Toney said payday loans sprang up simply to meet a need that banks and licensed small-loan companies weren't meeting.
Georgia currently has about 1,000 small-loan companies licensed under the Georgia Industrial Loan Act. They are authorized to make loans of less than $3,000.
Toney said the typical small-loan customer may need $1,500 to buy a used bass boat, for example. He borrows the money, gets on a three-year payment plan and pays it back at up to 60 percent annual interest.
A payday-loan customer, he said, typically needs anywhere from $100 to $500, and has no desire to get on an extended payment plan.
"The GILA folks are going to (ask) him to buy credit life insurance," Toney said. "They're going to stretch that payment out over six months. That's just the nature of a GILA loan. The guy might have the money to pay back that $100. But he's not going to be encouraged to do so. He's going to be told you've got six months to pay it back."
Toney said Georgia's usury law shouldn't apply to payday loans. The usury law makes it a misdemeanor to loan money at more than 60 percent annual interest. But in practice, Toney said, payday loans are paid back in two weeks or less. "I can tell you that nobody that utilizes this service gives a rip about the APR," he said. "It's a two-week loan or a 30-day loan, depending on when you get paid. The consumer that considers it something beyond 30 days is foolish."
If a bill is passed to regulate payday lending, Toney said, the payday-loan companies would not oppose a provision banning rollovers - the practice of extending the term of a loan by paying a fee every two weeks. A company could not string a customer along for weeks or months if the customer was unable to pay back the principal.
Operators of payday loan businesses in Idaho now need special licenses and must follow strict conditions, under a new law that took effect this month.
''I think it's to their benefit," said Mary Hughes, chief of the Financial Institutions Bureau at the Idaho Department of Finance. ''I think when the bar is raised, which this law certainly does as far as the kind of practices they can engage in, it helps the industry overall, because I think it improves the reputation of the industry."
In fact, it was a prominent payday loan operator - MoneyTree Inc. - that sponsored the legislation.
''It was an instance where the industry, or at least a portion of the industry, was concerned about establishing a more stringent code of practice, and it appeared to me to be in the consumer's best interest," said Sen. John Goedde, R-Coeur d'Alene, who was the bill's floor sponsor in the state Senate.
Among the new law's restrictions: Payday loans can't be for more than $1,000; they can't be renewed more than three times; borrowers have the right to cancel the loan before the end of the next business day without cost; and lenders must clearly disclose the fees to borrowers as an annual percentage rate.
Stated as an APR, a typical payday loan carries an interest rate of about 300 percent, Hughes said. But it typically is for a small amount, about $100 or $200, and a short term, like two weeks. The typical fee is $15 to $20 per $100.
Idaho's new law doesn't limit those fees or interest rates. Years ago, Idaho had a usury statute that placed limits on interest rates, but it was repealed, Hughes said.
''Since then, especially with the growing numbers of payday and title lenders, typically some legislators are interested in looking at that every year, but it's not met with a wide degree of support," she said. Most lawmakers, she said, seem to prefer to leave rates to the competitive market.
Pat Sullivan, lobbyist for MoneyTree Inc., said, ''The bill is very consumer-oriented, and it is geared toward consumer protection."
MoneyTree, founded by Payette, Idaho, native Dennis Bassford, has grown since 1983 to include 87 locations in nearly half a dozen states. Sullivan said the firm adheres to high standards and wants its industry to do the same.
''The Department of Finance established the fact that there were actors out there that they were concerned about," he said.
The lobbyist said a southern Idaho judge and several legislators complained to him about a situation where a lender was suing a borrower who had defaulted on a $100 loan, and was seeking treble damages in small-claims court. ''If a guy can't pay $100, he sure can't pay $300," Sullivan said. ''MoneyTree does not do that. ... They thought that's a very, very harsh way to handle a business dealing of this nature, as did the Department of Finance."
Payday loans typically require a borrower to issue a post-dated check, and then receive payment for the amount of the check less an up-front fee. The borrower promises to pay the money back before the date of the check, or incur additional fees.
''It's a noncollateralized loan, it's a different instrument," Sullivan said.
The new legislation prevents payday loan operators from suing for treble damages, and also requires background checks and inspections of business records; sets standards to ensure that the firms have the assets to cover their loans; and allows no collateral other than a post-dated check.
Hughes said complaints about violations of the new law, which is now part of Idaho's credit code, can be directed to the department's consumer finance bureau in Boise, at (208) 332-8002.
MoneyTree approached the Department of Finance about the issue and worked with the department on the bill.
''They actually carried the legislation," Hughes said. ''But very early on in the process, they sought our input, and we did some of the drafting of it to make certain it still fit well into our credit code."
Idaho's 148 payday loan operators - 23 of them in North Idaho, from Lewiston north - already were regulated under state law with other lenders, but there were few specifics that applied to their industry.
''The credit code has been in effect so long that it predates the payday loan industry," Hughes said.
The department enacted some regulations in 1999 specific to the industry; those are now incorporated into the new, more stringent law.
Virtually all of Idaho's payday loan operators who were licensed under the previous law have applied for the new, specific licenses, Hughes said.
Goedde said the payday loan business has been growing.
''It certainly has in Idaho, and I'm assuming we're representative of the nation," he said. ''When people are in need of short-term cash, it seems to be an easy way to get it."
The Coeur d'Alene senator said payday loan businesses seem to function as an alternative to pawn shops, catering to people who need small amounts of cash right away, to tide them over until their paycheck arrives.
''It's a product designed for a very specific purpose," Goedde said. ''I guess anyone facing that situation has to evaluate their options and make a decision based on what's available to them. If they have an immediate need for cash and truly see that as a very short-term need, I think this is a very viable product. ... There is no characterization that this is a low-cost product. You pay for the ability to avail yourself of it."
When her money was gone, three days stood between Sara Gavino and her next paycheck.
So, last Tuesday she drove over from her home in Portland to CZ Payday Loans on Andresen Road. A few minutes later, she walked out with a big smile and $ 250 in cash to tide her over.
The convenience of getting a head start on spending her next paycheck from Legacy Emanuel Hospital cost Gavino $ 37.50. She left at the store a check for $ 287.50, post-dated for Saturday.
The 15 percent fee for loans of 1 to 31 days is worth it, says Gavino.
She's one of hundreds of people every day who "buy" money from payday loan stores in Clark County.
"I come all the way over here because this is a clean, friendly, helpful place," said Gavino. "I've been here a lot. I feel trusted here."
Fixtures at strip malls, the stores display brightly colored signs and cater to overextended consumers living on the financial edge.
Growth of the payday loan and check-cashing business has been dramatic in Clark County.
The 1999 phone book listed six such stores. Now there are at least 20 here.
They operate under various names, such as The Cash Store, Rapid Cash, Quik Cash, Checkmate, Check Into Cash, The Cash Connection, Rapid Cash and Cash & Go.
For some customers, they are an essential fact of life.
It's not unusual for a customer to pay off one loan only to take out another immediately, for another 15 percent fee.
But, unlike some states, Washington prohibits "rolling over" or renewing a loan until still another payday by simply paying a new fee but not the principal.
Here, the full amount must be paid before a new loan is approved by the same lender.
However some customers get around that by borrowing simultaneously from competing stores, paying 15 percent at each.
Payday loans range from $ 50 to $ 500. But the maximum goes up Sunday when the approximately 400 money stores in Washington will be allowed to lend $ 700, thanks to the 2003 Legislature and Gov. Gary Locke.
The fee will remain at a maximum 15 percent on the first $ 500, but drop to 10 percent for anything between $ 501 and $ 700.
The new law also provides additional protection for consumers by allowing them to cancel a loan within 24 hours at no charge.
It also creates a no-penalty, 60-day payback plan for anyone who has taken four or more loans one immediately after the other.
Laws governing the industry are policed by the Washington Department of Financial Institutions.
Industry leaders here say the state is one of the best in the nation for the governing of the payday loan and check-cashing business.
"Washington has a model law," said Dennis Zea, a partner in CZ Payday Loans, a three-store Vancouver operation. "It's better for the consumer."
Whittier Johnson of the state DFI said, "We average about three complaints a year, statewide. The rules are clear and the customers know them. It's all very straightforward."
DFI personnel visit and audit the books of every store in the state every two years.
Paycheck to paycheck
Based on interviews with Johnson and customers, it's apparent many money store patrons live paycheck-to-paycheck, with little savings and high credit card debt.
"I come here maybe once a month," said a man in his 30s named Randy.
He declined to give his last name.
He was at The Cash Store on East Fourth Plain Boulevard one recent afternoon getting $ 50. He had two weeks to pay back $ 57.50.
Others might have their money tied up in investments, a car, a house, even a 401(k) retirement account, and need a quick loan to get through an emergency. That's how one well-dressed man described his circumstances.
He stopped at Quik Cash Payday Loans on East Fourth Plain Boulevard to get a $ 500 loan. He said he needed it for a trip to Colorado to attend a relative's funeral.
He owes on his car and his house and has $ 4,700 in debt piled up on three credit cards.
Like TV dinners
Before 1995 in Washington, anyone needing a quick and easy short-term loan was pretty much limited to family, friends or a pawn shop, said Zea of CZ Payday Loans.
But the Legislature passed a payday loan law, clearing the way for the business.
"This is an emergent industry that was long needed to provide a service for the 'under-banked,' " Zea said. "It's supply and demand."
Lisa Cochran of CZ said, "It was an untapped market, like TV dinners in the '50s."
Cochran and her friend, Linda Zea of Vancouver, worked at the Veterans Administration Medical Center in Portland when they decided in 1997 to open a money store here. Lisa's father was already in the business in Yakima.
They were joined in 1999 by their husbands, Dennis Zea and Ron Cochran.
Today there are three CZ Payday stores in Vancouver and Hazel Dell, while most such stores are part of national chains owned out-of-state.
A banker's view
Mike Worthy, president of the Bank of Clark County, says money stores aren't tapping a market served by commercial banks.
"In our world, if somebody came in and said, 'I've got the shorts and need to borrow $ 500 to get me to the next payday,' that isn't the kind of business we do," Worthy said.
"We would suggest approving a credit line of some size, based on the quality of their credit and their job history.
Even if most customers are poor money managers, it doesn't mean they write bad checks.
"Our customers are very honest people," said Lisa Cochran. "Incredibly honest."
A customer whose check bounces can be charged a $ 25 bad-check fee by the store.
Ultimately, a loan gone bad could be turned over to a collection agency.
"That would be a measure of last resort," said Dennis Zea. "We could be hard-nosed and say, 'Too bad, so sad.' But chances are, we'll extend the loan a day or two if we've talked to them."
The default rate at CZ is about 3 percent, compared to a national default rate of 4 percent, Lisa Cochran said.
Whittier Johnson of the state Department of Financial Institutions said the industry has been perceived as making small loans to the poor.
"I think the customers are also middle class and upper middle class who have overextended their credit because their 18 percent (interest rate) credit cards are maxed out," he said.
Dennis Basford of Seattle, president of the association that represents money stores, said, "We provide cash for consumers who need cash short term.
"We provide a good choice, which they feel is cost-effective."
MONEY STORES AT A GLANCE
Here's how money store loans work:
* Customers show a recent pay stub, a photo ID and proof of an active checking account.
If they are first-timers, they also provide information such as name, address, date of birth and Social Security number.
* The clerk checks the store's computerized database and, assuming there are no problems such as an unpaid earlier loan, the customer is cleared for a loan.
* The customer writes a personal check to the store for the total of the loan, plus the 15 percent fee. ($ 115 for a $ 100 loan.) The check is post-dated to the customer's next payday.
* The clerk takes the check and gives the principal to the customer in cash.
First-time customers typically will have their money within 15 minutes; repeat customers can be out the door in five.
* If the customer comes in on or before the loan's due date and pays the full amount of principal plus fee, his uncashed check is returned; otherwise it is cashed.
To Learn More
* Washington Department of Financial Institutions: 360-902-8700; www.dfi.wa.gov
* Financial Service Centers of Washington (trade association): 206-246-3500; www.fiscwa.com
Regulars: paycheck-to-paycheck people
Hundreds of customers take out loans for $ 50 to $ 500 in at least 20 money stores across Clark County every day.
Here's what a few customers, plus one money store employee, told The Columbian one recent afternoon:* * *
"I come here maybe once a month," said Randy as he left The Cash Store, 5508 N.E. Fourth Plain Blvd.
"Like everybody else, I live paycheck to paycheck," he said, after borrowing $ 50 and leaving a post-dated check for $ 57.50.
Randy, who appeared to be in his mid-30s, works for a window-distribution company in Portland.
He said he is making payments on the 2001 pickup he recently bought for $ 15,000 and has credit card bills.
"It pretty much sucks up a man's check now days," he said. "If you're running low and need money for gas, what else you gonna do?"* * *
David, who works as a dishwasher at a Hazel Dell restaurant, borrowed $ 100 from Checkmate, 5201 N.E. Fourth Plain Blvd.
He left a post-dated personal check for $ 115.
"I need rent money," said David, who has a wife and a little girl to support.
"I've been to a bunch" of money stores, he said, adding that a week earlier he had borrowed $ 150 from one nearby for $ 172.50. "It perpetuates itself."* * *
Across the street, at Quik Cash Payday Loans, 5210 N.E. Fourth Plain Blvd., a banner out front read, "GRAND OPENING. Your first loan is interest-free."
Inside, a young female clerk behind the thick window said, "These loans really are handy. Maybe your car breaks down and you don't get it back without cash.
"Or if somebody has bad credit, you might come here."
She interrupted herself to issue a $ 100 loan to a man in his mid-20s who said he couldn't wait for his next payday one week later.
He said he has a wife and two children and two months ago borrowed $ 150 at the place across the street.* * *
A gold, late-model Saturn pulled up in front of Quik Cash and a tanned man of about 40 got out and strode inside.
He looked sharp, in pressed slacks, sport shirt, gold watch on one wrist and a gold bracelet on the other.
He said he works in advertising and would be flying to Colorado in three days for his stepmother's funeral. He borrowed $ 500.
"I could probably make it without the loan," he said. "But I wanted to give myself some padding."
He said it was his first visit to a money store. He's a bachelor, buying a house in Cascade Park and paying for the car. He said he has some credit- card debt, but "I'm paying it down."
He said he owes $ 800 on one card, $ 1,500 on another and $ 2,400 on a third.NOTE:Reproduced from the The Columbian (Vancouver, WA.)
July 21, 2003, Monday
BYLINE: GREGG HERRINGTON, Columbian staff writer
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Payday Loan Newsletter 109-2003
This information is discussed further in depth in our Payday Loan Startup & Training Manual. You may ORDER it NOW. Next Month a new topic and coverage of more states.
From: Trihouse Enterprises, Inc.
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