Growth of payday loan industry explodes
By Andrew Conte

Sitting along a busy Silverton thoroughfare roughly a mile from Kenwood Towne Centre, the ACE America's Cash Exchange store serves as a model for the rapidly expanding payday lending industry.

A half-dozen neon and cardboard signs advertising financial services fill the windows of the corner store, which sits next to a bridal shop and across the street from a jeweler. Inside, tellers wait behind bullet-proof glass to hand out the short-term, high-interest loans that have become increasingly popular over the last five years.

Machines in the corner of the room sell lottery tickets and more signs offer the company's terms for cashing checks, another popular service. The entire operation seems designed to give customers as many choices as possible while working to move them in and out quickly.

The Silverton outlet embodies the industry ideal: highly visible, near retail shops, clean, convenient and efficient.

''All consumers like doing business with a company where they're treated with courteous, efficient customer service,'' said Eric Norrington, marketing vice president for the Texas-based company. ''The major thrust of our business is convenience. We want to provide people with a store that is readily available to where they work and where they live.''

As a leading company in the nation's hottest lending industry, ACE provides people with that convenience by having hundreds of check-cashing outlets in 29 states. With just 220 stores in 1992, the company now oversees a network of 702 of its own stores and 93 more franchise stores like the two in Cincinnati.

Not all of the stores are permitted to make payday loans, and lending only makes up 10 percent of ACE's overall business. But the company's revenue from payday lending has grown from $164,000 in 1994 to $10.1 million last year.

ACE's success mirrors that of the entire industry, which has exploded nationwide from fewer than 300 stores seven years ago to more than 6,000 today, according to the National Check Cashers Association in New Jersey.

In Ohio, payday lenders have gone from 88 outlets in 1997, the first year the state started keeping track of them, to 382 outlets as of March. Indiana lenders have had even more success, growing from 15 outlets with $12.7 million in business five years ago to 454 branches and $287 million in business last year. Kentucky now has 327 locations, an increase of 54 new branches since April 1998.

Industry advocates and some banking regulators point to that phenomenal growth as proof of the consumer demand for convenient, low-hassle loans - even at extremely high rates topping 1,000 percent in some cases.

But consumer advocates warn the fees can add up quickly, leaving customers paying more in interest than they ever borrowed and unable to escape their rapidly-expanding debt.

''Once you start, you can't get out because you can't live month-to-month without one of those loans,'' said Jean Ann Fox, director of consumer protection at the Consumer Federation of America, a Washington, D.C., nonprofit group. ''You keep paying, paying and paying and you still owe the same amount.''

With so many people seemingly willing to pay almost any price for ready access to cash, the success of payday loan companies highlights an underlying truth about the robust economy: Many lower-middle class Americans are still living hand-to-mouth. Wall Street may be racking up record gains and states' welfare rolls dropping, but many working class people are not making enough money to keep ahead of their debts, economists say.

Among the 19 states that have legalized payday lending operations, Ohio has some of the strictest laws. The state prohibits borrowers from renewing loans over and over at the same store and it effectively limits the fees to $7.50 per $50 lent on a two-week loan.

But an informal survey by The Post of 10 Cincinnati payday loan companies found four of them willing to roll over loans and only one that could provide the annual percentage rate as required by state law.

Ohio banking regulators have few complaints about the industry, arguing it provides a legitimate service. The state gets about five complaints a year; the Cincinnati Better Business Bureau received two last year.

Since passing new regulations on payday lenders last year, Kentucky officials say they also have had few problems.

''The bulk of this industry is trying its best to comply with law,'' said Art Freeman, commissioner of the Kentucky Department of Financial Institutions. ''It's just like all industries: There are probably a few bad apples out there, but as a bulk the industry is trying to do a good job.''

But Mark Tarpey, supervisor of Indiana's consumer credit division, has concerns.

Working with the legislature, his office tried to impose tighter restrictions on the industry this spring. But when the lenders introduced their own bill neither prevailed. For now, the state does not have specific regulations for payday loans, and companies operate within loopholes in the usury laws.

''A lot of states didn't have time to determine what they wanted and the industry has been very successful lobbying to get what they want across,'' he said. ''Sometimes you feel a little bit out-gunned when you're trying to get your message across.''

Like regulators, economists admit the stores provide a necessary service for low-income workers; but few economists say they'd take out the loans themselves. The loan agreements are too costly for all but the most desperate borrowers.

''It's a transaction that people make a judgment on and willingly engage in,'' said Mike Walden, an economics professor at North Carolina State University. ''Different people make different choices and some may be willing to pay high interest rates.''

John Caskey, author of the book ''Fringe Banking: Check cashing outlets, pawn shops and the poor'' (Russell Sage Foundation, $14.95), attributes the industry's rapid growth to:

Check-cashing companies looking for new sectors as more people get paid by direct-deposit.

State legislatures quick to cut holes in usury laws for the new industry.

More people than ever before with damaged credit ratings.

In Ohio where state laws prevent people from taking consecutive loans out from the same lender, some consumers try to beat the system by borrowing from a second company to pay off their debt to the first. It can lead to complex payment structures.

But Caskey warns the lenders are keen to the strategies.

''The consumers who are sophisticated may be playing a game but the payday lenders are too,'' he said. ''They want to coax as much interest out of you as possible. They can get more interest out of you to make it worthwhile.''

To their credit, some companies are starting to say they will not make loans to anyone who has an outstanding account elsewhere. Industry leaders argue that as the number of loans increase, default rates also rise.

The confusion over interest rate charges seems to cause the most concern among consumer advocates. When the lenders charge a fee for a two-week loan, they are actually exacting an annual percentage rate that could mount into the triple digits if rolled out for a full year.

For a two-week $100 loan in Ohio, the maximum charge equals $15. That may not seem like much but it equals a 390 annual percentage rate. It is not compounded.

State laws require lenders to show borrowers the full annual percentage rate and a disclaimer that the loan costs more than those at traditional lenders. But consumers often do not pay attention, said Mary Hurlburt, credit educator at the nonprofit Consumer Credit Counseling Service of Cincinnati.

''They're desperate,'' she said. ''They need the money today and are more worried about not having the money today, than with what will happen tomorrow.''

Jim Frauenberg, president of the Ohio Check Cashers Association and owner of Columbus-based Check$mart, compares the lending fee with a bank charge for bouncing a check. Charging a $25 penalty on a bounced check also is the equivalent of a three-digit annual percentage rate, he says.

Finally, consumer advocates complain about payday lenders' collection techniques. In a letter to a Portsmouth, Ohio, woman who defaulted on a loan, the company's collection agency implied that she had committed a ''theft offense'' under the state's bad check laws.

While they threaten criminal prosecution, however, payday lending companies have a much more difficult time making good on bad-check claims.

Lenders have approached Cincinnati police about prosecuting cases, but the city responds that the agreements are civil matters rather than criminal. Checks must be written fraudulently before the city will charge someone, said Detective Ray Wallace in the city's fraud unit.

Terry Cosgrove, Cincinnati city prosecutor, agreed that if the borrower wrote the check in good faith his office would not consider that a criminal offense.

Still, nothing stops companies from filing criminal complaints against borrowers or prevents people from pleading guilty to the charges.

ACE's Norrington said his company does not threaten people with criminal prosecution.

Another industry insider, who spoke on the condition of anonymity, admitted that even when lenders do threaten criminal charges they typically do not have the time or resources to do so.

If more people knew the truth, he feared, few of them would ever pay up.

''You don't go after people on criminal charges because it's not worth it,'' he said.

''We have no interest in those guys criminally; it's not in our interest, and it's not in their interest.''

Despite the consumer advocates' complaints, the lenders remain popular. ACE expects to have opened 90 new stores in the fiscal year ending this month.

''It fills a real life demand if you consider that many Americans do not have credit for a variety of reasons and find themselves in situations where they need a small amount of cash to get through a bump in the road,'' Norrington said.

From: http://www.cincypost.com/news/1999/payday062199.html