Whose Interest?

By DEBORA VRANA

Jan. 18, 1998 12 AM PT

TIMES STAFF WRITER

Miguel Juarez doesn’t see much use for a bank savings or checking account.

When he needs cash fast, he goes to Central Financial Acceptance Corp. and takes out a quick $50 from the ATM. The 35-year-old gardener says his “savings” is the remaining balance on his $500 personal loan with Central. And the interest he pays?

“I’m not sure,” said Juarez, who arrived in Los Angeles 11 years ago from Durango, Mexico. “But it’s easy here--I get cash right away.”

Central offers loans from $300 to $1,500 at interest rates that average a whopping 26%. A large majority of its customers are Latino immigrants, the bulk of whom earn less than $25,000 a year and are without checking or savings accounts and credit histories.

They are a growing portion of America’s so-called unbanked--the estimated 25% of the population that doesn’t have checking accounts. Central hopes to fill a gap by targeting new arrivals from Latin America, the fastest-growing immigrant group in the United States.

Central is the brainchild of Gary Cypres, 54, himself the son of immigrants from Eastern Europe. Cypres, who was born in the Bronx and now lives in West Los Angeles, is an accountant-turned-investment banker with the air of a rumpled professor. He works out of a musty headquarters office in Commerce.

A few years ago, he took a long look at the changing demographics of Southern California and decided to expand Central from a small-time firm offering appliance loans through its Central Furniture stores to a publicly traded company providing loans for travel, used autos and other personal needs.

The business is as risky as it is controversial. The costs of keeping tabs on such small loans and the fact that many have no collateral sharply increase the potential for losses. Then there are the seemingly usurious lending rates, which are much higher than the average 18.8% charged for a standard credit card, according to RAM Research, a Maryland data firm.

That’s why Central is sometimes seen as either a loan shark profiteering from the poor, or a benefactor giving Southern California’s newest immigrants access to capital, free check-cashing and the American dream.

Central’s owners, of course, believe the latter.

“Everyone says we need loans in the inner city and no one is doing these types of small loans but us,” said Cypres, who is learning Spanish. “This is what our customer needs, a loan to get the car fixed, a loan that can start a small business.”

Louis Caldera, a former Assemblyman and a former Central board member who is now a member of the Clinton administration, agrees that Central fills an important gap in the Latino community.

“It gives them access to credit, not only small personal loans but small-business loans,” Caldera said. “This is important for a community that doesn’t have a lot of cash lying around for a rainy day. They also help you establish a credit history. In some ways it does more to deliver access to credit than any government program could.”

The other view? “These types of lenders in general are often just one step ahead of the knee-breakers,” said John Raccine, editor in chief of Specialty Lender, a monthly newsletter tracking lenders. “They are not really in the business of lending money--they are in the business of collecting it.”

Central has become the largest lender of its kind in Southern California, with 150,000 customers and $133 million in loans. It recently added automated teller machines and just signed a deal with Kmart to allow its cash machines in four other Western states.

Though his annual salary is only $175,000, Cypres is a multimillionaire, directly owning about $7.2 million of company stock through a family trust. Through an entity known as West Coast Partners, Cypres also indirectly controls an additional 70% of Central’s outstanding stock that is worth about $50 million at today’s prices.

West Coast Partners includes such investors as Wells Fargo and Union Bank of California. In fact, Wells is one of the largest investors in Central and indirectly owns about 17% of Central through its investment in a holding company.

Cypres now hopes to expand Central into a real bank for a growing low-income market that is underserved by the large, traditional lenders. In fact, plans to buy an inner-city bank are in the works, and there may be a deal as early as this month.

“To our customers, we are a bank already, with our free check-cashing and small loans,” Cypres said. “Now the next step is to offer the full range of options, with checking accounts and deposits.”

Still, a sharp increase in the number of delinquent loans at Central has hampered profit and depressed the company’s stock price. Cypres blames the delinquencies on uncertainty sparked by immigration law changes and says he expects them to decrease this year.

It’s just such unexpected political and economic factors that make unsecured personal lending fraught with peril. Indeed, many traditional lenders have failed to attract significant numbers of immigrant Latino customers because of cultural barriers, and that’s left Central with no major competitors in the region--a major reason it’s been able to attract high-quality investors such as Wells and Union.

Some analysts go so far as to liken Cypres to A.P. Giannini, the founder of Bank of America, noting that Giannini got his start lending to Italian, Russian and Slovak immigrants in California at the turn of the century. Cypres, they say, is doing much the same thing for the Latino market.

But Central’s rates are much higher than those charged by Giannini. His rates were similar to those offered by major banks at the time, according to historical data.

Interest rates for any lender are limited under California’s usury laws, and the maximums follow a sliding scale, said Ken Nagashima, special administrator at the state Department of Corporations. The maximum interest allowed for a loan of, say, $225, would be 30% a year, he said.

Central’s rates are high, Cypres says, because it’s costly to provide the free check-cashing services that go along with each loan. Keeping track of a large number of small loans that can require more attention than other loans is also costly, he said.

“We have to cash all these checks for these people and provide infrastructure for the loans. It’s very expensive. That’s why major banks are getting out of that business,” Cypres said.

At Central’s main lending offices in downtown Los Angeles, more than 200 chairs are set up to handle the weekend crowds. Although Central says the wait for a loan is typically 30 minutes to an hour, one woman applying for a loan said she and her husband had been waiting three hours.

Soila Perez, a 21-year-old restaurant worker, is a typical Central customer new to the world of automated banking. She’s using one of its ATM machines for the first time to take out $300 from her $700 Central loan so she can make a payment on another loan somewhere else.

“It feels good to use the machine,” Perez said. “I was feeling lost, but they help you here.”

Perez, who came to Los Angeles from Guatemala seven years ago, says she has a checking account with Bank of America but no savings account. She doesn’t know how much she has in outstanding personal debt. And she, like many of Central’s customers, is unconcerned about the interest rates charged on the loans. When asked, she said she had no idea of the rate on her loan.

Yolanda, a housekeeper who did not want to give her last name, has a $500 loan with Central. She sends money home to her mother in Mexico to pay for care of her daughter. She tried once to get a loan with Wells Fargo, but “they wouldn’t give it to me.” She says she likes Central because “it’s Latin and you feel comfortable here.”

“We don’t ask for any green cards or anything,” said Yesenia Munoz, a Central supervisor in a downtown Los Angeles center. “People feel more comfortable with other Hispanics.”

Critics argue that Central’s customers are vulnerable to abuse because they may be financially unsophisticated and may have had few or bad experiences with banks in their home countries. Because they have never had checking or savings accounts or access to credit, they may not know the right questions to ask.

Cypres disagrees.

“Some people seem to think our customers aren’t smart consumers,” he said. “Just because you don’t have a formal education doesn’t mean you don’t know when you are being taken advantage of.”

Cypres, a former visiting faculty member of the Amos Tuck School of Business at Dartmouth College, wears a cardigan sweater to work and drives a modest car. The company moved its headquarters to spaces above one of its appliance stores in Commerce after gang activity near its downtown Los Angeles offices made it unsafe to work there, he said.

After being trapped in a downtown store during the 1992 riots, Cypres’ wife begged him to take some security measures; he bought a bulletproof vest for his drives to Central offices in poorer neighborhoods.

“All of my friends think I’m nuts from where I came from to where I am now,” he said during an interview in his cluttered, dusty headquarters office, surrounded by the antique adding machines and typewriters he collects. But in a way, Cypres has returned home.

Growing up in New York, he mixed with many European immigrants and became familiar with the challenges they faced. His father was in the jewelry business in the Bowery, where, as a boy, Cypres helped out running errands.

In Southern California, he says, “you can’t live on the Westside and ignore the changes taking place in this state. It’s not a white majority anymore. We have a wonderful ethnic mix, and businesses are going to have to adapt to that if they want to survive.”

Though Central doesn’t have many competitors in the small-loan business, other companies do offer appliance loans. One of them is Dearden’s, founded in Los Angeles in 1910 by Englishman Edgar Dearden to offer furniture on credit. Ronnie Bensimon, an executive at Dearden, which now has seven area stores, said he would not comment on a competitor.

One reason Central is largely without competition is the high delinquency rate that accompanies its type of lending.

Lenders similar to Central had delinquencies of about 3% or 4% for the third quarter of 1997, according to the newsletter Specialty Lender. However, the percentage of loans more than 60 days past due for Central was 6.56%, up from the previous quarter’s 5.61%. Central’s 30-day delinquencies jumped to 9.97% from 8.36% in the previous quarter.

Cypres blames the delinquencies on changes proposed in the immigration reforms of 1996 that put the status of many of his customers in limbo. Until 1996, and even through the recent recession, his borrowers were reliable and repaid debts on time, he said.

But even though recent legislative changes have eased concerns somewhat, lingering fears that many of Central’s borrowers may leave the country without repaying their loans have kept stock prices depressed.

Central went public at $12 a share in June 1996. After reaching a high of about $21.50 several months later, the stock slumped and is currently trading at about $10.. The company has delayed a $50-million financing that was to be priced the week in late October that the Dow Jones industrial average plunged 554 points.

“The risk-reward here is out of balance from a shareholder viewpoint,” said Charlotte Chamberlain, a financial institution analyst with Jefferies & Co. in Los Angeles. “I don’t see any real upside in their earnings for quite a while.”

Chamberlain noted that Central’s “convoluted ownership” is another factor keeping stock prices down.

Since Cypres and major institutions own most of the stock, there aren’t many shares available for market trading.

Still, analysts said there is opportunity for the company’s profit to increase as the local demographics continue to shift in Southern California.

“From an investment point of view, you have a significant improvement in the L.A. economy recently and a growth in the demographics that increases its customer base,” said Joseph Jolson, analyst with NationsBanc Montgomery Securities, which took the firm public. “These are two very strong trends for them.”

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CENTRAL FINANCIAL

Central Financial’s profit and revenue have been expanding at rapid rates in recent years in a segment market ignored by most lenders. Though, full-year 1997 figures are not yet available. Central earned $5.2 million in the first nine months of the year on revenue of $22.2 million.

At A Glance

Name: Central Financial Acceptance Corp.

Based: Commerce

Description: Makes unsecured personal loans and loans for airline travel and used cars, primarily to the fast-growing, Hispanic immigrant community.

Employees: 399

Chairman, CEO, CFO: Gary Cypres

Locations: 12 main offices, 77 locations where ATM or partial services are offered.

Number of loans outstanding: $133 million

Year public: June 1996

IPO price: $12 a share

52 Week Market High: $19.375 a share on January 13, 1997

Friday close: $10.38