It’s a financier’s dream: Lend money to workers with steady jobs and short-term cash problems--at more than 600% interest.
That vision is a lucrative reality for a group of street-corner bankers who have made “payday lending” one of the nation’s fastest-growing industries. A borrower writes a postdated check to the lender, to be cashed on her next payday, and walks out with cash. The loan can be renewed as often as the borrower likes.
In less than a decade, payday lenders have created a new industry and overcome challenges by lawsuits and states that called their triple-digit interest rates illegal. They’ve succeeded by redefining the word “loan” and persuading lawmakers in 19 states to exempt them from laws that limit interest rates. Now they’re working on changing the law in states that still consider them outlaws.
Janet Delaney found out how payday loans work when she needed $200 to pay her bills.
A friend told the hospital food service worker about a new storefront loan office called “Check Into Cash.” The store let her write a check she couldn’t cover and gave her $200 on the spot. They agreed not to cash it until her next payday--for a $38 fee.
When payday came, the $16,000-a-year worker didn’t have $200 to spare. Fine, the payday lender said, pay another $38 and you’re off the hook until next payday. A year later she had paid $1,220 in fees. And she still owed the $200.
“I had to write a check to pay my light bill, my phone bill. That’s the way it went every two weeks,” said Delaney, who lives with her daughter, son-in-law and newborn granddaughter in a rented two-bedroom apartment in Cleveland, Tenn. “I never dreamed it could get to be such a mess.”
Fees like hers have created a profitable and fast-growing industry that didn’t exist a decade ago.
W. Allan Jones opened his first Check Into Cash office, the one Delaney visited, in 1993. Now he lends to the masses at 270 storefronts from California to the Carolinas. His company had $21.4 million in revenue in 1997 and is opening 15 stores a month. Now he’s preparing to sell shares in his company, the first stand-alone payday lender to go public.
“People are willing to pay for convenience,” Jones said. “I’m just lucky. I hit on something that’s very popular with consumers.”
His is the most dramatic of many stories of newfound wealth made on payday loans.
The number of check-cashing outlets--many of which offer payday loans--has doubled to 6,000 since 1990, according to the National Check Cashers Assn. Another 2,000 offices do nothing but payday loans, said Bob Rochford, deputy counsel for the association. One of them, Advance America Cash Centers, was founded by former Blockbuster Entertainment executive George D. Johnson, who has expanded the chain to nearly 500 stores.
“There is an obvious need,” Rochford said, “and it is a very popular service.”
The burgeoning industry has its epicenter in the unlikely Appalachian town of Cleveland, Tenn., home of two of the nation’s largest payday lenders, Jones’ Check Into Cash and rival National Cash Advance.
Cleveland, population 30,000, is wedged between the hills of rural Tennessee, where downtown shoppers say hello, drivers leave the keys in their cars, and local mogul Jones invites the whole town to his annual Halloween party.
Along a five-mile stretch of Keith Street, past the roadside church sign that says, “God is God and he don’t ever change,” is where most of the town’s 15 storefront payday lenders operate. Many bear stylish neon signs and look like auto rental agencies. Others, sometimes next door, are no more than a carpeted storefront and desk. They prosper on the short-term money troubles endemic to the blue-collar machine operators who keep the town’s Coca-Cola, Maytag and Rubbermaid plants running.
A number of Cleveland-area borrowers banded together and filed a class-action lawsuit against Check Into Cash. It cost the company $2.2 million to settle last year. More than a dozen class-action suits against payday lenders in Tennessee, Kentucky, Alabama and Florida are ongoing.
By the time he settled with borrowers in Tennessee, Jones and his colleagues had already persuaded state legislators to pass a 1997 law permitting payday lending, with some limits. Along the way, he made more than $23,000 in political donations.
Since 1990, payday lenders have persuaded lawmakers in 19 states to change the law to exempt them from limits on interest rates.
“It is due in part to lobbying by members of our organization,” Rochford said.
Another 13 states allow payday loans by setting no limits on rates or, in the case of Indiana, by setting a maximum annual rate but allowing a $33 per loan finance charge.
The remaining 18 states and the District of Columbia have “usury” laws that cap interest charges with no payday loan exemptions--at rates ranging from 17% a year in Arkansas to 57.68% in Georgia.
Payday lenders are trying to change the law in those states.
“We’re going to be talking to some other legislatures about looking at that,” said Sam Choate, general counsel of Check Into Cash. “We think that Virginia, for example, is a place where the market is being underserved.”
Underserved, perhaps, but not unserved. Because federally chartered banks aren’t bound by state laws, they can offer payday loans even in states that ban them. Eagle National Bank of Upper Darby, Pa., for instance, makes payday loans through its Dollar Financial Group in Virginia, which outlaws loans over an annual percentage rate of 36%.
Some payday lenders that are bound by state laws do business in states with usury laws. Their reasoning rests on a hairsplitting definition of “interest.”
When lenders linked with the Gambino Mafia family charged 3% to 5% per week for illegal loans made out of a South Florida check-cashing office, no one argued that it wasn’t interest. Payday lenders call their charges “fees,” not interest. Therefore, they reason, the charges don’t violate state interest-rate caps.
Although they lend smaller sums than loan sharks--usually $100 to $500--payday lenders often charge similar amounts. A typical rate, 20% every two weeks, adds up to a 520% annual rate for borrowers who keep renewing their loans.
“The interest rates charged by these people would make the Gambino family blush,” said Birmingham, Ala., lawyer Lang Clark, who has reached tentative settlements with several Alabama payday lenders in recent weeks.
Redefining interest hasn’t always worked. The attorneys general of several of the 18 states with usury laws--including Alabama, Georgia, Michigan, Pennsylvania and Virginia--have declared payday loans illegal.
The new spate of laws in states that, like Tennessee, specifically allow payday lending typically require lenders to disclose APR and set limits on rates and loan renewals. In Tennessee, for example, the maximum rate is 15% every two weeks, or 390% APR. Check Into Cash lowered its rate in the state after the law was passed.
Payday lenders argue that APR is a poor measure of payday loans because most borrowers repay them in weeks, not years. The average loan in Colorado was for 17 days, and only 58,000 of the 374,477 payday loans made in 1997 were renewed, according to state figures.
“We have never been able to identify a consumer who paid 400% interest,” said Gerald Goldman, general counsel for the National Check Cashers Assn.
He’s never met Delaney.
She paid 610%, returning to a Check Into Cash storefront 32 times from August 1994 to July 1995 and borrowing from two other payday lenders just to make the fee payments.
She’s not typical, Jones said.
“Our typical customer is a female schoolteacher who’s had a car-repair problem,” Jones said.
Critics argue that offers promising easy money today at high rates to be paid another day are like loan sharks’ come-ons, an unreasonable temptation for desperate people.
The main way borrowers get in over their heads is through revolving loans.
The new laws in Tennessee and other states technically prohibit borrowers from renewing loans. Borrowers must come in on payday and put money on the counter instead of just paying another fee. But they can immediately write another check and pick up the very same cash they placed on the counter. The lenders call it a new loan.
“They still walk out with the same $200,” said Richard Fisher, who has pursued class-action suits against Check Into Cash and other lenders in Tennessee, Kentucky and Alabama. “It’s a shell game.”
Gertrude Thompson returned to Check Into Cash 19 times. After the Cleveland factory worker paid $542 in fees to borrow $200, she lost her telephone and fell four months behind on her house payments. As money grew tighter, she went to 16 different payday lenders every two weeks to juggle the debt.
“Nobody forced me to go there,” said Thompson, as her 3-year-old live-in grandson, Matthew, tugged at her sleeve. “But they made it so easy. . . . What am I going to do now?”
A ban is no answer, said Check Into Cash’s Choate.
“That’s sort of like saying, ‘Let’s close Las Vegas or Atlantic City down because some people have problems with gambling,’ ” he said. “It’s not the rates that got Gertrude Thompson in trouble. It’s her inability to discipline her own spending habits.”
Alabama class-action lawyer Clark counters: “A drug dealer never forced a guy to smoke crack, and we’ve got laws against that.”
Payday lenders have been accused of abuses beyond mere high rates.
Treasure Coast Cash of Stuart, Fla., used bogus Martin County Sheriff’s Office stationery to threaten delinquent borrowers, according to the Florida comptroller’s office. Another lender, Cash 2 U, prosecuted late payers under the state’s bad-check law and got treble damages--even though the law doesn’t apply to postdated checks, said John Willard, head investigator for the comptroller’s West Palm Beach office.
“I find it pretty unconscionable,” Willard said.
Lynn Knight called to warn a Hanceville, Ala., check casher that she’d be late in repaying the $200 she borrowed at 520% APR. It did little good. The 19-year-old nursing-home worker had to bail herself out of jail to care for her 6-month-old daughter.
Her father, Clayton Lee Finley, says her payday lender used the threat of jail just as a loan shark might have used the threat of physical violence.
“They used to have the men come out and break your legs,” he said. “Now these companies are using the justice system to collect outrageous amounts of interest from desperate people.”
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State Loan Limits
Specific payday loan regulations, by state, with maximum fee and effective annual percentage rate for a 14-day loan:
California: 15%, 391%
Colorado: 25% or $25, 625%
District of Columbia: 10% plus up to $20 fee, 391%
Florida: 10% or $5, 261%
Iowa: 15% for first $100, then 10%, 391%
Kansas: sliding scale from $5.50 for up to $50 loan to 6% plus $5 for $250 loan, 391%
Kentucky: 15%, 391%
Louisiana: sliding scale from $5 to $15, 261%
Minnesota: sliding scale from $5.50 for up to $50 to 6% plus $5 for $250 loan, 391%
Mississippi: 18%, 469%
Missouri: 15%, 391%
Nebraska: 15%, 391%
Nevada: to be set by state regulation
North Carolina: 15%, 391%
Ohio: 15% per month, 391%
Oklahoma: 20%, 521%
South Carolina: 15%, 391%
Tennessee: 15% or $30, 391%
Washington: 15%, 391%
Wyoming: 20% or $30, 521%
States that prohibit payday loans, and maximum permissible loan rate:
New Hampshire: 24%
Puerto Rico: 25%
Rhode Island: 36%
Virgin Islands: 26%
West Virginia: 31%
States that permit payday loans by not regulating small loans, including Indiana, which has a maximum annual charge of 36% but allows a per-loan charge of $33:
Delaware, Idaho, Illinois, Indiana, Montana, New Jersey, New Mexico, New York, North Dakota, Oregon, South Dakota, Utah, Wisconsin
Consumer Federation of America / Ohio Department of Commerce / Associated Press