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Quick cash lashes borrowers

March 5, 2006 - St. Louis, Missouri

Quick cash is easy to get in Missouri.

But it will cost you.

The cash advance industry is a booming business here, fueled by pawn brokers, check-cashing outlets, title loans and "payday" loan companies.

They offer short-term consumer loans -- no credit check required -- with a two-to-four-week maturity. Average costs of the loans in Missouri are $15 per $100 borrowed.

At an annual percentage rate, those fees translate to 391 percent. Missouri has one of the highest interest rate caps in the country, up to 1,950 percent annualized.

The Illinois Legislature in December passed the Payday Loan Reform Act, which capped loans for the industry at $1,000 or 25 percent of a customer's income, whichever is less.

Nationwide, cash advance is a $45 billion per year industry that's found a niche in low-income neighborhoods. But here, these businesses have popped up in middle-class suburbs, too, including Florissant, Olivette, Arnold and St. Peters.

"If you look at our customer base, it's defined as the middle-income working American," said Jamie Fulmer, spokesman for Advance America, Cash Advance Centers Inc. "In order to have an account with us, they have to have an open and active checking account and a regular source of income. These are everyday working people."

But critics say the fees violate state usury laws and gouge consumers who already are living from paycheck to paycheck.

Lenders say they meet a financial need for short-term consumer loans that are not provided by traditional banks. Consumers have responded.

"You can't walk into a bank and get a $300 loan and, generally speaking, these people can't get credit," said Eric Norrington, vice president of ACE Cash Express Inc. of Irving, Texas. "Our customer is making a rational choice to use our product, because the alternatives are more costly."

Missouri consumers are among the most prolific payday borrowers, taking out 2.6 million payday loans between Oct. 1, 2003, and Sept. 30, 2004, the most recently surveyed time span completed by the Missouri Division of Finance.

The finance division, which regulates the cash advance industry in Missouri, gave out 1,198 licenses for the stores in 2004, a 37.5 percent increase over 2003.

The storefronts and services often resemble neighborhood banks. ACE Cash Express Inc. offers check-cashing services, wire transfer, bill payment and a debit card program that creates a checking and savings account.

But cash advance industry practices, such as rollover loans and triple-digit interest rates, trap consumers in a cycle of debt, said Missouri Attorney General Jay Nixon.

"These companies are not empowering consumers. They go in, write a check that's not good until they get paid, and people are living week to week like this and paying huge fees."

Quick fix

For consumers in a fix, the loans seem like easy money.

At most cash advance businesses, customers only need to show identification, a bank statement, their most recent paycheck stub and a checkbook. They're asked to write a post-dated check, due in 14 days, for the amount of the loan including the interest.

A history of bad credit, no credit or unpaid bills doesn't disqualify a customer from getting a loan.

Problems can start two to four weeks later, when the loan matures, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America, based in Washington.

"These companies encourage consumers to write checks without money in the bank to pay for them," Fox said. "If (you) can't pay the finance charge, your check will bounce when it's deposited and your bank will charge you a bounced check fee."

Customers who can pay the finance charge, but not the total principal, can roll the loan into another one. The customer writes another 14-day post-dated check.

Each rollover loan incurs a finance charge, which can translate into higher compounded rates. Missouri allows up to six rollover loans.

"It really becomes unbelievable after the rollovers," said Rep. John P. Burnett, D-Kansas City. He's drafting legislation to cap annualized interest rates at 36 percent and eliminate rollovers at cash advance businesses in Missouri.

"What consumers think is a simple, short-term loan quickly spirals out of control," Burnett said.

Lenders say they don't encourage the back-to-back loans.

Community Financial Services Association is the trade group that represents the cash advance industry. Spokesman Steven Schlein said the higher interest rates are justified for the short-term, high-risk loans.

"If these could be made for cheaper, the banks would do it," Schlein said. "We make $2 or $3 profit on a $50 loan."

The rollover crunch

Consumer advocates say lax banking laws in Missouri have made the state a haven for the cash advance industry.

Missouri consumers can't borrow more than $500 per loan. And they are not allowed to pay more than 75 percent of the original loan in interest and fees.

But the highest reported annualized interest rate in Missouri was 1,277.5 percent, according to the Missouri Division of Finance. Including rollover fees, Missouri payday lenders are allowed to charge up to $60 for every $100 lent over a 14-day period, said Steven Geary, consumer credit specialist for the division of finance. That equates to an annualized interest rate of 1,950 percent.

Among nine states surveyed by the division of finance, rollover loans are forbidden in Arkansas, Iowa, Kentucky and Nebraska. There's no rollover limit, though, in Oklahoma, which allows a maximum loan of $760 and a 240 percent interest rate.

Under Illinois' new Payday Loan Reform Act, lenders can charge up to $15.50 per $100 borrowed for 14 days. Borrowers also will be prevented from taking out two payday loans at the same time.

The new law also says short-term loans can't stretch longer than 45 days, and borrowers who have trouble repaying the loan are allowed a 56-day repayment period with no additional interest charges.

"This puts in place a number of consumer protections that give people an opportunity to take a break from the treadmill of debt they get locked into with payday loans," said Tom James, an Illinois assistant attorney general.

Cash cow

The cash advance industry is only about 10 years old, and has about 20,000 stores nationally.

Cash America International Inc. of Fort Worth, Texas, one of the largest publicly traded companies in the industry, provides a glimpse of the profit margins.

The firm operates 839 pawnshops, payday loan and check-cashing stores across the country. The company lists four pawnshops in St. Louis.

Cash America International generated $594.3 million in revenue and $69.1 million in profit last year, according to its 2005 financial report.

ACE Cash Express, had revenue of $268.6 million and a profit of $27.4 million for its fiscal year ended June 30. The company operates 1,371 stores.

Many of the lenders use commercial banks to issue the short-term consumer loans, a practice that draws criticism.

"These kinds of rent-a-bank models use federally insured banks for predatory lending," said Fox, of the Consumer Federation of America.

The FDIC recently issued a letter to several banks that partner with the payday loan operators to stop offering the loans. But payday loan companies are skirting that by doing business with state-chartered banks not regulated by the FDIC.

Schlein, of the Community Financial Services Association, defends the bank model.

"It's the same way your Visa card works, where Visa makes partnerships with banks to market their services," Schlein said. "The banks are making the loan, and use the payday loan company as an agent."

Statistics about Missouri and Illinois Payday Loans
    Missouri Illinois
Licensed Lenders   1,198 727
Average Loan   $241.11 $380
Maximum Loan   $500 Lesser of $1,000 or 25% of monthly income
Average Number of Rollover Loans   2.2 Not allowed
Maximum Annual Percentage Rate   1,950% 404%
 
Sources: Missouri Division of Finance, Illinois Department of Financial and Professional Regulation

News Source

St. Louis Dispatch, Tavia Evans, Staff Writer

Related Stories - ACE Cash Express (NASDAQ: AACE)

Cash America International Inc. (NYSE: CHS)

Related Stories - Missouri

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