Turning payday into profit
August 20, 2006 - Sarasota, Florida
The people who call Rosemarie Hayes for help never thought they'd be in trouble.
Their reasons vary. Some had a car break down, others missed paying a bill or two. Then they saw the advertisements promising fast, easy cash -- a loan until next payday.
It sounded easy and harmless enough.
But by the time they contact Hayes, a certified credit counselor with Consumer Credit Counseling Services of Central Florida, they have become trapped in a vicious cycle -- a treadmill of debt-shuffling and interest payments with no way out.
Although Florida passed legislation in 2001 limiting the dollar amount and number of loans payday lenders could make to individual consumers -- $500 maximum per loan and only one loan outstanding at a time -- Hayes said people are circumventing the law by using payday lenders on the Internet.
Florida requires that payday lenders access a state-run database to ensure that a person hasn't already taken out a loan. But payday loans obtained through the Internet and other nonreporting avenues don't show up on the database.
"The new laws state that they shouldn't have any more than one at a time but that's not happening," said Hayes, who counsels area residents by phone through an Orlando call center. "I've had clients with seven or nine payday loans, three and more with the same lender."
For a payday loan, also called a cash advance, a borrower gives the lender a post-dated check for the amount being borrowed. The check is held until the borrower's next payday. When the borrower pays the loan, the post-dated check is returned and the borrower is charged a 10 percent fee on the amount borrowed. A $5 verification fee, allowed by Florida law, is also sometimes charged.
That means people who borrow $500 could potentially have to pay as much as $555 when they redeem the post-dated check. Although Florida law only allows payday loans to be short-term, providers are required to state what the loan fees would translate into on an annual basis. The typical payday loan in Florida equates to an APR of more than 286 percent.
Making matters worse, those with outstanding payday loans also get hit with penalties from their bank and sometimes lenders if they are unable to pay the loan within the maximum 31 days set by Florida law and the lender deposits the check, Hayes said.
"The most common dollar amount of a cash advance is like $500," Hayes said. "And if they don't get that money by then, bam, the check is run through. The check bounces, so the bank charges a penalty fee and the lender charges a penalty fee, and they will run the check through again. I just think money is being made by taking advantage of people who are in a vulnerable state. I think if people were really screened before taking advantage of this, they wouldn't get as many cash advances as they do."
A major player
Despite critics, Ian A. MacKechnie stands behind the laws regulating his company's business practices.
MacKechnie is executive vice president and treasurer of Amscot, one of the fastest growing providers of payday loans in the state.
Amscot currently has 130 stores in Florida -- 12 of them scattered throughout Manatee and Sarasota counties. The business served 1.25 million people in the Tampa Bay area in 2005.
"About one in three people have done business with us in the last 10 months," MacKechnie said.
The slogan posted on the Amscot's store windows states: "You're OK with us."
On average, Amscot opens a store about every 12 days.
"We're on target for 35 new locations this year," MacKechnie said, adding that locations in Ellenton and Venice are being eyed for new stores. "We plan to keep it at about that pace. It's very manageable for us."
This year, MacKechnie expects his company to generate between $105 million and $110 million in revenue. About 41 percent of that revenue comes from payday loans, MacKechnie said. Amscot derives an additional 42 percent of its revenue from government and payroll check-cashing.
"We're profitable," MacKechnie said, declining to say how much of that revenue constitutes a net profit.
MacKechnie believes his business provides a service that many people need.
"It's not intended to be a long-term solution to anyone's financial problems, and it should be used rarely and it should be for a limited amount of money," MacKechnie said with a pronounced Scottish accent. "It's a very useful financial tool for people when they have unexpected expenses like their car breaks down or they have a little financial hiccup before their next payday. I can't imagine what would happen if anyone took it away. They would be in a real financial lurch."
MacKechnie, whose father started the business, concocting the name by blending "American" and "Scottish," said Florida's regulatory controls on payday lenders are among the most stringent in the country.
"You really don't hear about abuses in Florida anymore," MacKechnie said. "It's in other states where they have much higher rates -- you know, 15 to 18 percent compared to 10 percent in Florida."
MacKechnie said Florida law also prohibits Amscot and similar companies from rolling over loans, a practice that can send APRs soaring.
"If the customer is not able to repay the advance we are not allowed by law to assess any more fees," MacKechnie said. "It is 10 percent forever. There's no compounding of interest or anything."
Last year Amscot issued just more than one million payday loans, MacKechnie said. "It's consumer demand," MacKechnie said. "There's an enormous demand for this type of service. Our advertising is good, but it's not that good."
Last year the company had to write off 14.5 percent, or more than $6.5 million, payday loan fee revenues because of defaults.
Amscot will usually work with customers who are unable to pay back a loan in the specified time, MacKechnie said. "Someone goes into default and we work with them and work out a repayment plan." The arrangement usually involves the customer accepting financial counseling, he added.
MacKechnie said he prefers to work with a delinquent borrower, because that individual may use Amscot for its other services, such as check-cashing, tax preparation and a provider of pre-paid MasterCards.
"We're going to try to work out a payment schedule with the customer," MacKechnie said. "They may cash their paycheck with us, they might have a pre-paid Amscot MasterCard, they might be filing taxes with us. They might be a valuable customer for us. We don't want to alienate them."
MacKechnie said he takes Florida laws governing payday loans seriously.
But he concedes that people obtaining payday loans from other sources like nonregistered lenders or the Internet could lead to Amscot lending to a borrower with another outstanding loan.
"It would be hard to get one (second loan) from another licensed provider, but for example the Internet, you put payday loans in on the Internet and you'll come up with a million places," MacKechnie said. "Some of them charge very, very high rates -- 20 or 25 percent. And basically, you're giving your banking account to someone, who knows where they are."
Playing by the rules
Hayes is often challenged in her attempts to arrange payment plans for her indebted clients.
"You may be talking with someone in Tampa, but the corporate office is in Mexico," Hayes said. "Sometimes it takes a lot of work for us to find out where they're actually located, to be able to send the payment. They will work with us, but usually the payment can't be less than $50 to $75. It's a vicious trap."
Clients with multiple, outstanding payday loans find their paychecks gobbled up by fees and attempts to repay the principals on the loans, Hayes said. Sometimes those clients have taken out other loans to cover their living expenses, further perpetuating their debt situation, she said.
Working with payday lenders registered in the state is usually a much easier affair, Hayes said. "I know that they have to work with us, but I don't think they like it," she said.
Mike Ramsden, financial administrator with the Florida Office of Financial Regulation, said compliance among the state's payday lenders is good.
Most payday loan providers are diligent about checking prospective borrowers against the state's database, he said.
"The question is, does it work? It certainly does work," Ramsden said. "It does prevent a consumer from having multiple loans, which is one of the goals of the legislation. The database does a very good job of enforcing that legislation. I would have to tell you that compliance rates are pretty good. It certainly never accounts for everybody, unfortunately."
Ramsden said his agency responds to complaints about payday lenders either not registering with the state or not utilizing the database prior to giving loans to customers.
According to Office of Financial Regulation records, only one payday lender has been fined in the past two years in the Tampa Bay region.
Cash It Now Inc. was fined $5,000 for holding post-dated checks and having checks that did not match the database, said Lee Wiley, in the money transmitter regulations department of the Office of Financial Regulation.
The payday lender also had ownership records that didn't match state registration documents and sent collection letters to debtors that contained prohibited language referring to criminal prosecution and triple damages, Wiley said.
Ramsden said his agency doesn't take a particular stance on the ethical nature of payday lenders. His job is merely to enforce the law.
"Essentially, we operate under whatever the Legislature tells us is the law," Ramsden said. "The Office of Financial Regulation's job is to enforce that. There is definitely a demonstrated need out there for a product that fits these parameters but that's not news to a whole lot of people. There are people who need short-terms loans."
But Hayes is adamant about people getting that financial assistance someplace else.
"They'll (clients) tell us, 'I'm in real trouble. I've got nine payday loans and I just can't make the payment and if they deposit these checks I can't pay my rent,'" Hayes said. "It's young and old that this is affecting.
"There are so many agencies in all communities that provide funding assistance. There are food pantries. And it's just a matter of them finding out about the agencies in their community rather than falling prey to this."
The Herald, Brian Neill, Staff Writer
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