Sunday, March 5, 2006

Quick cash is easy to get in Missouri. But it's not cheap.

The St. Louis Post-Dispatch reports that the payday advance industry is booming in the Show Me State, with agencies offering short-term consumer loans — no credit check required — with a two-to-four-week maturity. The average costs of payday loans in Missouri are $15 per $100 borrowed.

At an annual percentage rate (or APR), that translates to 391 percent. Missouri has one of the highest interest rate caps in the country — up to 1,950 percent annualized. By comparison, an Illinois payday loan reform bill was passed in December, capping loans at $1,000 or 25 percent of a customer's income, whichever is less.

Nationally, payday cash advances generate $45 billion per year. In Missouri, businesses have popped up in middle-class suburbs in addition to the low-income neighborhoods where they are often seen.

"If you look at our customer base, it's defined as the middle-income working American," said Jamie Fulmer, spokesman for Advance America. "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."

Critics of cash loans say the high fees violate state laws and gouge a consumer base that is living from paycheck to paycheck as it is. Lenders counter by saying they simply respond to consumers' needs, meeting a financial need for short-term consumer loans that traditional banks cannot or will not provide.

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

Missouri consumers are among the most prolific when it comes to payday advance loans, taking out 2.6 million between October 1, 2003, and Septembeer 30, 2004, according to the Missouri Division of Finance. The finance division gave out 1,198 licenses for the stores in 2004, a 37.5 percent increase from 2003.

The storefronts and services often resemble local banks, offering check-cashing help, wire transfers, bill payment and a debit card program that creates checkings and savings accounts. But cash advance industry practices such as rollover loans and triple-digit APRs trap consumers, said the 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," he said.

QUICK FIX, OR QUICK DEBT?

For consumers in a bind, the faxless payday loans seem like easy money. At most companies, customers need to show I.D., a bank statement, and the stub from their most recent paycheck. A history of bad credit, no credit or even unpaid bills doesn't disqualify a customer from getting a cash 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.

"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 balance, can roll the loan into another one. Each rollover incurs finance charges, which translate to compounded rates — and Missouri allows up to six rollover loans. Lenders say they don't encourage the back-to-back loans, but they are undoubtedly prevalent.

"It really becomes unbelievable after the rollovers. 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," said Rep. John P. Burnett, a Kansas City Democrat.

The Community Financial Services Association, a trade group that represents the cash advance payday loan industry, says higher interest rates are justified for short-term, high-risk loans. If these could be made for cheaper, the banks would do it, according to the assocation, which asserts that the profits per loan are actually quite low.

TO ROLL IT OVER, OR NOT?

Consumer advocates say lax banking laws in Missouri make the state a haven for the payday cash advance business. Missouri consumers can't borrow more than $500 per loan and aren't allowed to pay more than 75 percent of the original loan in interest and fees. Yet the highest APR reported in Missouri was an astounding 1,277.5 percent.

Among nine states surveyed by Missouri's division of finance, these 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.
Illinois' new law allows lenders to charge up to $15.50 per $100 borrowed for 14 days, and prevents borrowers from taking out two payday loans at the same time.

"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 Asst. Attorney General.

A CASH ADVANCE COW

Despite being only about a decade old, the payday cash advance industry has grown at a rapid pace and has about 20,000 stores nationally. Here is a look at Missouri payday loan providers, compared with Illinois, by the numbers:

MISSOURI ILLINOIS

Licensed lenders 1,198 727

Average loan $241.11 $380

Maximum loan $500 $1,000 / 25% of income

Average # of rollovers 2.2 Not allowed

Maximum APR 1,950% 404%

This entry was posted on Sunday, March 5th, 2006 at 10:59 am and is filed under Missouri.