Payday Loan Times

The San Francisco city attorney’s office filed a lawsuit Thursday against two short-term payday cash loan establishments for exploiting borrowers with high interest rates and devious business practices.

Check ‘n Go, which operates three stores in the city, and Money Mart, which operates 12 stores in the city, are the targets of the city attorney’s litigation.

According to the lawsuit, both businesses offer short-term faxless payday loans with interest rates over 400 percent, which violates state law. The suit also claims that the businesses have attempted to circumvent state law by working with an out-of-state bank, the First Bank of Delaware.

City Attorney Dennis Herrera said these payday loan establishments prey on low-income and working-class families who live from paycheck to paycheck.

“Check ‘n Go and Money Mart have targeted working families with an illicit lending scheme that would make a loan shark blush,” Herrera said in a statement. “With annual interest rates exceeding 400 percent, these business practices are not merely unconscionable, they’re illegal - and we intend to put an end to them in California.”

A survey completed in March by a San Francisco group reported that most bad credit payday loan establishments don’t warn their customers of the dangers of high-cost payday loans despite several laws meant to force businesses to provide full disclosure.

According to the California Reinvestment Coalition, a group of 245 nonprofit organizations and public agencies across the state, payday lenders have been taking advantage of lax California regulations for years.

In 2004, Californians spent more than $757 million in loan fees. According to the survey, that number would have dropped severely if only payday advance loan lenders had been more diligent in educating borrowers, a promise that the industry made to consumers through an advertising campaign.

Charisse Ma Lebron, who organized the study, said the lawsuit is a long time in coming.

“CRC commends City Attorney Herrera for protecting consumers, which is unfortunately what the state legislature has failed to do for all Californians,” she said in a statement.

The Navy and the California Reinvestment Coalition (CRC) are working with various banking institutions to provide low-cost consumer loans or “quick consumer loans” to Sailors as an alternative to using payday cash loan lenders.

The Navy has recently coordinated with California government officials and the CRC about providing a safer consumer loan to Sailors to aid in preventing them from getting into financial trouble.

Capt. Mark Patton, commanding officer of Naval Base Point Loma, has taken steps to help by approaching the state congress and also has had talks with California Gov. Arnold Schwarzenegger concerning payday loan issues.

“It is a challenge to offer Sailors accessible and affordable credit,” said Patton. “This will allow us to hold our base banks accountable to provide better products and to help us take care of our own.”

Some of the more serious problems with some faxless online payday loans include annual percentage rates (APR) of up to 400 to 500 percent and no provisions for borrowers to make partial payments.

The proposed basic consumer loan would give Sailors new options such as set interest rates at 30 percent APR and penalty-free partial payments. Not only would the personal loan not exceed 25 percent of the borrower’s income, but also would consist of a loan limit of $500.

“This new system proposal will provide Sailors with the money they need while keeping them from falling deep into debt,” said Keith Kaufman, personal financial management program manager for the Fleet and Family Support Center (FFSC) San Diego.

“USA Federal Credit Union and North Island Credit Union have already contacted the FFSC and informed Sailors that they have a product in the works with reasonable interest rates, realizing they are lending money to people with either low credit or no credit,” said Kaufman.

The new opportunities may negatively affect faxless payday advance lenders in the area. Kaufman has no objections. “Thank you. We never wanted you to do business with our Sailors to begin with.”

The California Reinvestment Coalition surveyed 253 faxless payday advance lending establishments across the state and found that consumers are being misled or not given enough information about payday loans.

Entitled Payday Lenders Evade Regulations, the poll exposes that several payday lending establishments that are not in compliance with state laws.

CRC’s surveys reveal that relaxed laws and a lack of regulation are allowing California payday loan lenders to gouge consumers who don’t fully understand what they are getting into. Thus, it is no surprise that Californians spent more than $757 million in Payday Loan fees in 2004.

“After surveying 253 payday lending establishments in California, our results reveal that consumers are being misled about the interest rates and fees associated with payday loans, and they are not being informed about their rights and protections according to the law,” said CRC Payday Campaign Organizer Charisse Ma Lebron.

Several of CRC’s 247 nonprofit and public agency members surveyed payday lending establishments in San Francisco, Sacramento, Los Angeles, San Diego, Oakland, Oceanside, National City and the San Fernando Valley. CRC members and allies posed as potential first-time customers and recorded exactly what they were told by instant cash loan clerks and noted what was posted in the establishment.

What they found was alarming:

- 32 percent of the payday outlets did not post a complete Schedule of Fees, which is necessary in order for consumers to know how much the personal loan will cost.
- 70 percent of the payday lending representatives did not know what the APR of the loan was or provided an inaccurate APR associated with a two-week $255 loan.

- According to the tellers who knew the interest rates of their payday product, the lenders’ interest rates for a payday loan varied from the average 460% to as high as 2147%.

- 68 percent of payday lenders did not allow their customers to extend the term of the cash advance payday loan from two weeks to one month in order for the customer to more affordably pay back the loan.

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California Check Cashing Stores and Golden Gate Capital, a San Francisco-based private equity firm with $3.4 billion under management, today announced the acquisition of Fast Cash Stores, Inc.

Fast Cash, based in San Jose, CA, provides payday advance, check cashing, and other financial services to its customers.

The combined company will have more than 90 retail locations across northern California. Terms of the deal were not disclosed.

“The transaction creates the leading provider of check cashing and [no faxing payday loan] services in Northern California”, said Richard Lake, CEO of California Check Cashing Stores. “Customers should expect the same high levels of customer service and will benefit from enhanced offerings with even greater geographic coverage.”

“Both California Check Cashing Stores and Fast Cash have a strong history of great customer service,” said James Ball, President of Fast Cash, Inc. “The combination allows us to continue providing our customers with great service with even more convenient locations.”

“We are excited to continue to support California Check Cashing Stores as it further executes on its growth initiatives, both organic and through acquisition,” said Jesse Rogers, Managing Director at Golden Gate Capital.

California Check Cashing Stores, LLC is a leading retailer of alternative financial services including check cashing, short-term loans, wire transfers and bill payment services. The Company focuses on serving consumers seeking alternatives to traditional banking relationships in order to gain convenient and immediate access to cash.

Gov. Arnold Schwarzenegger promised Wednesday to work for the “swift passage” of legislation that would help the state crackdown on onerous California payday loan practices targeting the military.

The governor’s endorsement of Assembly Bill 7 followed the release of a draft report from his top military advisers, who urged him to step in.

The task force, which included some of the top military commanders of San Diego area bases, cited an alarming increase in revoked security clearances that threatens military readiness in times of growing world tensions and which has also taken a personal toll on families of those struggling to climb out of debt.

“The governor is encouraged that this legislation reflects the recommendations of his advisory council on military affairs,” said Bill Maile, a spokesman for Schwarzenegger. “The administration is a sponsor of the bill and will work with the authors to ensure its swift swift passage.”

Assemblywoman Lori Saldana, D-San Diego, and a co-author of the measure, said the task force recommendation will boost its chances. A similar effort to curb military payday loans failed in the Senate last year.

“It’s important that we act quickly to protect our military families,” she said.

Meanwhile, a nationwide consortium of payday loan companies announced Wednesday that it has adopted a series of self-policing measures aimed at protecting all borrowers, not just the military.

In most cases, payday lenders offer cash advances for a fee. Generally, the loans are short term, until the next payday. When fast cash loans are not repaid on time the annualized interest can quickly grow to triple digits. But, those who cannot repay wind up borrowing more for longer periods of time, accruing a crushing amount of debt quickly, according to critics.

Congress imposed a 36 percent interest rate cap on loans to service men and women effective Oct. 1, but failed to specify which federal or state agency would have police powers. The measure by Saldana and Assemblyman Ted Lieu, D-Torrance, would conform California law with federal law, thereby giving California the ability to act.

“Without action by California, the state will have no authority to enforce the provisions of the federal law, effectively diluting the protective measures of the federal law,” the task force noted.

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The commander of all West Coast Marine Corps bases told the Oceanside City Council on Wednesday that many troops are falling into serious financial trouble due to payday loans with annual interest rates as much as 2,000 percent.

After hearing the presentation, the council voted unanimously to direct its staffers to study how Oceanside could limit the number of such lending businesses, reported The North County Times.

“We have to work to take some immediate action on this issue,” said Mayor Jim Wood.

The council members said they want city staffers to consider requiring such businesses to have a special permit or creating a temporary moratorium on the lenders.

Twenty-one fast cash loan lenders operate in Oceanside, said Maj. Gen. Michael R. Lehnert, whose command includes Camp Pendleton, just north of Oceanside.

“Oceanside has the highest density of payday lending institutes in the state of California and possibly the country,” said Lehnert, who noted that Pendleton is one of the more populated bases with more than 40,000 troops. “But this is not just in Oceanside, this is a national problem.

“We’re not trying to shut down the payday lenders, we’re trying to stop predatory lending practices,” he said.

He said local no fax payday loan lenders charge annual interest rates of between 450 percent and 2,000 percent.

Payday loan offices are usually located in poorer neighborhoods and near military bases. The businesses allow residents without savings to get access to cash that can be used for emergencies such as a doctor’s visit, car trouble or an electricity bill.

The maximum check a customer can give a faxless cash advance lender in California is $300, said Karl Higgins, a Vista lobbyist who said he was representing the payday lending industry. Higgins didn’t address the council because he arrived after Lehnert concluded his presentation.

“The industry is not targeting military borrowing,” Higgins said. “We have met with the Marine Corps and Navy twice explaining our position and offering to provide financial education and classes to customers.

“We are working with other local governments in San Diego (County) such as Chula Vista and National City. We look forward to working cooperatively with the military and city of Oceanside.”

The military has seen more and more servicemen run into problems with payday advance loan lenders as regulations for such businesses have been loosened in the last several years, said Lehnert.

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Patricia J. Cirillo, president of Cypress Research Group, a market and business research firm, is responding to the Dec. 26 editorial “Modern day usury / Cap interest rates on payday loans” in The Sacramento Bee …

The Bee editorial urging Congress to extend a 36 percent interest cap for military members on short-term loans, in particular online payday loans, to all consumers ignores the real economic outcome:

• Limited options in the marketplace for consumers and increased costs.

Deferred deposit transactions - known as cash loans - are just one competitive choice for consumers who need short-term credit. All of these choices have fees.

But deferred deposit, which is regulated by California’s Department of Corporations, is often the least expensive and most convenient option - an option consumers would likely lose if the interest cap were extended.

Is that a desirable outcome?

Not for the hundreds of thousands of Californians who need short-term loans each year. The reality is that if you need an unsecured, short-term no fax payday loan, there are only a few commercial options. You could let a couple of checks bounce, using overdraft protection from your bank.

This would cost, on average, $54, a bit more than the cost of a $300 payday loan. Or, you could elect to be late on some routine bills - credit cards, mortgage, rent or car payments. Each would incur late fees - for example $39 or more for a credit card late fee, plus interest.

And being late could damage your credit.

A 36 percent rate cap, from a business perspective, would make it nearly impossible for companies to offer payday advances in California. Simply put, the costs (labor, worker benefits, rent, facilities, insurance, interest, etc.) of processing an average loan - which takes about 20 minutes - cannot be covered by revenue from the 36 percent annual rate over two weeks on the maximum $300 transaction California law allows.

In fact, this is why Advance America, one of the country’s largest providers, has announced it will not wait until October 2007 to stop offering transactions to military members.

It is easy to question all short-term faxless cash advance fees. But the fact is the costs to provide a $300 loan are the same as the costs for providing a $3,000 loan. And while a 36 percent rate cap would eliminate choice for responsible consumers, the need for these types of loans will not go away.

The winners in this scenario would be those offering unsecured, short-term credit - both within and outside the law - who often already charge more than payday lenders.

And lack of competition does not lead to decreased costs, just the opposite.

Predatory payday loans are an exploitative scam, known in the past as “usury.” So begins an editorial in The Fresno Bee.

Congress in October passed a 36% cap on interest on payday loans for military personnel (it takes effect Oct. 1, 2007). That still is an unconscionably high interest rate, but it’s a lot better than the current 300% to 700% range of the typical payday loan.

The new Congress should extend that 36% cap on faxless payday loans for all consumers.

The instant payday loan industry calls these products “emergency two-week loans,” but the Center for Responsible Lending, has a better name: “financial quicksand.” The center’s recent report said the average payday borrower pays $793 for a $325 loan.

How does that happen?

Take a typical new military recruit. He gets a two-week paycheck of $600. When the family car breaks down and needs repair, he takes out a two-week payday loan for $325, paying a fee of $52.

If his expenses for food, utilities, health care and other essentials are $500, that leaves him only $100 – not enough to repay the loan in full, as required after two weeks when his next paycheck arrives. So he takes out a new loan to pay off the old quick cash loan.

After flipping the original loan 8 times, he’s now up to $468 in interest. To pay back principal and interest, he has to come up with $793.

These are not emergency two-week cash advances, but long-term loans at exorbitant rates of interest.

That’s why Chairwoman Sheila Bair of the Federal Deposit Insurance Corp. says that the lending market has become divided between two groups, those who get “virtually cost-free basic financial services” and those who “pay high amounts.” Lower-income people who have no financial cushion pay exorbitant fees and interest on loans, while those of higher income pay very little.

The payday advance industry worries that the cap passed by Congress for the military could serve as a precedent. They ought to worry. These exorbitant-rate loans are unconscionable for all consumers. A 36% cap should apply to all.

Some of California’s top military commanders will again call on the Legislature to crack down on payday loans, months after a reform measure collapsed at the last minute amid accusations of deception and resistance from an odd liberal-conservative alliance.

The Daily Breeze has the story.

Gov. Arnold Schwarzenegger has directed a panel of generals and other advisers to recommend new legislation to rein in payday loan practices aimed at the military.

“Our servicemen and women should not have to worry about financial predators trying to take advantage of their deployment situation,” Schwarzenegger said when he appointed the task force this fall.

The Republican governor is working with Democratic Assembly members Ted Lieu of Torrance and Lori Saldana of San Diego on a payday advance loan measure that is expected to be introduced this week.

Details have not been finalized, but the authors say it could impose limits on fees, among other industry practices. A separate bill will look at how to limit industry advertising that makes it appear as if a company is endorsed by the military.

The legislation also would broaden state authority to pursue cash loan lenders who violate a federal 36 percent interest rate cap.

Congress approved the cap earlier this year, but left enforcement in the hands of the Pentagon. Leiu and Saldana said the Pentagon cannot be expected to pursue complaints given wartime pressures and other global responsibilities.

Payday loan law needs teeth:”We’re putting teeth in federal law,” Lieu said. At the same time, he said, the state can do little to solve the true problem: low pay.

“The [faxless payday loan] industry knows it has an underpaid, captive audience to target,” Lieu said. “We’re trying to address a symptom. The root of the problem is our soldiers are grossly underpaid.”

Military leaders have been urging California lawmakers and Congress to step in, claiming that financial troubles risk security clearances and could limit deployments.

“They are expected to be physically ready, psychologically ready and financially ready” before deployment, said Michael Lehnert, commanding general of the seven bases that make up Marine Corps Installations West. “We have seen a dramatic increase in those who have hit the wall financially. … It is having an effect on our readiness.”

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A report released this weeks says the use of cash loans cost Californians an estimated $365 million in 2005, more than any other state.

The industry derived 90 percent of its 2005 revenue from “trapped borrowers,” those who took out five or more loans that year, the Center for Responsible Lending said.

In California, payday borrowers took out an average of six same day payday loans.

“In spite of increased scrutiny and attempts to reform the payday industry, the industry and payday lending today remains a business dependent on keeping borrowers caught in a debt trap,” said Michael Calhoun, president of the Durham, N.C.-based Center for Responsible Lending.

The Mercury News had the report.

No credit check payday loan lenders, often combined with check-cashing operations, provide immediate cash for a high fee. In a typical example, a borrower will write a payday outlet a personal check for $300 and receive $255 on the spot. After their next scheduled paycheck, anywhere from a day to two weeks later, the outlet cashes the check and pockets the $45 difference.

California law caps such loans at $300 and their fees at 15 percent. That works out to a 390 percent annualized interest rate, assuming a two-week loan.

The Community Financial Services Association, a Washington, D.C.-based trade group for the payday industry, says these personal loans are critical tools for people with short-term credit needs. It characterized the CRL study as “misleading.”

“This rehash of flawed statistics is designed for publicity purposes, not a serious discussion of consumer lending needs,” said Darrin Andersen, CFSA president, in a prepared statement.

He did not dispute the $4.2 billion figure, saying: “The bottom line is that consumers spend $4.2 billion a year for a product they choose over the alternatives.”

The CFSA response did insist that the industry doesn’t encourage extensions of loans, noting they’re illegal in 37 states. But the CLR study did not refer to extensions, sometimes called a cash advance payday loan rollover, but “flipping,” paying off an initial loan and subsequently taking out a second.