Payday Loan Times

The Community Financial Services Association of America, the national trade association for payday advance loan lenders, is planning to spend $10 million for an advertising campaign that it says is intended to educate people on how to use payday loans wisely.

Consumer advocacy groups are highly critical of these cash advances because when the fees are annualized, they often amount to triple-digit interest rates — even more than 1,000 percent in some cases. The groups argue that the loans take advantage of cash-strapped consumers.

”This is a public relations act from an industry under heavy fire,” says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. ”This is a move to derail state and congressional legislation.”

Instant payday loan lenders were banned from Georgia in 2004, although lawmakers there are considering letting them back in. Other state legislatures are considering restrictions on payday loans. Last year Congress passed a law forcing the industry to cap at 36 percent the annual interest rates on loans to military service members and their dependents.

Industry executives say their multimillion-dollar campaign is not an image booster. Rather, they call it an effort to encourage consumers to use payday advances in a responsible manner. They argue that payday loans are the more affordable route for people who find themselves in desperate need of money.

”If it only cost $10 to bounce a check, I’m not sure we would have nearly as big a payday loan industry,” says Don Gayhardt, president of Dollar Financial Corp., a payday lender. ”Payday loans are not predatory. We enhance the economic well-being of people.”

In fact, to show its commitment to helping people, the trade group is asking members to voluntarily implement new practices. The most notable is an extended payment plan for those borrowers who cannot immediately pay back their loan. At no cost, borrowers would be allowed to repay the loan over four pay periods.

For example, if a customer is paid every two weeks, he would get an additional two months to pay off the cash loan. If paid monthly, he would get an additional four months.

I have no doubt the media campaign will be successful. The ad I viewed, which features Darrin Andersen, president of the CFSA, has soft music and shows a child with his arm in a sling and a man on the side of the road with a car obviously in need of repair. The subliminal message: If you need money to fix a problem, we’re here for you.

Andersen advises that people should use payday advance loans only for unplanned short-term expenses. Borrow only what you feel you can comfortably repay, he says.

As the commercial plays out, we hear a woman’s soothing voice saying, ”Always use payday advances responsibly.”

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Payday cash advance lenders have begun to hound Rena McFadden’s husband, threatening to take him to court unless he quickly repays the more than $2,000 he owes.

“The time to repay is too short. He’s been trying to talk to them, but they won’t talk,” McFadden, a 39-year-old who works in a dry cleaning shop, said recently. “They want the money by the next pay day. How are you supposed to pay your bills?”

Therefore, McFadden said she likes a proposal unveiled Wednesday by the payday lending industry allowing customers more time to pay back a loan. But she and consumer watchdogs still question whether people who use fast payday loans will really get help from an industry whose loans’ annual interest rates can exceed 400 percent.

“Payday lenders make it easy for consumers to get trapped in predatory debt,” said Teresa Arnold, legislative director for AARP in South Carolina.

Payday lenders offer quick cash advances - for a fee - that customers are supposed to repay once they receive their next paycheck. Borrowers who cannot repay the guaranteed payday loan by the next payday often “roll over” the loan repeatedly, leading to more charges that can quickly add up and lead to a cycle of debt. Customers are drawn to the lenders because, unlike banks and credit unions, they don’t run credit checks.

The payday loan industry’s biggest change would give customers more time to pay back a loan with no financial penalty. This “extended payment plan” would be available at least once a year and provide borrowers between two and four extra months to pay off loans. It was paired with a $10 million ad campaign warning that payday loans are not a long-term financial solution and a ban on ads that promote payday advances for “frivolous purposes” like vacations.

The move came as states from Virginia to New Mexico consider legislation to limit payday lending practices. In South Carolina, home to the nation’s largest payday lender, lawmakers are considering a measure that would cap at 36 percent the annual interest fee on the loans, and limit the number of payday loans a consumer could have with a single payday loan company.

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The payday cash loan lending industry, often under attack by consumer groups, rolled out a new list of best practices Wednesday at a time when Democrats in U.S. Congress have threatened more scrutiny over high-cost loan products.

The Community Financial Services Association of America said it has launched a $10 million “national public education campaign aimed at informing consumers about the responsible use of payday advances.” The group represents many of the payday lenders providing loans that are often due when the borrowers get their next paycheck.

The trade group said its members would offer an extended repayment plan for borrowers having trouble paying off short-term loans. The extra time will come without any new fees or accrued interest, the trade group said.

Also, the trade group said its members will “refrain from advertising the payday advance services for frivolous uses.”

Bad credit payday loan stores have frequently attracted scrutiny from consumer groups, in part because some borrowers take out the short-term loans and then continue rolling the credits over, racking up more and more fees.

Last year, Congress passed a law that cracked down on cash advance payday loan companies operating around military bases. Also, with growing home foreclosure rates attributed to high-cost subprime mortgage loans, lawmakers have said they want more scrutiny over industry lending practices.

Members of the trade group include Allied Cash Holdings LLC, Advance America, Check ‘n Go, Moneytree, Inc., and Check Into Cash, Inc.

A writer from financial newsletter, The Motley Fool, had the following to say:

I don’t need ‘em and haven’t used ‘em, but I have an affinity for payday lenders. Whenever an industry is under attack from the government, regulators, or various do-gooders, the strong libertarian streak in me wants to defend them.

Of course, it also doesn’t hurt that investing master Peter Lynch considers industries with a high “ick factor” ideal sources of good investments.

No fax payday advance lenders are simple businesses to understand. A customer with short-term cash flow problems walks into an Advance America store, hands over a postdated check as collateral, and walks out with a fistful of cash. Most of the time, these loans are for a two-week period - just until the next paycheck arrives (hence the industry name) - and the borrower pays a fee for the service.

That fee, however, gets everyone riled up. A $15 fee per $100 borrowed doesn’t seem particularly onerous, but consumer advocates want to liken bad credit payday loans to the annual percentage rate you’d be charged on a regular loan. When you do that, it equals a 391% APR.

There are a couple of reasons why the fees are so high.

Payday customers can be bad credit risks, and default rates can run high. First Cash Financial had loss provisions of 23% in 2006, while Cash America’s were 30% last year. And there’s the convenience issue. Customers simply can’t get small, short-term loans from their local bank. Folks in need of short-term financial solutions have been abandoned by traditional lending sources.

Though many associate bad credit practices with the poor, EZCORP has found that the typical customer in Texas using its maximum $1,500 pay day loan service has an individual income of around $60,000 to $70,000 annually.

While Advance America and QC Holdings have remained solely payday lenders, the others have branched out into related fields. EZCORP runs pawn shops, as do First Cash Financial and Cash America, while Dollar Financial does payday loans, check-cashing, bill payment, and money transfers. Buy here/pay here used-car dealerships are another new area payday lenders are beginning to explore.

In a very Lynchian way, payday lenders are good investments. They’re disliked by large swaths of people, and they have a high ick factor, but they provide a necessary and highly profitable service. Despite attacks from regulators, payday lenders will survive and thrive.

That’s good for investors, and it’s why I love ‘em.

Consistent with most other payday lenders’ results, tiny QC Holdings saw flat expenses atop higher revenues lead to wider profit margins. QC Holdings is a pure-play lender in a field that often involves a mix of fast payday loans, pawn shops, and most recently used-car dealerships.

Competing against industry giant Advance America, the company still grew quarterly revenues 16%, to $48.7 million, on higher volumes of loans written, including the addition of 51 branches it acquired in South Carolina back in December.

It originated approximately $291 million of payday loans during Q4, a 7% increase over the $271 million worth it originated last year, according to The Motley Fool.

At the same time, branch operating expenses remained flat year over year, despite the increased number of stores. That suggests an improved and more efficient operating structure. The longer no fax payday loan stores stay open, the more profitable they become. It falls right in line with CEO Don Early’s prediction last quarter that investors should expect higher revenues and consistent costs.

It was a hard lesson to learn for QC Holdings.

The payday loan company initially expanded too far, too fast, and suffered mightily for it. Now, with experience under its belt, the company has found a consistent formula. It’s expanding at a less torrid pace, only expecting to open 20 to 30 new branches in 2007. Nonetheless, it’s seizing opportunities when they arise, such as its $16.2 million acquisition of South Carolina branches from privately held Express Check Advance.

Along with 46 new branches it opened in the last quarter, those additions have already contributed $3 million in revenues.

QC is also closing down 35 branches that cost the company $2.4 million in losses in 2006, undoubtedly opened in the frenzy of new fast payday advance stores intended to increase its footprint early on.

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Payday loan company Advance America (NYSE: AEA) will report fourth-quarter 2006 financial results on Feb. 7.

What analysts say, according to The Motley Fool:

Buy, sell, or waffle? Of the nine analysts covering Advance America, five say hold, three say buy, and one defaults with a sell.

Revenues. Revenues for this guaranteed payday loan company are expected to jump to $187.4 million, a 43% increase over last year’s $130.7 million.

Earnings. Profits are expected to grow 15%, to $0.23 per share, with a 13% increase forecast for full-year results.

What management says:
Specializing in cheap payday loans, Advance America has been able to insulate itself from some of the market vagaries competitors who also have exposure to pawn shops and other ancillary services have experienced.

Cash America, for example, recently reported it raised its loan loss provision to nearly $27 million, or more than 37% of cash advance fees, perhaps in expectation of higher defaults on online payday loans granted over the Internet. Advance America saw its own provision for doubtful accounts rise to 22.7% of revenues in the third quarter from 21% the previous year.

The payday cash advance lender notes that its receivables tend to be seasonal and are lowest at the end of the first quarter, matching when people receive their income tax refunds, and highest at the end of the fourth quarter. Therefoes, expect Advance America’s receivables to be higher with this report.

What management does:
Advance America operates under what it calls its “standard business model” whereby it is the party responsible for qualifying borrowers, setting terms and conditions for loans, advancing money to approved borrowers, and assuming the risk of default. Previously, the company had often operated under what it called an “agency business model,” whereby third-party lending institutions performed many of those functions.

In 2005, changes in FDIC regulations precluded that from happening anymore, so all of Advance America’s 2,745 centers operate under the standard business model. It is creating efficiencies for the cash advance online lender, which are helping to boost the bottom line.

Center gross profits, however, feel the pinch of new center openings, which tend to be more costly until they become established. In the third quarter, the company had opened 91 new stores.

One Fool says:
This Motley Fool Inside Value selection has turned around its operations in an industry with an unseemly underbelly. Despite the public and vocal attacks on the instant cash loan business and Advance America in particular, the company has been performing remarkably well and is still valued at less than many of its competitors even though it is the largest of the payday lenders.

With the lowest forward valuation, an increasing presence in this country, and a strong balance sheet, Advance America still seems a good buy at prices still 25% under the annual highs.

ChristiaNet.com, the world’s largest Christian portal with twelve million monthly page loads, asked readers to participate in a new survey by answering the question:

Should Christians get cash advance loans?

The overall consensus of those who participated seems to be that it depends on the reason one is getting the no faxing payday loan. Individual circumstances can vary and sometimes Christians need help.

ChristiaNet’s President, Bill Cooper advises, in a press release:

“Consider the need to the amount of interest charged on cash advance loans. If the need calls for desperate measures, then do some research before making a final decision.”

Out of 317 responses, 111 answered “yes” to the survey question. Many participants in this group felt that sometimes loans are needed to help with negative financial situations. Emergencies often call for needed cash - but it is important to pay back the faxless payday advance promptly to avoid other charges.

Christians shouldn’t go into debt, but sometimes it may be necessary. One participant said: “Everyone makes mistakes and can accidentally get into trouble financially. If you are honest, trustworthy, and capable of repaying the debt, go ahead but pray first.”

The number of participants who answered “no” to cash advance loans totaled 117. Many in this group believe that it is money mismanagement that causes people to result to paying high interest loans. Another wrote:

“The Bible says that being in debt is similar to being a slave. We serve a God that provides for His children but He also wants us to learn good stewardship.”

Looking for a reprieve out of a bad financial situation is good but Believers should seek God and be obedient to His Word for their answers.

Eighty-nine readers were unsure about the answer to the fast cash loan question. Readers seem to agree that borrowing money for an emergency is one thing but making a habit of doing so is another matter altogether. As one reader pointed out: “This should be done on the direction of the Holy Spirit.”

Many in this group acknowledged that everyone’s financial situation is unique. Therefore, it really depends on the situation and why the no fax payday advance is needed. One reader advised: “Just make sure that you can pay back the money before borrowing it.”

The Center for Responsible Lending has published a critique of major analytical flaws in a new working paper Defining and Detecting Predatory Lending on payday loans by Federal Reserve economist Donald P. Morgan of the Federal Reserve Bank of New York.

The Fed paper comes to the preposterous conclusion that while no fax payday advance lending is “expensive,” it is not “welfare-reducing” and therefore not “predatory.” The Center for Responsible Lending had a premonition that this paper would contain such out-of-step findings when the first reference it saw to it was a laudatory pre-publication tease, with excerpts, on a rent-to-own industry website.

From the Center for Responsible Lending critique:
Morgan’s findings are flawed for three key reasons:

1. The analysis contains fundamental errors in its characterization of which states allowed faxless cash advance lending. Example: Morgan identifies North Carolina - which had at least 500 stores during the analysis period - as a non-payday lending state.
2. Key definitions utilized by the research are overly narrow or are contradicted by available data. Example: Morgan, in part, defines vulnerable households as those with unpredictable future income. However, an industry survey notes that households are nearly three times likely to borrow cheap payday loans because of unexpected expenses.
3. Morgan’s finding that unlimited payday lending leads to lower prices is flatly contradicted by other research. Example: Researchers from the FDIC, using a national, random sample, found that most quick cash advance companies charge the maximum rate permitted by state law.

The Motley Fool presents a business/stock market look at recent payday advance ruling …

We’re only one month into 2007, and already, 19 states have introduced more than 50 separate pieces of legislation regulating the payday loan industry. While some of the current bills are holdovers from last year, state legislators are well on their way toward matching the 65 separate bills introduced last year in 25 states.

You can perhaps understand the animosity towards alcohol and tobacco companies. Yet fast payday advance lenders provide a much-needed service to a large swath of the public that has been completely abandoned by traditional financial institutions.

A short-term bridge over troubled water
Credit counselors charge that the interest on payday loans is usurious. For example, Advance America charges $15 on a 14-day $100 loan; extended out to a year, that’s an annual percentage rate of 391%.

The typical annual percentage rate for a guaranteed payday loan from a Dollar Financial Money Mart store is 456%, while Cash America’s $25 fee per $100 borrowed would be equivalent to a 651% APR. To fiscally prudent people, this is not only outrageous, but predatory.

Yet such arguments distort the nature of these personal loans.

Many of the people who use these services are considered a credit risk by banks, credit unions, and other financial institutions. Those businesses wouldn’t even give these people a bridge loan, let alone charge a rate that wouldn’t be considered usurious. These consumers have become what is known as the “unbanked” or “underbanked.” In fact, they may not even have poor credit histories - they simply don’t have any at all.

Serving the underserved
For a variety of reasons, many of the consumers lack checking or savings accounts, and cannot obtain credit card cash advances. Many cash loan customers are recent immigrants. EZCORP, for example, is based primarily in and around Texas, and has found that many of its customers are Mexican immigrants.

Because the use of payday services in Mexico is not as stigmatized as it is here, it’s even more of a growing business south of the border, and EZCORP has expansion plans there.

While no faxing payday loans are the bread-and-butter of these businesses, they’re often not the sole source of revenue. These lenders often cater to the full range of the underbanked consumer’s needs, and many also operate pawn shops, where merchandise is put up as collateral for a small, short term loan. Some also provide low-limit credit cards and buy-here/pay-here auto dealers.

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Cash Now Corporation, a public payday loan company engaged in the design, manufacturing, marketing and distribution of customized cash advance and check cashing software and white or private label back end systems, Internet based payday loans, and other sub prime financial utility tools, annouced today after the market closed, the completion of the regional training transaction.

The trainee, a Maryland based mortgage broker, plans on adding additional services to their clients via the Internet such as online payday loans and other sub prime financial services made available by Cash Now and its vendors.
Cash Now’s CEO Garr Winters said:

“This is a bit of a different twist from our traditional model, however, as more and more states and provinces change the laws on payday loan lending we are noticing an increase in the media scrutiny and the need for [easy payday loan] and check cashing operators to stay on top of the current laws and regulations that affect our industry.”

Case in point, the recent soon-to-be-released San Francisco Chronicle expose on the payday loan industry that is comparing traditional bank fees to those charged by cash advance payday loan companies. The company confirms that it did contribute to the payday industry support cause, as it did participate with the journalist inquiry.

Mr. Winters continued:

“We are not a bit surprised that most consumers and journalists alike did not realize that in most cases, taking out a short term payday advance is less expensive than the fees charged by some traditional banks.”

In other company news, the company remains concerned about the erosion of its share price. The company plans on issuing a “President’s Message” press release to its shareholders, that will address this and many other frequently asked payday advance loan questions of its shareholders.