Payday loans face scrutiny

CASHING OUT: Advance America, the largest U.S. payday lender, says most of its customers understand the loans they are taking out. / PBN PHOTO/NATALJA KENT
CASHING OUT: Advance America, the largest U.S. payday lender, says most of its customers understand the loans they are taking out. / PBN PHOTO/NATALJA KENT

Modern payday lending was legalized in Rhode Island in 2001 and didn’t cause too much outcry until the recession began adding to the number of local families falling deeper into debt and bankruptcy.
Now for the third consecutive year, a coalition of lawmakers, social-service organizations and religious leaders are trying to outlaw the interest that payday lenders charge, calling it onerous and predatory.
As they did the past two years, the coalition faces an uphill battle getting a bill, sponsored by Rep. Frank Ferri, D-Warwick, approved on Smith Hill. Similar bills have died without a floor vote in the past and neither House Speaker Gordon D. Fox, D-Providence, nor Senate President M. Teresa Paiva Weed, D-Newport, have signaled any change in their positions from last year.
But each year the coalition has added a few new members and focused additional scrutiny on payday lending in particular and short-term, distressed borrowing in general.
In response to the anger over payday lending, some Rhode Island organizations have launched their own nonprofit-oriented, short-term loan programs, including the Capital Good Fund, West Elmwood Housing Development Corp. and Navigant Credit Union.
But payday-lending companies say these alternatives are not truly accessible for the majority of people in the state facing an immediate cash crisis without good credit.
The real alternatives their customers would turn to, they say, include unregulated Internet lenders, credit cards, pawn brokers, neighborhood loan sharks, bank overdraft fees, check bouncing and missed monthly utility payments, all of which can come with higher costs than their products.
“The misunderstanding is folks fail to look at the broader marketplace and compare the characteristics of other products,” said Jamie Fulmer, senior vice president for public affairs at Advance America, the largest payday-lending company in the United States and Rhode Island. “If you don’t have $100, you can borrow from Advance, or you’ll write a bad check, use overdraft protection, pay to have a utility reconnected or another delayed payment fee to another vender, like a cellphone carrier. Because we are so heavily regulated, we offer simplicity, transparency and full disclosure,” Fulmer added. “Our customers understand what they are getting.”
In Rhode Island, what payday borrowers get is a cash advance, capped by state law at $500, minus a 10 percent flat fee, to be repaid typically in two weeks. (The fee on a $500 loan would be $50.) The loans are typically secured with a pay stub to prove employment and a personal check from the borrower, post-dated to the repayment date of the loan.
Much of the debate around payday loans centers on when borrowers do not repay the loans on time and roll them over into another pay period.
Rolled over for an entire year, the 10 percent fees on each new loan add up to a 260.7 percent Annual Percentage Rate, which is the measure used to calculate interest and the number that has drawn fire from industry critics.
As a comparison, Navigant Credit Union’s alternative short-term lending program charges a $20 flat application fee on all loans, with 18 percent APR, and has a 90-day repayment period with no rollover.
Navigant Chief Lending Officer Fred Reinhardt said the loan program is intended as a community service, not a moneymaker.
Banks in Rhode Island are allowed to charge a maximum of 36 percent APR, but in 2001 lawmakers passed a law treating payday loans as a kind of check-cashing service exempted from that limit.
It’s that exemption from the 36 percent maximum that payday-loan opponents are trying to get rid of in the Ferri bill and that Advance America argues will put them out of business in Rhode Island.
“We think the consumer should have multiple products and be able to decide instead of regulators trying to pick winners and losers,” Fulmer said. A South Carolina-based company bought last year by Mexican lender Grupo Elektra, Advance America operates in 29 states across the country, with 2,400 locations and 6,000 employees. It opened its first store in Rhode Island in 2005 and by 2010 operated 20 of the 29 payday lending centers in the state, according to R.I. Department of Business Regulation figures. Rhode Island is the only New England state in which the company operates and it is now down to 19 Ocean State locations.
According to Advance America’s most recent annual filing with the U.S. Securities and Exchange Commission, since the end of the last decade, tougher government regulations and saturation in the industry have caused payday lenders to stop opening new stores and focus on maximizing profits at existing locations.
The nine Rhode Island payday lending stores not run by Advance America in 2010 were run by Ohio-based Check n’ Go, which now lists seven Ocean State locations on its website.
According to an IHS Global Insight report in 2007, the payday-lending industry directly employed 41 people in Rhode Island.
But while Advance America argues that 260 percent is a misleading way to look at the cost of their loans, opponents say it’s an accurate reflection of the loan product, which they argue is designed, like credit card debt, not to be paid back on time.
According to Advance America’s SEC filing for 2011, the average duration of their cash advances nationally was 18.2 days, well above the usual two-week loan term and up from 17.6 days in 2009.
The average size of the cash advances also grew from $361 in 2009 to $375 in 2011, with the average charge to customers on those loans rising from $53 to $55 over the same period.
Last July, the Pew Center on the States added new ammunition to the debate in a report that found the average payday borrower takes out eight loans per year and has an outstanding debt with a cash-advance lender for five months out of the year. Pew surveyed payday borrowers and found that 69 percent of those they spoke with used the service to cover routine, recurring expenses, compared with only 16 percent for unexpected or emergency expenses.
“This year we have research that shows most borrowers use payday loans to cover ordinary living expenses, not emergencies,” said Margaux Morisseau, director of community building at Neighborworks Blackstone River Valley and the organizer of the Rhode Island Coalition for Payday Lending Reform. “As for the alternatives, racking up credit card debt or late fees is actually better than going to a payday lender.”
The Pew survey also asked borrowers what they would do without payday loans. Eighty-one percent said they would cut down on expenses, while less than half said they would seek a loan from another source.
Whether cutting down on food, clothing or falling behind on bills is better than payday loans remains a subject of debate.
Last year, Sen. Joshua Miller, D-Cranston, then the chairman of the Senate Corporations Committee, led a push for a compromise bill that would have further regulated all manner of short-term lending, including check cashing.
“If we just eliminate payday lending, the same vulnerable population will just be exploited by the Internet, pawn brokers, check cashers and loan sharks,” Miller said.
But neither the reformers nor lenders could agree on a compromise and Miller’s bill died as well.
Paiva Weed spokesman Greg Pare said the Senate president still supports Miller’s approach to comprehensive changes that forge a compromise on payday lending.
Larry Berman, spokesman for Fox, said the speaker is studying the issue but has also generally supported a compromise instead of the full elimination of the payday exemption.
“[Fox] is doing his own work on this issue and looking for alternatives to the payday loans,” Berman said. “We should expect something on the regulatory part this year.” •

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