Lenders cashing in on short-term loans

July 16, 2006 - Charleston, South Carolina

As a leading advocate for the low-income community, attorney Susan Berkowitz has seen firsthand the perils of payday lending.

Every year, thousands of people take out costly short-term loans to help see them through to payday.

What starts as one loan to cover an unexpected expense, or even groceries, often becomes two loans, Berkowitz said -- the second loan used to pay off the first. Then it's a third loan, then a fourth and the cycle continues.

Berkowitz says she met one client who was juggling 19 loans at the same time.

Industry officials say they provide a valuable service to people who need it. Critics call cash-advance services a trap door to deeper debt.

"The payday loan industry has learned to develop lending practices that take advantage of those who can least afford it," said Berkowitz, director of the South Carolina Appleseed Legal Justice Center, a Columbia-based advocacy group that provides legal services for the poor.

The businesses aren't hole-in-the-wall loan sharks along a dark alley in a shady part of town. Most are high-profile, publicly traded companies with national advertising campaigns and service centers in busy retail areas.

The nation's largest cash advance business is based right here in South Carolina. The company, Spartanburg-based Advance America, is banned from offering payday loans in neighboring states, but in its home state, business is booming.

This year's legislative session led to rumblings of future legislation that would limit the number of loans a person could have at one time. But for the time being, it's a case of money talks.

It also flies. Two years ago, Gov. Mark Sanford hitched a ride to Seattle for a National Governors Association meeting on Advance America's private jet. Sanford said through campaign spokesman Jason Miller that he accepted the trips, legal under state ethics laws, to attend political events, rather than use state transportation for what were nongovernment events, thereby saving tax dollars.

But not everyone is going along for the ride. North Carolina and Georgia, have, in effect, prohibited payday lending within their borders.

Payday loans are available to people who have a checking account. Consumers can borrow up to $300 by writing a check to the lender. The check is held until the customer's next payday, typically two weeks, hence the term payday lending.

The charge can be up to $15 for every $100 borrowed, which translates to an annualized interest rate of around 400 percent.

That means a person who borrows $300 owes $345 two weeks later. If they can't pay the debt, they can pay $45 in interest and take a new loan to cover the rest.

"Although $45 doesn't sound like a lot of money. That's a lot of interest over two weeks," Berkowitz said.

Big business

In 2000, licensed payday lenders issued 2.6 million loans in South Carolina and charged $91 million in fees, according to the Appleseed Legal Justice Center. During fiscal year 2004, the most recently available data, that number had jumped to 4.3 million loans and fees of $153 million.

In the four-year period from 2000 to 2004, 13.6 million payday loans were issued in the Palmetto State, generating $473 million in fees. Florida, by comparison, has a population five times that of South Carolina but had only 4.1 million such loans during 2004, Berkowitz said.

Since not all South Carolinians use this type of lending, it's safe to assume many people took out multiple loans, she said.

"If they had that kind of money, they wouldn't need the loan in the first place," Berkowitz said. "It just spirals out of control."

Since 1997, Advance America has grown to 2,640 centers in 36 states as of March 31. The company opened seven centers around South Carolina last year and one so far this year, bringing the statewide total to 113, including 14 in the Charleston region.

In February, Advance America reported record earnings. For the year ended Dec. 31, the company reported that revenue jumped 10.5 percent to $630 million, up from $570 million during the prior year.

Gross profit for the year increased 2.9 percent to $172 million from $167 million, according to Securities and Exchange Commission filings.

During that period, customers' average age was 39 years, the company reported, with 66 percent ages 18-44. The average loan was $339, up from $328 in 2004, with average fees of $55.

Middle-class market

The company's target demographic is the hard-working middle class, said Jamie Fulmer, director of investor relations for Advance America.

That market is reflected in a company strategy that locates centers in high-visibility areas, such as strip malls, or close to high-traffic retailers, such as Target and Wal-Mart stores. The company's Web site uses descriptions such as "Next to Food Lion" for the Moncks Corner center and "Across ... from Piggly Wiggly" for its St. George location.

As for fees, Fulmer said the company's charges are comparable to what banks charge for a bounced check. If a $10 check is returned, the bank's fee is likely to be around $32, he said, which equates to a very high annual percentage rate.

"We believe we provide a useful service to millions of Americans who need a cash advance between paychecks," Fulmer said.

A payday industry group, the Community Financial Services Association of America, reported in 2001 that most customers at payday centers are aware of the fees charged on loans but do not equate the fees to an annual interest rate.

Also, many customers recognize that payday loans are costly, perhaps reinforcing the argument that people who use the service need the cash, the Alexandria, Va.-based group found in its study, which was conducted by the McDonough School of Business Credit Research Center at Georgetown University.

Forced out of N.C.

In the same year as the report, North Carolina lawmakers decided to put a stop to the practice when the state Legislature declined to extend a law allowing it.

Lawmakers determined that the lenders' practices breached the state's 36 percent cap on interest rates. Lenders maintained they were not subject to the state law because they were agents for out-of-state banks.

But last fall, the North Carolina Banking Commission ruled that Advance America was a lender, not an agent. The company subsequently shuttered its 117 North Carolina offices. By this spring, the remaining companies, too, had pulled out.

Some consumer advocates would like South Carolina to follow suit and ban payday lending, or at least modify existing laws. In 2003, the state Legislature here did pass a law that required anyone borrowing money at higher-than-market interest rates to attend a free credit-counseling session.

Appleseed would like to see more, such as a ban on lending on the Web by lenders not licensed in South Carolina. A law proposed by the group would make it an unfair trade practice and the lender's contract unenforceable in South Carolina.

The group also proposes a requirement that consumers wait 24 hours after paying off an existing loan before they can enter into a new transaction. Appleseed also recommends a state-sponsored database of live loans that all lenders must check before granting loans to ensure a customer is eligible.

Next year, the General Assembly may consider one of the group's recommendations: limiting borrowers to a single payday loan at a time.

State Rep. Eldridge Emory, a Lancaster County Democrat, is one of the more vocal lawmakers who favor greater industry regulation. Emory, a retired banker who was formerly with Lancaster-based Founders Federal Credit Union, said this week that lawmakers must find a way to limit the industry so consumers can't be abused. Borrowing money to escape debt is not a solution, he said.

"They've borrowed a small amount of money, but they owe a lot," said Emory, who will not seek re-election this November.

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The Post and Courier, Peter Hull, Staff Reporter

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Lenders cashing in on short-term loans

July 16, 2006 - Charleston, South Carolina

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