New state laws regulate payday-advance loans
August 27, 2006 - Grand Rapids, Michigan
James Anderson just finished paying off a loan with an eye-popping annual percentage rate higher than 380 percent, but he couldn't have been happier.
The loan was $300 he borrowed from Approved Cash Advance, 823 28th St. SW, in Wyoming went to fix an air conditioner during the recent heat wave.
Because he didn't have the cash on hand, getting a quick two-week loan at a cost of around $35, including interest and fees, was a no-brainer.
Anderson said he would not hesitate to use the service again.
Such payday-advance loans are a growing source of quick cash for Americans in need of quick influxes of cash.
But the industry has long been criticized by consumer advocates for making its money from people in vulnerable states.
Here's how these lenders, also known as "deferred-presentment providers," usually work:
A customer who needs $200, for example, would take a personal check, proof of income such as a paycheck stub, identification and a recent bank statement to a cash-advance office.
The store verifies employment and checks the customer's name against a statewide database to ensure he or she has no more than one other similar loan outstanding. But the store does not conduct a credit check.
Before he or she receives any money, the customer writes a check for about $230, including interest and additional fees, for the $200 loan and postdates it by two weeks.
The store then advances the customer the $200 in cash and arranges a time for repayment of the loan. If the customer does not show up for repayment, the postdated check is cashed.
If the check bounces, the lender can charge up to $25 in addition to the amount owed and pursue collections but not criminal charges. Bank bounced-check fees also apply.
State lays out new rules
Until July, Michigan had few rules to control the industry. But last month, a new set of industry-backed state regulations went into effect, and they have helped to weed out some of the more predatory players, according to industry supporters.
Steve Leach, who operates 50 Instant Cash Advance offices around Michigan, said his Grand Rapids-based company was glad to see the regulations. Three Instant Cash Advance offices are located in southwestern Michigan.
"We were unhappy with some of the operators out there who were charging 30 percent more (in two weeks) than we were," he said.
The new legislation allows loans to have annual interest rates of up to 375 percent on a $250 loan, plus various fees.
It also limits the number and amount of loans consumers can take out and forbids threats of criminal prosecution against people who fail to pay.
But not everyone is pleased.
Jean Ann Fox, of the Consumer Federation of America, said the new law is unfortunate because Michigan already had a much more reasonable small-loan law on its books that was never enforced.
That law capped the annual rate on small loans at 25 percent, allowing a loan-processing fee of up to 5 percent for amounts up to $250.
"They would have been better off to enforce the rule they had," she said. "If they felt they had a loophole, then close it."
Fox's advice for people considering a payday advance is simple: Don't.
"It looks quick and easy, but it will get you caught in a cycle of borrowing," she said. "These loans get paid before other obligations because people don't want their checks to bounce; they don't want to lose check-writing privileges."
Advance America, the largest of the publicly held payday-advance companies, said its average customer uses the service seven or eight times a year. He or she pays average fees of $55 per transaction with an average loan amount of $339.
That works out to $330 to $440 in fees, on average, per year, per customer.
Business is booming
Jamie Fulmer, director of investor relations for Advance America, said the company offers a service millions of customers need.
For many, the alternatives of credit-card late fees, bounced checks or overdraft fees are far more expensive than the payday-advance fees.
"These are folks who understand what their options are," Fulmer said.
In 2005, Advance America said, it served 1.53 million customers with 11.6 million cash advances from 2,604 locations.
The company saw its revenue grow nearly 7 percent, to $308 million, during the first six months of the year. Net income rose 9 percent, to $33.3 million--about 11 percent of revenue.
The busiest times of the year are in the third and fourth quarters as customers seek back-to-school and holiday cash.
"It's very easy for people who don't have short-term financial needs to criticize," Fulmer said. "You oftentimes hear the criticism, but you rarely hear solutions."
The Consumer Federation, however, offers its ideas on how to avoid cash crunches.
At the Consumer Federation's recently launched Web site, www.paydayloaninfo.org, it recommends building an emergency savings fund, budgeting, pursuing traditional, less-expensive credit or loans, borrowing from family members, getting credit counseling, negotiating with creditors and even working more overtime.
Law generates business
At the Cash Store, 1209 28th St. S.W. in Wyoming, Assistant Manager Patsy Collins said business has increased since the regulations went into effect July 1.
That's partly because consumers need to go to more than one place to get a second loan, she said. The new rules allow only two loans at a time, and each must be from a separate provider.
"We used to advance up to $1,500," Collins said. "Now people need to spend their $3 a gallon to get the rest of the money they're entitled to because of the limits."
Collins said customers take loans for a variety of reasons.
"It ranges from them needing extra cash to go away for the weekend or go to a concert to getting groceries to get them through to the end of the week."
One couple who declined to give their name came into the Cash Store saying they needed money for diapers, gas and groceries.
As he unstrapped his baby from her car seat, the father said he had just lost his job at Steelcase Inc. and that the family was simply out of money.
The couple ended up getting turned away because they didn't have a checking account that had been open for at least 30 days -- one of the four requirements on the Cash Store customer check list.
Business owner Leach said the industry is rapidly maturing. The new laws are part of that process, helping to establish industry standards and consumer protections.
He said he expects large players to consolidate over the next few years. But he doesn't expect customer demand will go away.
"It's really good people who would prefer to do it from an industry rather than have to borrow it from their father, mother, sister or brother and have to explain their business," Leach said. "This is not a broke public."
Kalamazoo Gazette, Chris Knape, Staff Writer
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