Payday loan firms feeling the pinch
October 7, 2006 - Detroit, Michigan
With Michigan's economy in the tank -- thousands of unemployed factory workers and underemployed service workers are looking for jobs and many people are struggling to pay their bills -- you might expect business to be booming at payday loan centers.
In reality, those centers are suffering right along with hundreds of other businesses in the state.
A new Michigan law that limits how much payday centers can lend and lowers the fees they can charge borrowers is taking a toll. So is the fact that only those getting a paycheck can qualify for a loan, which leaves out the growing ranks of unemployed in Michigan.
"We haven't seen a spike in business, but the (bad) economy and the law happened simultaneously," said Phil Locke, president of the Michigan Financial Service Centers Association, which is comprised of mostly payday loan center owners. "I don't know if it was the economy or the law."
At least 25 small loan centers in Michigan, out of about 700, have closed since the law took effect in June, Locke said, including five of his 32 lending offices.
Payday loans -- also known as check advance loans, postdated check loans or deferred deposit check loans -- are a fast and easy way for people to get cash to tide them over until their next payday.
The number of payday loan shops exploded in the 1990s. While the industry continues to grow nationwide, it's hit a skid in Michigan because of the strict new regulations and the continuing climb in the number of unemployed.
Some loan shop owners say the law is unfair and unnecessary, because the industry already was regulating itself. Even their customers defend them, saying it's faster and easier to borrow money from a payday loan center than from a bank or credit union.
Critics argue that payday lenders were not regulating themselves, but were simply taking advantage of desperate, vulnerable people.
"These places prey on the people who can least afford it," said Sen. Martha Scott, D-Highland Park, who lobbied for even lower lending fees. During the debate on the bill, she presented an amendment to lower the maximum interest rate to 10 percent from 15 percent, but the amendment was defeated.
Quick, simple loans
The procedure is simple and quick: Customers write a personal check for the loan amount to the loan shop, plus an average fee of about 20 percent. The loan shop provides the loan in cash, and holds the personal check until the borrower's next payday -- usually two weeks. If the borrower needs more time to pay back the loan, they can roll it over for another two weeks for an additional fee.
For example, a $100 loan requires a $115 check from the borrower. If the borrower can't repay the loan after two weeks, it can be extended for another $15.
The more times the borrower extends the loan, the more expensive it gets; sometimes customers end up paying more money in fees than the original loan.
That's why the Michigan legislature stepped in, and for the first time set strict limits on payday lending practices, including:
Fee limits: Before the law, loans centers charged $15 to $30 for every $100 loaned. The law sets the interest rate on a sliding scale: 15 percent for a $100 loan, 14 percent for $200, 13 percent for $300, 12 percent for $400 and 11 percent for loans up to $600.
Loan limits: Shops can't loan more than $600 at a time. Before, loan centers would give out $1,000 or even more. Borrowers also can't get a new loan if they have more than two outstanding loans from any combination of payday lenders.
Disclosure requirements: Lenders must keep track of all transactions, including fees and loan amounts, on an online database the state created to make sure lenders aren't exceeding the limits.
Licensing: All payday lenders must be licensed. So far, 711 licenses have been issued.
"It's got a lot of checks and balances," Kathy Fagan, a public relations officer for the state's Office of Financial and Insurance Services, said of the new law.
Loan centers, the first of which opened in Michigan in the mid 1990s, were never before regulated by the state, so there is no data available on their lending totals or their revenues, or even how many there were a year ago.
"It's safe to say the number (of payday loan shops) has grown in Michigan," Fagan said. "Unfortunately, because we just started regulating these entities on June 1, we have virtually no historical data on the industry."
Did state go to far?
Loan shop owners said they understood the need for some regulation, but think the state went too far. Some say they are hardly making ends meet.
The new law "has its good points, but it has bad points, too," said Walter Drake, a consultant for his wife's Payday Advances shop. He said business is off considerably at the shop.
The Clinton Township office had about 500 customers in previous years, compared with about 107 so far this year, he said. And its 30 percent to 40 percent profit margin has dwindled to nothing.
"We're running on minus," Drake said.
Drake said the state's stringent rules make it tougher for small payday loan shops to compete against big chains such as Check 'n Go and Advance America.
"The government has taken away the ability (for the industry) to regulate itself," Drake said.
Loan shop owner Michael Rinoldo supported legislation to protect borrowers, but said the new law isn't fair and was passed without input from lenders.
Since June, he has seen a 20 percent to 30 percent drop in business at Cash Now, his Oak Park store.
Customers who need more than $600 now go to other sources such as pawn shops and Internet-based payday advance companies that aren't regulated by the state and charge as much as 35 percent interest, Rinoldo said.
"Customer protection went right out the window," Rinoldo said. "People think we take advantage of poor people, but it's just not true.
"We don't deal with poor people," he said, noting many of his customers are upstanding citizens with respectable jobs, such as teachers and doctors, who simply need a short-term loan to get by.
Even big loan companies are feeling the pressure of Michigan's law.
Check 'n Go, which has 1,300 loan centers worldwide and 100 offices statewide, had to reduce its fees from 18 percent to the mandated rate of no more than 15 percent. On top of that, there has been a 35 percent decrease in business at the Michigan stores, according to the company.
John Rabenold, Check 'n Go spokesman, said the law does make it inconvenient for customers who need to borrow more than $600, and it probably sent some customers to Internet-based firms located in other states and, many times, other countries where laws don't apply.
Massive layoffs, particularly in the auto industry, aren't helping the payday lending business, either.
The hundreds of thousands of Michigan residents who don't have a job don't qualify for a loan. As of August, the state had the highest unemployment rate in the nation at 7.1 percent, or 360,000 unemployed workers.
Customers defend shops
Customers defend payday loan shops, saying they fill a need. Getting a quick, short-term loan is better than a bouncing a check and paying a $25 overdraft fee or spending hours completing loan paperwork at a bank, they said.
Gregory Hodges, a 45-year-old electrician from Detroit, frequents loan shops when an unexpected expense arises. At an Oak Park loan shop recently to pay back a $250 loan, he said he would rather pay a fee and get the cash quickly than deal with a bank.
"I come now and then just to hold me over to payday if something comes up," Hodges said. "Never for personal things. Never for pocket money."
"Considering that you have to go through credit checks at banks and credit unions, (loan centers) are pretty good."
The Detroit Times, Jennifer Youssef, Staff Writer
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