News

Pay Day Lending

Aired December 5, 2001

The effects of the economic slow down were compounded by the 9-11 attacks. A month after the disaster the number of unemployed people in the country skyrocketed from more than 730,000 to more than 7 million. But one industry that hasn’t lost steam is Pay Day lending. In fact, business is booming as more and more low-income people, in mostly urban areas, look for quick and convenient ways to do their banking. 90.3 WCPN®’s Tarice Sims reports on the secret of the industry’s success and why some people in the financial world are not happy about it.

Tarice Sims–It’s Friday night and for the people lined up inside a local cash express location near Shaker Square, it’s also pay day in more ways than one. John is a frequent customer there. He uses their services to cash his checks and is considering a loan because he says it’s convenient.

John–They tell me they got a thing in there, you can do it real fast, all you need is a bank statement and a phone bill, phone receipt. If I need it, I know where to come - like I said it’s right across the street and everything. They do a lot of business here - the place does good, real good. It’s the best thing that was put here. You’d never believe the amount of people that comes in and out of here, do their business, pay their bills - everything.

TS– The Website Payday and Paycheck Loans.com national report, the average loan is $300 resulting in a monthly loan volume of close to $150,000 a month. But the National Consumer Law Center reports that these loans are successful because they prey on “cash-strapped” consumers who rarely have the ability to repay the entire loan therefore creating a cycle of debt. Elizabeth Renuart is a staff attorney with the NCLC.

Elizabeth Renuart–Banks don’t make small loans. You can’t go to a bank and get a $500 loan - they don’t do it. So, where are you going to go in a time of a crisis? You go somewhere and now there’s this type of lending available because they recognize there was no other type of lending being made at a reasonable cost for this type of money.

TS– Renuart says another part of the problem is the lack of laws. The state of Ohio regulates these types business limits the amount to $500. Also the borrower is required to pay two fees of $20 per loan and up to $25 bank fees. Also all loans are to be repaid within 6 months. But Renuart believes current legislation does not have the consumers’ interests at heart.

ER–If they didn’t have the payday loan law, the cap would be 28%, but your legislator did pass a special payday loan law that takes it out of that 28% protection and raised it up to 390% . The reason why it’s not clear in your law, I mean, it’s why these legislative efforts sort of take some legislators by surprise and they don’t understand what’s going on is they’re always listed as a fee a $15 per $100 or a $20 per $100 dollar there’s not an interest rate listed in there so you can’t tell how it translates into interest but when you do the translation your law allows 390% .

TS–John McCormack is the President of the Ohio Association of Financial Services. He also owns American Cash Exchange in Northfield Park, just southeast of Cleveland. McCormack says people have told him he charges up to 1200% but he says you cannot translate a short term two week loan rate into an annual fee and expect a small number. Put simply, he says he sees nothing wrong with Ohio’s laws and everything right with providing a service to those who need it.

John McCormack– Our customers bounce checks, our customers are tight on money, our customers live paycheck to paycheck. If you don’t understand that about this customer you don’t have any business in this business. Customer retention is a huge part of our business activity because like I said 100% of our fees come back in the form of bad debt. Now the only real income we have is what we’re able to collect on that. But when we’re out collecting money we’re trying to get our customer whole again so he can do business with us.

TS– McCormack admits there are some people in this business who take advantage of people who need this service and they are the ones who need more regulation. Georgetown Law Professor Gary Peller says he does not see how any form of payday lending can be called a legitimate financial service. In fact he calls it loan sharking.

Gary Peller–It’s loan sharking because what loan sharking is usurious interest lending at usurious interests rate and there’s no doubt in most states these interest rates of over 400% are usurious rates and usurers is a crime in most states.

TS–Peller has put his words into action. He is representing a class action lawsuit submitted in Maryland against ACE America Cash Express charging the company made illegal payday loans charging an interest rate of 400%.

Meantime, the business continues to expand as more locations are popping up outside of urban areas now. Also, websites have become a tool in the expansion providing information for willing entrepreneurs on how they can start their own payday-lending outlet. In Cleveland, Tarice Sims, 90.3 WCPN® News.