PREPARED TESTIMONY OF DANIEL A. EDELMAN
REGARDING PAYDAY AND TITLE LOANS *
*This article is here reproduced without the supporting footnotes. If you would like to read a copy complete with footnotes, please contact Edelman, Combs & Latturner .
What they are
"Payday loans" are short term, very high interest rate loans. The loans are typically two weeks in duration and carry annual percentage rates ("APRs") of 300% to over 2000%. At the end of the two week term, the customer will frequently "roll over" the loan for an additional two week period by paying the interest.
The "payday lender" does not run credit checks, making the loans attractive to those who have, or think they have, bad credit. Typically the loans are made to anyone who brings in a photo ID, a bank account statement, and a pay stub.
The loans are typically "rolled over" on multiple occasions. According to industry analysts, the average customer obtains 11 loans per year. Payday lenders affirmatively encourage repeat transactions. Many consumers greatly exceed the average. Further, in addition to rolling over loans with one company, many persons obtain concurrent loans with two or more companies. We have seen some borrowers get loans from as many as eight to ten payday lenders at once, and roll them over for more than a year.
If the lender charges $20 per $100, or a 521% annual percentage rate -- a very common rate -- a borrower who has 10 rollovers or refinances on a $500 loan will pay a total of $1100 in interest to have the use of $500 for 4 months -- and still owe the $500 principal!
"Title loans" are similar loans made on the security of automobile titles, generally for one month terms. The lender will lend a fraction of the book value of a fully paid-for automobile. If the loan is not repaid, the lender will repossess the automobile. The law requires that the car be sold and any surplus be returned to the borrower, but some loan documents we have seen purport to provide that the lender can simply keep the car.
The number of "payday loan" and "title loan" establishments in Illinois is increasing exponentially. There were no "payday loan" establishments in Illinois until 1997; now there are hundreds. In Indiana, payday lending has increased from 15 locations with $13 million loan volume in 1994 to 454 locations with $296 million loan volume in 1998. A recent report states that there are 8,000 payday loan outlets in the United States.
Typical "payday loan" rates in the Chicago area are 365% to 1000%:
American Loan Company 521%
Americash 365%
Campus Cash Systems 469%
Cash Store 521%
Chartwell Financial 427%
Checks for Cash Credit Corp. 336%-365%
Check Into Cash 573%
Check-N-Go of Illinois, Inc. 456%-521%
Check Now 521%
Checks-N-Advance 523%
Devon Financial Services 390-520
E-Z Loan Company 520%
Fast Cash Advance 365%-456%
GFG Loan Company 365%
Halsted Financial Services 500%+
Harrisburg Quick Cash 521.43%
Illinois Title Lenders 216%
Insta Cash, Inc. 385%
Instant Cash Advance (One Iron Ventures) 486%-912%
McKenzie Check Advance 535%-740%
Millenium Title Lenders 521%
Moolah Loan Company 360-520%
National Money Service 780%
Nationwide Budget Finance 521%
Paycheck Advance Express, Inc. 456%-521%
Pay Day Loans, Inc. 521.43%
Payday Check Advance, Inc., d/b/a
Payday Express 521%
Payday Loan Corp. of Illinois 521%
Payday Loan Express, Inc. 365%
Payday Loan Store of Calumet City, Inc. 684%-995%
Payday Loan Store of Illinois, Inc. 695%
The Payday Loan Store -- Oak Lawn 695%
Payday Today Loans LLC 521%
Quik Cash (Community Financial) 521%
Short Term Loans 260%-342%
Speedy Check Cashers 521.43%
Sun Cash 240%-520%
Swansea Quick Cash 521.43%
Tele-Cash 917%
The highest we have seen is 2,007.5%, charged by a Springfield, Illinois lender (Appendix B), and 2,400%, charged by an Indiana lender.
"Title loan" rates are in the 200%-300% range, which is extraordinarily high for secured credit.
Why they are a problem
"Payday loans" are generally made to consumers facing financial emergencies. Once a consumer obtains a "payday loan," he or she will often be unable to pay it off except from the proceeds of additional "payday loans." "Instead of using a loan once in an emergency, borrowers tend to get on a treadmill of repeated loans they can't get off . . . . It's almost a pattern . . . It really is people who are desperate for money."
A substantial number of borrowers will not be able to repay the loans as agreed. Published reports indicate that the incidence of default on these loans is in the 20-25% range. If a payday lender claims a lower incidence of default, it is often because it is failing to take into account the effect of refinancings. If a borrower refinances three times and then defaults, the incidence of default for that borrower is 100%, not 25%. Because of the high incidence of rollovers, it is not appropriate to divide the number of defaults by the total number of loans and rollovers; if the average customer gets 11 loans and rollovers per year, doing that understates the default rate tenfold.
Frequently, the "payday loan" store is the last stop prior to bankruptcy court. At least 20-25% of recent Northern District of Illinois bankruptcy filings involves significant payday loan debts. In many cases, the consumer is driven into bankruptcy by the payday loans -- they can handle their other debts, but not the interest on the payday loans.
The harmful effect on other creditors can be expected to increase with the proliferation of payday loan establishments. We are already seeing instances in which banks and credit card issuers are having their obligations wiped out because payday loans force a borrower into bankruptcy. In California, banks have been hit so badly by payday loan defaults that they are now supporting regulation of payday lenders.
Who are the borrowers
One owner of a "payday loan" establishment attributed the sudden growth of cash advances to a cash strapped, lower middle-class. "More and more people earning $ 25,000 to $ 30,000 with two or three kids, a car payment and insurance payment, are living from payday to payday."
One informal survey indicated that the average customer is a white female earning between $14,500 and $20,000 per year, 28 years old, and employed in the service or health care industry. The second largest group of borrowers is African American.
A press release issued by the parent of Payday Check Advance, Inc., which claims to be the largest payday lender in the Chicago area, with 32 locations as of March 31, 1999, states that "we target stores in working-class neighborhoods. All things being equal, the higher the concentration of our target demographic in the neighborhood the more productive the store location will be."
Lack of moral or economic justification for rates
The payday loan industry attempts to justify its charges as simply the result of amortizing a one-time fee for originating the loan over a very short period. This is not accurate. It costs about $8 to set up a payday loan account. This might justify charging $8 plus a reasonable rate on the money loaned. It does not justify charging $20 per $100 lent on a $500 two-week loan, which represents an annual percentage rate of 521%. It does not justify applying the 521% interest to the outstanding balance if the borrower defaults or rolls the loan over.
In fact, for most borrowers the payday lender does in fact collect 500% or more interest on credit that remains outstanding for a substantial period. This happens in two ways. First, the consumer obtains a succession of rollovers or refinancings. Second, in the event of a default, the lender keeps the interest running at the stated APR. (See Appendix C for examples of loan agreements so providing.) "[E]ven bad loans may be profitable because some customers pay for months before giving up."
Notwithstanding the extraordinarily high default rate, "payday lending" is very profitable. A study by the State of Tennessee shows that the return on equity that payday lenders enjoy exceeds 30%, which is about three times the national average for banking and industrial firms. A recent brokerage house report states that the return on investment may exceed 40%. Any claims by payday lenders of lesser profitability need to be carefully examined to see if they take into account the fact that many of these lenders are opening new stores and ploughing their profits back into the business.
Payday Check Advance, Inc., which claims that it is the largest payday lender in the Chicago area, states that "the low fixed costs have allowed new Payday stores to quickly turn profitable" and that "our target is to achieve an average monthly pre-tax profit of $4,000 per location."
Another large local payday lender, Instant Cash Advance (One Iron Ventures) was recently acquired by a public company.
The profitability of payday lending is underscored by the fact that many payday lenders are growing into national chains. For example, Check Into Cash opened its first office in 1993 and now has 320 outlets, with $21.4 million in revenue during 1997 and as much again during the first six months of 1998; it is planning to go public. Another "payday lender," Advance America Cash Centers, has nearly 500 outlets. Ace Cash Express, a publicly-held chain with over 800 outlets, collected $10.1 million in payday loan fees during fiscal 1998. Another major chain is Check & Go, operated by CNG Financial Corporation of Cincinnati.
At the present time, about 1/3 of all payday loan outlets are owned by 6 chains.
The industry claims that people should be able to contract on any terms they want. However, for thousands of years, every civilized society has found it necessary to limit the rate of interest that people can be permitted to pay. We do not allow many kinds of consensual transactions that pose threats to society.
Inherently predatory nature of payday lending
Most lenders are required by law to assess the creditworthiness of their borrowers and to make loans only if they expect the borrower to repay. Banks, savings and loans, credit unions, and other conventional lenders are required to engage in prudent lending practices. This is why they require borrowers to fill out loan applications which state how much they make and how much they spend. The lender looks to the proportion of the debtor's income that will be spent after the loan is made, and analyzes whether it is sufficient to repay the loan.
Conventional financial institutions are examined by federal and state officials charged with the task of making sure that they are adhering to such standards. In the case of real estate loans, recent amendments to the Truth in Lending Act make it unlawful to engage in a pattern of making loans that can be collected only through foreclosure.
Payday lenders do not assess whether their borrowers can repay the loans. In fact, they make loans which by definition leave the borrower unable to repay all of his or her debts. The typical borrower is someone living from paycheck to paycheck who has a sudden need for money. The payday lender requires the borrower to turn over 1/4 to 1/2 of his next paycheck to repay the loan. If the borrower's paycheck is barely sufficient to meet living expenses and has not allowed the borrower to build up any sort of reserve for emergencies, how can he turn over 1/4 to 1/2 of his paycheck to the lender and still pay for food and rent? Obviously, he cannot. "If you need money bad enough to go to one of these stores, you're probably not going to have the money to pay it off." The key to payday lending is that the lender figures that it can coerce the borrower into repaying the payday lender ahead of paying for food, rent, and other debts.
How do payday lenders do this? By obtaining postdated checks. When borrowers fail to pay or renew the loans, they deposit the checks. If the check does not clear, the lender threatens to enforce or does enforce the bad check statutes, even though the Illinois laws do not apply to a postdated check known to be worthless when issued. Copies of threatening letters and court complaints referring to the bad check laws are in Appendix D. One of these is issued by the payday lender that is located in the State of Illinois Building. By threatening the borrower with quadruple damages or criminal prosecution, the payday lender insures that it will be paid ahead of any other creditors.
The use of the bad check laws greatly exacerbates the harm to the borrower. In one case (Appendix E), a borrower obtained a $200, two-week loan. The stated finance charge was $40. When the loan was not repaid on time, the lender sued under the Illinois bad check statute for (i) $240, plus (ii) a $720 penalty, and (iii) $300 attorney's fees. Thus, the cost of borrowing $200 was $1,260! This is quite usual where borrowers fail to pay and are sued under bad check statutes.
In some cases, the payday lender sells its bad debts to companies that are engaged in the business of purchasing and enforcing bad debts. These debt purchasers are not subject to regulation by the Department of Financial Institutions.
Regulation of payday lenders
According to a November 1998 survey by the Consumer Federation of America, 18 states set their small-loan rate low enough to make the payday loan business unprofitable. Nineteen states and the District of Columbia allow the practice but regulate the terms of the loans. Thirteen states, including Illinois, have no limits on interest or terms of payday loans. Indiana sets a maximum APR of 36% but allows payday lending by setting a minimum finance charge of $33, which amounts to 1,716% APR on a $100 loan.
Apart from the excessive rates, the principal abuses of payday lending stem from (i) renewals, (ii) use of postdated checks to coerce payment, and (iii) misleading advertising.
All renewals should be prohibited. A payday lender should be prohibited from extending credit to a borrower or a member of the borrower's household for a period of time after an existing loan is paid off.
The use of postdated checks should be prohibited. The postdated check has no value except as a means of coercing payment. We do not have imprisonment for debt in Illinois. Threatening to use the bad check laws because a loan is not repaid amounts to a threat to imprison someone for not paying a debt.
No collateral should be permitted on these high-interest loans. There is no justification for 200 or 300% fully secured loans. Consumers who need automobiles to get to work and stay off welfare should not be losing their cars to "title lenders."
In addition, all advertising by payday lenders should be required to prominently include the annual percentage rate. Until recent lawsuits against payday lenders, they often did not advertise the annual percentage rates. Instead, they advertise that the loans cost $x per $100 and that they are easy to get. Examples of such advertisements are in Appendices F-G. The consumer does not see the annual percentage rate until he or she is presented with the loan proceeds. Many of these advertisements used by payday lenders violate of the credit advertising provisions of the Truth in Lending Act and Regulation Z.
Some of the advertisements (Appendix G) specifically refer to people who get social security checks. Advertisements targeting people on social security or pensions for payday loans should be prohibited.
Finally, no payday lender should be permitted to sell bad debts to any company that is not subject to regulation as a payday lender.
The following is proposed legislation that would limit the abusive practices of payday lenders and title lenders without imposing rate regulation.
PROPOSED STATUTE REGULATING PAYDAY LOANS
"AN ACT to create the Short Term Loan Act."
"Section 1. Short title. This Act may be known as the Short Term Loan Act.
Section 5. Definitions. As used in this Act:
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Section 10. Prohibited practices.
It shall be unlawful for a creditor to request or receive a postdated check in connection with a short term loan.
It shall be unlawful for a creditor to condition the extension of consumer credit on its repayment by electronic funds transfer. If a creditor provides for optional repayment by electronic funds transfer on a form document, the consumer must sign a separate authorization for such repayment which shall have above the signature line in 10 point bold type: REPAYMENT BY ELECTRONIC FUNDS TRANSFER IS NOT REQUIRED. IT IS UNLAWFUL TO CONDITION THE EXTENSION OF CREDIT ON ITS REPAYMENT BY ELECTRONIC FUNDS TRANSFER. No such authorization may be irrevocable.
A creditor may not:
Renew or refinance a short term loan,
Make more than one short term loan to the same consumer, or a person who is known to be a member of the immediate family of that consumer residing in the same household.
Make a second or subsequent short term loan to the same consumer, or a person who is a known to be a member of the immediate family of that consumer residing in the same household, until a period of 14 days has elapsed after all previous short term loans to such persons are no longer outstanding.
A creditor may not threaten or state that it has remedies that it does not have.
No short term loan may be made with an amount financed exceeding $500.
If a short term loan transaction is not paid when due the creditor:
may recover actual costs of collection, including attorney's fees;
may not recover any late charge;
may not continue to impose finance charges for any period after the due date of the short term loan transaction or renewal thereof.
No wage assignment or other security may be taken in connection with a short term loan.
No creditor may require a deposit of cash in connection with a short term loan transaction.
No creditor may withhold any portion of the amount financed or charge a prepaid finance charge in connection with a short term loan transaction.
No creditor may sell or transfer any evidence of indebtedness to any creditor not subject to regulation by the Illinois Department of Financial Institutions.
All media and point of sale advertising relating to short term loans must state the annual percentage rate or range of annual percentage rates charged with the same prominence as the creditor's name and address.
All loan agreements shall comply with the Truth in Lending Act, 15 U.S.C. 1601 et seq., and Federal Reserve Board Regulation Z, 12 C.F.R. part 226, as from time to time amended.
Section 50. Enforcement
The remedies provided herein are cumulative.
Any violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq., in connection with a short term loan constitutes a violation of this Act.
Any violation of this Act constitutes a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq.
The violation of any provision of this Act, or regulation thereunder, except as the result of accidental or bona fide error of computation, renders the short term loan void, and the person shall have no right to collect, receive or retain any amount financed, finance charge, or other charges whatsoever with respect to the short term loan transaction.
Any person found to have violated this Act shall be liable to the consumer for actual, consequential, and punitive damages, plus statutory damages of $1,000 for each violation, plus costs, and attorney's fees.
A consumer may sue for injunctive relief and other appropriate equitable relief to stop any person from violating any provisions of this Act.
The remedies provided in this section are not intended to be the exclusive remedies available to a consumer, nor must the consumer exhaust any administrative remedies provided under this Act or any other applicable law.
Copyright 1999, Edelman Combs & Latturner
