Thanks to Lauren Dorgan for this story:

This shows that as long as consumer demand is in place for short-term credit, lenders will find the means to provided it.

Payday Lender Hopes To Dodge Rate Cap ; One Business Thinks It Found A Loophole

The Concord Monitor

December 30, 2008

New Hampshire

By Lauren R. Dorgan

The lights have gone out at Main Street Payday Advance in Concord. A sign posted on the door explains that the store is closed “due to recent legislation passed by your elected officials!”

That’s just what many lawmakers hoped would happen last winter when they voted to cap annual interest rates at 36 percent starting Jan. 1, 2009. The restrictions effectively banished two growing loan industries: title loans, which charge 350 annualized percent interest, and payday loans that typically top 500 percent annualized interest.

But a block down South Main Street, something is happening that no one expected: An Advance America shop is still open for business and has no plans to close. If proprietors get their way, that shop and 23 other branches statewide will continue offering high- interest loans long into the new year.

According to a letter sent to the New Hampshire Banking Commissioner, Advance America wants to switch over to doling out open-ended small loans, which, it claims, are “not legally subject to the 36 percent interest rate cap” on title and payday loans, according to a letter written by attorney Steven Lauwers of Rath, Young & Pignatelli.

“(T)he interest rate on open-end small loans is not capped at 36 percent,” Lauwers wrote in a letter dated Dec. 9. “Instead, any interest rate is permitted, provided it is agreed to in writing by the lender and the borrower.”

Advance America has asked Banking Commissioner Peter Hildreth for his opinion on whether it’s right about the lack of limitations on the interest-rate cap. Hildreth has not made a ruling yet, but he said he’s talking to lawyers and considering the likelihood that Advance America would take its case to court if he rules against it. He said he would likely make a judgment call this week or next.

“They’re saying it isn’t a payday loan - it might have a high interest rate but it’s not a payday loan,” Hildreth said. The bill that passed the House and Senate last winter specifically refers to a cap on “payday loans.”

Although Hildreth spoke out in favor of the payday lending restrictions last year, he said that has little to do with his decision now.

“I have to do what the law says,” he said. “That’s what I’ve sworn to do. So it doesn’t really matter what my position on the bill was.”

The new product Advance America is pitching has terms that sound akin to a credit card with extremely high interest rates. According to the letter Advance America sent to Hildreth, the new “Credit Line Product” would involve offering consumers a line of credit in the range of $500 to $700 and allow them to withdraw advances on this line in $10 increments.

If a customer pays off the debt by theof the month, no charges will be added. But if the customer rolls over debt, Advance America would charge interest at an annual rate of 365 or 465 percent, the lower rate going to those who allow the company to deduct the “finance charges” directly from their bank accounts.

At present, payday lenders typically give two-week-long loans in amounts ranging from $100 to $500, with interest of $20 per $100, which equates to more than 500 percent on an annualized basis. The loans are secured with a pay stub, while title loans are guaranteed with a borrower’s car put up as collateral.

The industries’ supporters say car and title loans give an option to those people with spotty credit history who have little chance of getting a bank loan and who otherwise might turn to the welfare office. They also argued that the payday lending industry provided jobs to 200 New Hampshire residents.

But opponents won the day in the House and Senate last winter by arguing that the interest rates trap borrowers in a cycle of debt with oppressive rates.

“Interest rates just got out of sight,” said Sen. Lou D’Allesandro, a Manchester Democrat who supported the payday lending crackdown last winter. “People were just amazed at the 500 percent. I think in good conscience the idea was to get rid of it and look for an alternative.”

Yesterday, Advance America spokesman Jamie Fulmer said the company had no plans to shut down any of its 24 branches in New Hampshire, which he said employ 50 to 75 people.

“We look for ways to satisfy consumers’ short-term credit needs,” he said. “Especially in today’s economic environment, access to credit is extremely important to consumers.”

The Motley Fool published an interesting article about the largest payday lender in the United States. No, not Advance America, CashNetUSA, or Check-N-Go. It’s Well Fargo. Thats right, the bank you probably use for checking or a mortgage is in the business of payday lending. If you are disappointed by the fact that you can’t get a cash advance loan through Well Fargo take heart. US Bank, a major competitor of Wells also offer their own payday advance product. Chances are if you need a short-term loan a bank or even your local credit union (yes, they are in the business too, just Google the term “CU on Payday.”)

The Fool points out that the fees charged by these two large bank and a dozens of fee-funded credit unions are often as high as your local payday lender. Cash advance lenders suggest, and a number of studies by universities and accounting firms have shown, that the high fees charged by payday lenders is justified. However, to say the risks to depository institutions and private lenders are the same is untrue. Credit unions and banks have a leg up on the short-term lenders and on their borrowers. When a borrower utilizes their credit union or bank for a short-term or payday advance the credit union ensures the borrower has direct deposit. With direct deposit, the risk to the bank or credit union is minimal. The fees charged by the credit union or bank don’t appear to be justified. The profit margin for depository institutions on these loans is large, and in light of the ongoing credit crunch, they are a bright spot in an otherwise dismal lending landscape.

It is little wonder that some of the loudest critics of payday lenders are banks and credit unions. Could it be that payday advance lenders offering personal loans are an unwelcome competitor to banks and credit unions? As criticism of cash advance lenders has increased in the last few years interested parties should be suspicious of credit unions and banks who claim that short-term lenders are hurting consumers. If that is the case, then what are these depository institutions doing by offering the same loan products?

Here is an article from Dartmouth College that suggests that consumers fair better when they have access to cash advance loans. It appears the facts appear to be getting in the way of self-appointed consumer advocates’ agenda of expanding the “nanny state” government.

-TS

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Study Compares Oregon and Washington Households; Analyzes Changes in Key Aspects of Household Finances Before and After the Rate Cap

HANOVER, N.H., Nov 12, 2008 (BUSINESS WIRE) — Survey data on 400 payday loan users collected before and after the imposition of an interest-rate cap in Oregon suggest that the cap caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms, rather than helps, consumers.

The study, conducted by Prof. Jonathan Zinman of Dartmouth College, seeks to evaluate the effects of interest-rate and loan-term restrictions imposed by the State of Oregon in 2007. Previously, payday lenders had been charging borrowers at least $15 per $100 for two-week loans; effective July 1, 2007, the maximum finance charge that can be imposed on Oregon borrowers is approximately $10 per $100, with a minimum loan term of 31 days. The effective yield to lenders was reduced by two-thirds as a result of the new regulatory scheme.

Most payday lenders have exited Oregon following the cap, and the study finds that payday borrowing has fallen dramatically as a result. It also finds evidence that some former payday borrowers turned to alternatives that can be even more costly than payday loans, such as overdrafts and late bill payments.
The study estimates the effects of the Oregon cap by comparing changes in key aspects of household finances before and after the effective date of the cap, using comparable households in Washington state (which retained consistent regulation) as a “control.” The study covers changes from late June 2007 to early December 2007.

The most important finding in the study is that, relative to their Washington counterparts, the Oregon households were far more likely to experience a change for the worse in the key financial outcomes measured by the survey: job status and respondents’ assessments of their recent and future financial situation. These results suggest that restricting access to payday loans harmed Oregon respondents over the term of the study.

“Like some other studies, these results suggest that access to credit, even if expensive, can help some people make productive investments and help others manage their cash flows through emergencies,” Prof. Zinman said. “There’s more work to do to reconcile these results with findings from other studies that suggest access to expensive credit can exacerbate financial distress.”

The data collection for the study was funded by a grant from Consumer Credit Research Foundation, which did not participate in the analysis of the data or the drafting of the study.

The complete working paper on the study is available online at http://www.dartmouth.edu/~jzinman/Papers/Zinman_RestrictingAccess_oct0 8.pdf.

There has been much discussion as to the viability of short-term cash advance or payday loans in the news over the past few years. Some have even called for their outright prohibition. However, critics of the popular credit choice are quick to admit that there is a real need for these payday and personal loans. In spite of the apparent need for short-term credit (especially in this economy, which lacks abundant credit) some pundits speculate that these cash advance loans are on their way out thanks to the recent election of Mr. Obama and some liberal democrats. So what is in the wing to replace this necessary short-term product? Many familiar with the payday advance industry suggest it may be installment loans.

Installment loans are a different lending product that gives consumers even greater repayment flexibility. Demorats could hardly call these loans “predatory,” although federal officials once gave their express blessing to truly predatory loan products such as subprime mortgages, HELOC loans, and other high dollar loans tied to housing products.

With these short-term installment loans, consumers can repay in full at any time prior to their loan’s stated maturity date - which they choose at the outset of the loan - or they can make a set number of payments (typically around 20) over a period of weeks, normally bi-weekly. Costs are affordable and give the consumer much more of a safety net if they are unable to pay their loan in full on the two-week maturity date most payday loans have. Short-term lending and the fees and interest associated with it isn’t going away… it’s definitely changing, but you can be assured that consumers will pay as much or more with installment loans.

Clint Says read with some interest a statement from the North Side Community Federal Credit Union, located in the fair city of Chicago. North Side has caught the vision of how to better offer payday loans, cash advance loans, and other short-term credit products as its introduced its “PAL” program. Here are the details of their payday loan alternative:

-Average loan is $500 ($75.00 of which the credit union doesn’t allow the borrower to use, so the true principal loan amount given to the consumer is $425.00.

-An “reasonable” APR of 16.5% (why are the payday guys out of business yet? Let alone subprime credit card providers?)

-A $30.00 “application fee” (Why doesn’t this get rolled into the APR?)

-Hopeful borrowers must attend 4 financial education seminars (Can you see someone who needs an emergency loan waiting around to complete the four part series? Me neither).

Of course, the program superficially looks good to consumers, and why not? 16.5% APR verses a 391% APR product? You would have to be a fool to choose the more expensive loan. The question that interested policy makers and informed consumers should ask is, “why does the program have fewer than 1,000 participants in a city of nearly 3,000,000 individuals?” I can assure you its not because the credit union lacks a decent marketing budget.

In a press release from NSCFCU about the PAL program a couple of years ago, the organization, which relies heavily on bounced check and courtesy overdraft charges (60% of fees according to a recent article by Forbes Magazine) bemoaned the fact that at the time it was only charging those in need of short-term loans a $10- application fee, to quote the release:

“We currently charge only a $10 application fee for the loan. Increasing this fee to $20 would at least help cover our costs of the program.”

Since then, the program has increased is self proclaimed innocuous “application fee” from $10.00 to $20.00 and then to $30.00. Does the $30.00 fee cover the program costs? A look at the NSCFCU loan product using a comparative APR will shed more light on the application fee.

Remember the terms of the loan? $425.00 in principal, 16.5% APR, and a $30.00 application fee. To calculate the APR we need the duration of the loan. The vast majority of cash advance loans are repaid in 13 days (NSCFCU gives a borrower up to six months, but verifiable consumer behavior shows the majority of these loans are paid in full after two weeks). When calculated on a a two week basis the credit union payday alternative loan’s APR is 231.02% compared to a payday loan of 391%. Payday lenders have claimed that at the interest rates they charge they receive a paltry 6.6% net profit or the same as an average Fortune 500 company in 2007. Patrons should not be surprised when the CU asks for an increase in the “application fee” from $30.00 to $40.00 in the near term to help them break even.

Regardless, the alternative loan product remains somewhat cheaper, but why the continued lack of interest?

The requirement to go through weeks of financial seminars although noble and good, is unrealistic for many people who rely on short-term loans to help meet unexpected financial issues. All people who use cash advance loans are employed. Many work two jobs to get by. The last thing these working and middle class people have time for when they are in a bind is a four-week series taught by someone who looks down on the way they have handled their finances. What the credit union doesn’t realize or simply don’t care about, is these classes create a burden more costly that what they would pay at any online cash advance or payday loans provider. Time in many instances is more precious than saving a few dollars (the cost difference between most payday alternatives and cash advance products).

Payday advance and pre-paid VISA card providers have and will continue to succeed in their mission to provide short-term credit at reasonable prices because they have put themselves in the shoes of their borrowers.