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Sale-Leaseback
Lenders Defy Regulation |
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National
Banks
The two largest chains of check-cashing stores in the U.S. both offer payday
loans through a national bank that is exempt from state usury limits. Ace Cash
Express, with more than a thousand stores across the country and hundreds in
Texas (its biggest market), offers payday loans through an agreement with Goleta
National Bank.(11) The Dollar Financial Group
(DFG), the nation's second largest chain offering services under a variety of
store names, offers payday loans through Eagle National Bank.(12)
In both cases, the payday lender offers loans up to $500 with a term of 14 days.
DFG allows a maximum of four extensions. Ace has no renewal maximum, but requires
that borrowers pay down at least five percent of the principal balance in order
to extend the loan.
The agreement between payday lenders and a national bank may be little more
than a mechanism to ensure that payday lenders avoid the application of state
usury laws. While DFG purports only to act as an agent for a national bank in
its payday loan transactions, it recently settled a class-action lawsuit against
Eagle National Bank and DFG for $5.5 million dollars. The suit alleged various
violations of state and federal usury and consumer protection laws by both companies.(13)
According to statements filed with the Securities and Exchange Commission, the
agreement between Ace and Goleta National Bank gives Ace "substantially
all of the interest received by Goleta from the borrowers, and subjects the
Company [Ace] to substantially all of the risk of nonpayment by the borrowers."
[emphasis added] To further distance Goleta from the payday lending practices
it facilitates, the agreement makes Ace solely responsible for substantially
all third party claims that may arise as a result of the bank loans.
Goleta collects only a service fee, takes no risk and collects no interest.
Yet Ace may use this arrangement to avoid the application of state usury limits.
Since the Goleta Agreement was implemented (March 2000) Ace has expanded its
payday loan services from 339 stores to 992 stores.(14)
Ace makes loans averaging $266 and collects an average finance charge of nearly
$40.(15) Under Texas rules, a regulated payday
lender could charge no more than $15.32 for the same average size loan.
Banks rely on Section 85 of the National Bank Act which authorizes national
banks to export high interest rates from one state into another state that may
have usury laws.(16) Many states have no maximum
interest rate, and banks may charge any rate they can get.
The practical effect of the federal pre-emption is to allow Texas payday lenders
to import the banks' interest rates from other states and bypass Texas' limit
on interest rates. Serious consumer protection concerns arise in this lending
environment. For this reason, Consumers Union is one of several groups that
have asked federal officials to prohibit national banks from making payday loans
at exorbitant rates.(17)
In the meantime, however, payday lenders are still responsible for the terms
and conditions they impose on borrowers and must abide by the payday loan consumer
protections set out in regulations (particularly the requirement that they move
borrowers into a declining balance loan). Further, in March 2000, the Federal
Reserve ruled that payday lenders are subject to the Truth in Lending Act and
therefore must disclose in writing the annual interest rates they are charging.
Compliance became mandatory on October 1, 2000. The rule also clearly defines
such transactions as loans and fees as finance charges, although some sale-leaseback
companies continue to argue that they are not making loans.(18)
Alternatives
to Payday Loans
Payday lenders argue that they fulfill a need and help poor people make it to
the next payday when an unexpected expense arises. But in many cases, payday
loan borrowers may have other, less onerous options available. Companies that
compete directly with sale-leaseback providers and other cash advance companies
acting outside the law include regulated payday lenders, small loan financiers
and pawn loan shops.
In addition, credit unions have begun to respond to consumers' small loan needs
with new products and services. "Most people turn to the alternative financial
sector because they're excluded from the services of deposit institutions,"
says John Caskey, associate professor at Swarthmore College, in his report "Lower
Income Americans, Higher Cost Financial Services." But Caskey's study found
that one-third of households that used "fringe" bankers (i.e. check
cashers, pawnbrokers, payday lenders and rent-to-own shops) were also members
of credit unions.
In December of 2000, Credit Union National Association's Alternatives to Payday
Lending Task Force State Issues Subcommittee released a report on credit union
alternatives to payday loans. This report identified credit unions that have
developed reasonably priced alternatives to payday loans, like the Carolina
Trust FCU's "Micro Loan" program. It found that new loan products
and debt counseling programs can help credit unions adapt to meet their members
need for alternatives to payday loan products.(19)
As credit unions begin to ramp up their efforts to serve customers, other small
loan alternatives remain available. Regulated signature loans are as simple
as a payday loan, and not nearly as expensive. A consumer can walk into a signature
loan office and walk out with a small loan after minimal underwriting (the process
for determining credit-worthiness). Like payday lenders, signature loan companies
frequently take applications by phone and approve the loan while the customer
waits. Like payday loans, signature loans are generally small, averaging $297.
And the market is booming. According to the Office of Consumer Credit Commissioner,
signature lenders in Texas make more than 4.1 million loans totaling $1.2 billion.(20)
Signature loans are still expensive compared to credit cards or regular bank
loans, and lenders sometimes offer borrowers frequent opportunities to refinance.
When consumers refinance, they typically return the loan principal to the original
amount borrowed, thus slowing final repayment. But in no case does a consumer
get a non-declining balance loan, and the costs are not as high as accumulated
sale leaseback fees. Because signature loans are booming and interest rates
more than adequate, the OCCC crafted a very similar rate for regulated payday
lenders.
Notes:
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11 Securities and Exchange Commission Form 10-K, Ace Cash Express,
for the fiscal year ending June 30, 2000, "Bank Loans."
12 Securities and Exchange Commission Form 10-K, Dollar Financial Group, for
the fiscal year ending June 30, 2000, "Cash Til Payday Originations,"
and "Legal Proceedings."
13 Ibid, "Legal Proceedings."
14 Securities and Exchange Commission Form 10-Q, Ace Cash Express, for the quarter
ending December 31, 2000, "Quarter Comparison."
15 Ibid, "Supplemental Statistical Data."
16 The Cost of Credit, Regulation and Legal Challenges, National Consumer Law
Center, 2d Edition, 2000, Sec. 3.4.5, Interstate Banking: National Banks and
Rate Exportation.
17 Consumer Reports. Consumers Union in Action. March 2000. Vol.65, No.3, Pg.6.
18 Texas Senate, Committee on Economic Development, Subcommittee on Consumer
Credit Laws, Interim Report, 76th Texas Legislature, September 2000. Also Omaha
World-Herald, April 9, 2000, Business p. 1.
19 Credit Union National Association, "Alternatives to Payday Loans: The
Credit Union Option," December 2000.
20 Office of Consumer Credit Commissioner, response to Public Information Act
request by Consumers Union, 2/06/01. Annual report data, 1995-1999.
