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Rip-off America 

Payday lending was supposed to have been outlawed in North Carolina. So why are its storefronts still around, collecting $1,254 in fees on a $255 loan?

Maybe you've seen one of their stores in a strip mall somewhere. They're scattered around the Triangle, and while the company doesn't like being accused of targeting low-income neighborhoods, they certainly don't do business in the upscale 'burbs either. And unlike the other mall stores, Advance America's stand out because they sell just one product: payday loans. They lend you a little money for a few days, or maybe a couple of weeks--just until you get paid again, that is.

There can't be much profit in that, can there?

Switch to a meeting room in the N.C. Commissioner of Banks' office in Raleigh six weeks ago. Advance America is defending itself against the charge, brought by N.C. Attorney General Roy Cooper, that its one and only product--payday loans--violates the state's consumer finance law. Four well-dressed lawyers are on hand to argue AA's side, joined by at least two more senior executives who've come up from company headquarters in Spartanburg, S.C., to watch the proceedings.

Seeking to expedite matters, Banks Commissioner Joseph Smith asks the two sides--the AG's office and AA's lawyers--to stipulate to the facts of the case, which do not seem to be in any doubt, and argue only about the law. Soon, however, it becomes clear that AA is in no hurry whatsoever. It's got motions for discovery, arguments about estoppels and "complex pre-emption issues" that demand the careful consideration of pages and pages of banking rules from Kentucky and the FDIC--the Federal Deposit Insurance Corporation.

Why Kentucky? You'll see.

Before long, you realize that this case is going to take not hours, not days, but months. And these lawyers don't come cheap.

Which is your first clue that Advance America isn't some nickel-and-dime operation, but rather a publicly traded corporation whose 2004 revenues were in excess of $500 million nationwide. It is the biggest payday-loan company in the country by a factor of two or three, and it's the biggest in North Carolina, with 118 stores and more than $2 million a month in profits, despite the fact that the North Carolina statute permitting payday lending--which, remember, was an experiment when it was enacted in 1997--actually expired in 2001.

That's right! you say. We had a law allowing payday lending, but after a big legislative fight four years ago, the decision was made to get rid of payday lenders--wasn't it?

Yes, it was. Despite fierce lobbying by the industry, the General Assembly finally agreed with consumer advocates who argued that payday lending is just loan-sharking by another name.

But while the expiration of that law did knock some of the smaller payday-lending shops out of business here, it didn't get rid of the big boys--like Advance America--who found a way to get around the General Assembly's heave-ho. Or, to be accurate, two ways. First, they claimed protection under national banking rules. Then, when federal regulators clamped down on that dodge, they scurried to another refuge using a handful of willing state-chartered banks as their cover. Advance America's friendly bank is in Kentucky.

It's exactly what you'd expect from folks who lend money at effective interest rates of 400 percent and more. They'll keep doing it any way they can, because the pickings are just so good. Trying to put a stop to them, says an exasperated Cooper, "has been like Whack-a-Mole at the State Fair--you hit them over here, and they pop up again over there."

But Cooper hasn't quit. He maintains that the "rent-a-charter" approach is illegal under North Carolina law regardless of what kind of bank the payday lender is using. His case against Advance America is scheduled to begin July 11, and if he wins it--a big if--he predicts it will put an end to payday lending here for good.

Or, maybe not. The industry has its allies in the General Assembly, and they haven't given up either. They've got a bill, and they're quietly shopping it around Raleigh, too--just in case.

What's wrong with payday lending? To understand what a payday loan is and why someone would want it, even at a sky-high interest rate, it helps to think a moment about the world of "alternative financial services"--places like pawn shops, rent-to-own companies and check-cashing outlets. All are services for people who either don't have a bank account at all or, if they do have one, don't have readily available credit there or elsewhere. "For many low-income families," says Douglas Nelson, president of the Annie E. Casey Foundation, a philanthropy aimed at disadvantaged families, "money itself is a high-cost commodity."

Payday loans are the newest entry in this "alternative" category. Virtually unknown a decade ago, they're now legal in 36 states and the District of Columbia, plus another five states--like North Carolina--where payday lenders are doing business without a law on the pretext that they are merely the "agent" for a state-chartered bank somewhere else.

Almost overnight, payday lending has turned into a $40 billion-a-year industry nationwide, according to the best estimates.

And who are its customers? People who do have a bank account, but who don't have much in it.

That was Anita Monti's situation awhile back when she first went to an Advance America store in Garner. Christmas was coming, and the 61-year-old grandmother of five wanted to buy nice gifts for her grandkids. But making $9 an hour working second-shift at Celestica, which makes hard drives for name-brand computers like Dell and IBM, she was living paycheck to paycheck in a comfortable, but not fancy, North Raleigh apartment complex.

"I was not going to be able to do much for them," she recalls thinking.

So when a co-worker mentioned AA, she jumped at the chance to borrow $300 there, less the $45 fee she paid for the privilege. The loan was due in two weeks. Next payday, in other words.

Here's how it works: You write a post-dated check and, on your payday, the lender submits it to your bank. (In the industry, they call it deferred-presentment borrowing.) The lender doesn't care about your credit or lack thereof, only that you have a job and a checking account to collect from. Lenders do check on that.

So then what? In two weeks, Monti didn't have the $300 she owed. Why would she? She didn't have it before, and her bills--now including Christmas gifts--hadn't stopped coming. In fact, her electric bill was overdue. So, to stave off having AA submit her about-to-bounce check to the bank, she went back to them and borrowed another $300.

Or, if you're following along, what she did was borrow the same $300 over again, only in a new transaction that cost her another $45 fee.

And two weeks later? Another transaction, and another $45. Same $300.

This went on, Monti says ruefully, for more than a year. Every two weeks, in she'd go to AA, rushing to beat the bounced check, dreading it, embarrassed by it--so embarrassed she never asked anyone to help her get off the merry-go-round--until finally, by dint of a promotion and raise to $12 an hour and scrimping on such non-essentials as food, she managed to save the $300--plus another $400 she'd borrowed from a second payday lender--and escape.

Monti ended up paying more than $1,000. Shaking her head, she adds: "It just proves that bad things can happen to good people."

Nowadays, when Monti sees Advance America's ads on television enticing people to buy things they can't afford, they just about make her sick. "They make it sound so--la-di-da," she says, imitating the AA pitch. "It's so inviting, so--Well, everybody has one of those'--and you don't plan on what comes next. And the next thing you know they've got a hold on you--just like Jaws."

Indeed, Monti got caught in what the Center for Responsible Lending in Durham calls "the debt trap." Springing the trap is the whole key to profitable payday lending, according to CRL President Mark Pearce and Yolanda McGill, CRL's general counsel. If they didn't catch people in it, their profits--the easy money--would plummet.

CRL (www.responsiblelending.org) is a nonprofit advocacy group affiliated with Self-Help Credit Union, whose business is making its own responsible loans to lower-income people on a not-for-profit basis. Initially, CRL was created to battle predatory mortgage lending practices. But from its inception three years ago, it's found it's fighting the fast-growing predatory payday lending business, too, both here and around the country.

What it's learned, CRL officials say, is that Monti's prolonged time caught in the debt trap isn't the least bit unusual; it's the norm. Payday lenders advertise their product as a short-term loan to meet your temporary need for cash. But according to the industry's own data, just one borrower in 100 pays back his or her loan the first time and goes a whole year without taking out another one. The average payday borrower, by contrast, ends up shelling out $800 in fees to borrow an average $325, according to the CRL's analysis. It's like rent-to-own money, except you never own it. More than 90 percent of the industry's loans are made to people who borrow more than five times a year.

"We think it's a Pinto," says the CRL's McGill. "It is an exploding toaster." She's being funny, and deadly serious, too. Payday loans are a defective product by the usual legal standards, she argues. "Used as advertised, they will blow you up."

And if the averages are bad, a lot of cases are much worse. For example, there's Lisa Engelkins, from Winston-Salem, who came to CRL on a credit counselor's recommendation. A minimum-wage worker, she'd had the same $255 loan "flipped" 35 times, paying a total of $1,254 in fees to keep that small sum for a year and a half. She testified before the General Assembly when it considered, but rejected, reinstating the old payday-lending law in the 2003-04 legislative session.

Then there's the warehouse worker who was flipped more than 100 times over a five-year period by Advance America, paying $5,000 in fees for a $300 loan. He, too, went to CRL, but he asked them not to use his name.

CRL charges that the payday industry targets low-income women and minorities in particular. Last year, it looked at the locations of payday stores in North Carolina and concluded there were three times as many in the census tracts that have the most African-American residents. The industry hotly disputed the implications of that finding, saying its target market is middle-income.

In North Carolina and elsewhere, payday lenders also have come under fire from military officials, who complain that they take advantage of young soldiers who have regular paychecks but little in the bank and not much financial know-how. A study by the Military Times newspapers found "a distinct pattern" of payday shops concentrated near base locations: "Where there are military bases," the Army Times reported, "there are payday lenders."

In a letter sent in April to the chairman of the state Senate's Commerce Committee, the first stop for any new payday lending legislation, Undersecretary of Defense David Chu complained that too many young combat troops and their families "unadvisedly approach payday lenders for short-term relief." Chu urged the General Assembly to stick to its guns and not "legitimize" such lending.

The industry's side on these issues is expounded by the Community Financial Services Association of America, headquartered in Alexandria, Va., whose members represent more than 8,000 stores nationwide, according to its Web site (www.cfsa.net).

Willie Green, a former pro football player with the Carolina Panthers, among others, is a CFSA board member who lives in Shelby and owns a number of check-cashing and payday lending businesses himself.

Green says the industry's opponents are "self-appointed moral arbiters" who don't think people should be allowed to decide for themselves when--and on what terms--to borrow money. Payday loan terms are carefully spelled out on the documents, and customers are smart enough--and well-educated enough--to understand what they mean, he says.

The interest rate may be high, but for a single loan--for two weeks--it's usually less than the cost of a credit-card late fee or what a bank would charge for a bounced check.

Moreover, CFSA members follow a "best practices" code by which borrowers are told clearly that payday loans should only be used for short-term needs, not long-term credit, he says. A study done by Georgetown University researchers found that more than 9 out of 10 of the industry's customers thought its services were valuable, and 96 percent said they were aware of the cost of their loans.

The Georgetown study did find that "consumers were generally aware of the cost," if not the specific annual percentage rate (APR), of their loans. More than half had credit cards; half of them were maxed-out, according to the study, which "was supported, in part," its authors acknowledge, "by a grant from the CFSA."

Advance America started business in Spartanburg, S.C., in 1997, and two years later the firm was a "founding member" of the CFSA. Its CEO, William Webster IV, was until recently the CFSA's president.

Webster's background is chicken and Democratic politics. A University of Virginia Law School graduate, he ran a company that owned 27 Bojangles restaurants in South Carolina for a decade, then went to work in the Clinton administration, first as chief of staff to Education Secretary Richard Riley and later in the White House as director of scheduling and advance.

He's one of the two principals behind Advance America. The other is George Dean Johnson, a Republican and a leading fund-raiser for George W. Bush who's had a long career in business and real-estate development. Johnson started the Extended Stay America hotel chain and was its CEO until a year ago. He also owned the biggest chain of Blockbuster video stores, and for a time ran the Blockbuster division after the company was acquired by Viacom.

These two are heavy hitters, in other words, and they made a lot of money when they took Advance America public at the end of 2004. In the offering prospectus, Johnson is listed as owning 13.2 million shares and Webster 5.5 million; they were listed as selling 1.45 million and 600,000 shares, respectively, as part of the initial public offering of 21.5 million shares, at $15 a share. After rising a bit initially, the share price has dropped lately to under $12.

Because Advance America is a public company now, a lot more detailed information is available about its business practices than most other, privately owned payday firms.

In 2003, for example, AA made 10,179,000 payday loans, but to just 1,174,000 different customers. The average customer that year took out 8.7 loans. A small percentage of these were so-called "rollovers," where the loan is continued for another two weeks and a new fee charged, which is the easy way of springing the debt trap, but is illegal in many states. Ten times as many were "consecutive loans," in which the first loan is torn up and--after a day or so "cooling-off period" required by law--another loan is issued.

In all, 46.5 percent of AA's loans in 2003 were consecutive or rollovers--a selling point for the company's profitability as it sought to interest buyers in its stock, though at variance with the company's claim that it exists to serve customers' "short-term cash needs."

Advance America had 125 stores in North Carolina when the state's payday-lending law expired in 2001. It has seven fewer now, but its market share has grown as the total number of payday outlets here has dropped from more than 1,000 to an estimated 400 today.

When the law expired, consumer advocates say, the mom-and-pop operations that ran out of the local pawn shop or check-cashing place by and large closed or were put out of business by the Attorney General's office. A few tried making payday loans in disguise, like the company that leased your car for two weeks while you used it and then you paid them $300, or the outfit that rented two weeks' worth of "Internet services"--on their one computer--for $300. They were two of the moles Cooper's office has whacked in court.

But Advance America and a few other companies found refuge by associating themselves with national banks, continuing to do business just as before while claiming that they were acting as their host bank's "agent."

They got away with it until 2002 when, under pressure from Cooper, the federal Office of the Controller of the Currency declared that it was illegal for national banks--which the OCC regulates--to "rent" their charters in that way. The Office of Thrift Supervision also acted to stop national thrifts from renting their charters.

At the time, Cooper was suing one of the big payday companies, ACE Cash Express, in an effort to get the national charter rentals declared illegal in North Carolina. ACE settled with the state and left town.

Watching from the sidelines, however, Advance American didn't. Instead, it lined up a little bank in Kentucky and "rented" its state charter. Republic Bank & Trust doesn't do any payday lending in Louisville, but it could, and AA's legal argument is that it cannot be prevented from "exporting" what is legal in Kentucky to any other state.

Such "agency programs," as the CFSA terms them, are patterned after the nation's credit-card laws, in which banks chartered in South Dakota can charge customers everywhere whatever rates are allowed in South Dakota. They're completely legal, CFSA maintains.

That argument recently failed in Georgia, however, when Advance America went to court to stop the Attorney General there from enforcing a newly enacted law that bans payday lending. The case is still pending, but Advance America was unable to get a restraining order that would have let it stay in business until there's a final decision--which could be years from now.

According to the CRL's McGill, a federal judge there saw little chance that AA would eventually prevail on the merits, so he declined to protect it in the meantime. AA promptly "suspended" its Georgia operations. On Monday, a federal appeals court agreed with the judge.

That result is exactly what Cooper is looking for in his case against Advance America here. If he can get a favorable ruling from the banking commissioner, and then from the full banking commission, well, AA can appeal, but he'll have them on the run and subject to fines if they try to stay open. Cooper's argument is that, with the payday-lending law expired, AA must abide by North Carolina's Consumer Finance Act, which caps lenders' interest rates at 36 percent. The act applies to everybody "in the business of lending," which AA clearly is, Cooper maintains. Advance America is lending its own money, not Republic Bank's, and its claim to have an "agency" relationship with Republic is no more than a fig leaf for its illegal practices.

At the same time, Cooper is pressuring the Federal Deposit Insurance Corporation, which regulates state-chartered banks, to follow the lead of the OCC and crack down on their "rentals." For three years, the FDIC has resisted. But in April, it issued new guidelines for banks essentially limiting the number of payday loans they can associate themselves with to six per year per customer, and no more.

While that has no direct effect on lenders like Advance America, if the FDIC follows through with investigations of the banks' compliance, Cooper says, it could cause the few banks that do it to decide that fronting for the payday industry isn't worth the headache.

So Cooper is hopeful that the end is in sight (again). But there is one other potential stumbling block--the General Assembly. He's determined to stop any legislative move to let the payday industry slip his noose. Talking about that prospect in an interview, his feelings about payday lending all of a sudden spilled out:

"It's like somebody needs a life preserver, and you throw them an anvil. They take advantage of people's desperation. It's just like loan-sharking. It is loan-sharking. It's legalized loan-sharking--we don't think it's legal, I want to say that right now."

In the General Assembly, so far things are all quiet on the payday-lending front. There is a bill, SB-947, sponsored by Sen. David Hoyle, D-Gastonia, the chair of the Senate Finance Committee, that would essentially let the industry do business in North Carolina as it pleases. But it hasn't moved, and it's apparently not going to any time soon. It's stalled, our interviews with legislators and lobbyists on both sides indicate, because of heavy opposition in the Senate Democratic caucus, where Sen. Tony Rand, the majority leader, is among payday lending's most outspoken critics.

The bill also has split the Black Legislative Caucus, where Sens. Vernon Malone, D-Raleigh, and Mickey Michaux, D-Durham, are hostile to payday lenders while others, like Sen. Robert Holloman, D-Ahoskie, are looking for a compromise that would let them stay in business.

Holloman has been seeking support for industry-backed amendments to SB-947 that would limit the number of payday loans any single borrower could accept in a single year to 12, and cap industry fees at $15 per $100 transaction. To guard against borrowers getting around the limit by using more than one payday company, Holloman's amendments would also create a statewide database for all payday loans, financed by a small surcharge.

The fact of the surcharge, not incidentally, is keeping Hoyle's bill alive even though the General Assembly's "crossover" date has just passed. The bill didn't move in either house, but now it has a state fee attached to it, which exempts it from crossover rules.

Holloman says he "had a bad taste in my mouth about payday lending" and still does to some extent. But the fact is, payday lenders are out of there doing business, completely free of any state regulation, and thousands of needy borrowers are getting gouged. Establishing a cap of 12 loans and 15 percent fees "isn't perfect," he admits. "But we have a terrible situation now. People say it isn't legal? Well, it's been going on for four years now, and people are using it and they need some help."

But to Al Ripley, who's been lobbying on the other side of payday lending for the last three years for the N.C. Justice Center (he's their consumer director), Holloman's compromise is nothing more than a cave-in.

Ripley, like Cooper and the CRL leaders, thinks there is room for the state to create some form of short-term loan, payable in installments over, say, 90 days, that could be allowed to carry an interest rate higher than 36 percent.

But only, Ripley emphasizes, if payday lenders are absolutely barred from trapping borrowers in consecutive loans at that higher rate. The Justice Center has proposed such alternatives to the industry in the past, he says. And the industry has always rejected them because they "aren't payday loans."

No, they're not, he agrees.

"The central thing the industry wants is to be able to trap borrowers in back-to-back loans. They have to do that to be profitable," Ripley says. "Which means the thing that we [on the consumer side] find most egregious is the thing they say they can't live without."

Like Cooper, though, Ripley thinks the payday industry's days are numbered unless they come to the table and deal. Cooper will win against Advance American, and the FDIC's guidelines will bite too, he thinks. Bottom line: "They need a bill real bad."

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