Threatened Check Cashers Associating With Banks.
The rallying cry continues to be that the high fees charged for check-advance services aren't really usurious interest because the contractual agreements aren't really loans.
But as the Arkansas General Assembly considers repealing the 1999 law that codified the business as legal, some of the bigger players in this growing finance sector are trying a different tactic. They are associating themselves with national banks to take advantage of interstate banking laws.
ACE Cash Express Inc. of Irving, Texas, makes no bones about being in the business of lending money. That open declaration separates it from other check cashers operating in Arkansas.
But ACE isn't a run-of-the-mill check casher, either.
The publicly traded concern is the largest owner, operator and franchiser of check-cashing stores in the nation. The company operates a network of 1,208 locations, consisting of 1,045 company-owned outlets and 163 franchised stores in 33 states and the District of Columbia.
ACE generated an $8.2 million profit for the fiscal year that ended Sept. 30. Its total assets top $221 million. The company has 10 locations in Arkansas, the fourth-largest check-casher network in the state.
ACE's status in the industry didn't stop the Arkansas Check Cashers Association from booting the company from its membership. The association expelled ACE for openly disregarding one facet of state law governing check cashers: The company allows its customers to roll over their debt.
Rollover debt is a touchy subject for check cashers and a focal point of criticism for opponents of the check-advance business. That's why the topic was specifically addressed in the Check Cashers Act of 1999, crafted by the association.
Under that controversial law, check-advance customers are required to repay their debt in full within 30 days, with no renewal option.
Critics of payday lending decry that as a toothless prohibition that can still result in consumers paying fees for extended periods. They say a new check-advance agreement can be signed every month, which technically isn't a renewal but has the same effect of stringing out a final repayment of the debt as a rollover option.
State regulators don't see ACE's disregard of the check-casher law regarding rollover agreements as open defiance.
"The way they do business doesn't fall under my jurisdiction," said Peggy Matson, executive director of the Arkansas State Board of Collection Agencies, which also has oversight responsibility for check cashers.
That's because ACE advances money to customers through outright loan agreements that would be usurious under Arkansas law, except that the terms are protected by interstate banking law.
ACE has allied itself with Goleta National Bank, a $331 million-asset institution based in its namesake community near Santa Barbara, Calif.
The arrangement allows the company's check-cashing outlets to function as loan offices for Goleta National, owned by Community West Bancshares. The Southern California-based holding company also owns Palomar Community Bank of Escondido, Calif., a $73 million-asset operation.
ACE outlets differ from conventional loan-origination offices in that they specialize in very short-term loans that are typically less than $500, the same niche as check-advance operations.
The check casher-bank alliance also helps protect ACE from the growing docket of lawsuits filed by customers challenging check-advance agreements in Arkansas and other states.
This strategy has attracted the attention of the largest payday lender operating in Arkansas. First American Holding LLC of Cleveland, Tenn., which has 33 locations in Arkansas, intends to market and service loans for a national bank as well.
The company disclosed its intention to ally with an unnamed national bank and start marketing and servicing loans in a Dec. 6 letter to the Arkansas State Board of Collection Agencies.
"Unfortunately, this action has become necessary in light of the uncertainty surrounding the numerous lawsuits filed against industry operators," wrote Robert Manning, general counsel for First American.
Lawyers representing cash-drained clients of payday lenders in Arkansas are winning a growing number of cases, and judges are declaring that check-advance agreements are illegal contracts.
Nationwide, the check-advance business is coming under greater scrutiny as consumer groups decry the practice as predatory lending. Industry supporters defend it as a needful service for consumers who can't get short-term financing elsewhere.
In Arkansas, check cashers are clamoring for more regulation in hopes of avoiding a total shutdown of their payday advance business. The motivation is simple. Even with the inherent risks of dealing with "subprime consumers," payday lending is a lucrative enterprise.
An April 1999 industry analysis by the Little Rock investment company of Stephens Inc. estimates that a payday-advance store could be expected to produce a 48 percent return on investment.
That healthy yield reflects a 40 percent tax rate, annual revenue of more than $250,000, and a loss rate amounting to 8 percent of revenue. The analysis describes an industry growing toward a U.S. market populated by 24,000 payday-advance stores, generating $6 billion in fees annually.
"We believe that regulation and legislation will continue, and we are in the second or third inning of the growth and realization of the payday-advance store as a distribution channel for subprime financial services," the report notes.
Stephens has more than a passing interest in the business. The company is an investor in Advance America Cash Advance Centers Inc. of Spartanburg, S.C. The privately held player with a national presence has 28 locations in Arkansas, making it the second largest in the state.
The Stephens report indicates that the average customer uses the service five to seven times a year, according to data gleaned from the three or four largest payday lenders. The typical transaction involves $100-$300,with a $15 fee for each $100 advanced. Car repairs and medical bills are listed as the top reasons for using the service.
"We believe that the payday loan customer base is in the $25,000 to $40,000 household income level," the report states.
If that's an accurate portrait,' it raises some ominous questions about consumer debt. Using a credit card for such small amounts of "emergency debt" would be less expensive than a payday advance, even if the money weren't repaid for several billing cycles. Yet industry focus groups report that many consumers prefer payday advances over credit cards.
If true, it indicates that many borrowers are ignorant of the real cost of money and/or their credit cards are maxed out. Consumer advocates say this is their primary concern: If a borrower's personal finances are stressed, resorting to payday advances and its steep markups can only make a bad situation worse.
"The 'payday advance,' or the more genteel 'deferred presentment' product, has essentially existed in some form since the dawn of money as value for services.
"Short-term loans till payday of $5 for $6 was commonplace in the Second World War, and various forms of the transaction have generated very high yields to the 'lender."
Source: Stephens Inc.
Big 8 Check Advance Elms in Arkansas
* First American Cash Advance of Arkansas LLC, Cleveland, Tenn., 33 locations
Hot Springs 2, Little Rock 2, Batesville, Blytheville, Camden, Conway, Crossett, Fayetteville, Forrest City, Fort Smith Harrison, Hope, Jacksonville, Jonesboro, Malvern, Magnolia, Monticello, Mountain Home, North Little Rock, Paragould, Pocahontas, Pine Bluff, Rogers, Russellville, Searcy, Springdale, Stuttgart, Texarkana, Van Buren, West Helena, Wynne
* Advance America Cash Advance Centers Inc., Spartanburg, S.C., 28 locations
Fort Smith 2, Little Rock 2, North Little Rock 2, Arkadelphia, Batesville, Benton, Bentonville, Blytheville, Camden, Conway, El Dorado, Fayetteville, Forrest City, Hot Springs, Jacksonville,, Magnolia, Malvern, Pine Bluff, Rogers, Russellville, Searcy, Springdale, Texarkana, Van Buren, West Memphis
* American Check Cashers, Fort Smith, 11 locations
Fort Smith 2, Bentonville, Fayetteville, Jacksonville, Jonesboro, Little Rock, North Little Rock, Pine Bluff, Rogers, Springdale
* ACE Cash Express Inc., Irving, Texas, 10 locations
Little Rock 4, Pine Bluff 2, Fort Smith, North Little Rock, Texarkana, West Memphis
* Check-N-Tote Inc., Greenwood, 10 locations
Greenwood 2, Alma, Barling, Booneville, Dardanelle, DeQueen, Nashville, Paris, Waldron
* Cash In a Flash Check Advance of Arkansas, Memphis, 9 locations
Batesville Batesville, Conway, Crossett, Jonesboro, Magnolia, Texarkana, El Dorado, West Memphis
* AAA Check Cashing Inc., Batesville, 8 locations
Batesville 2 Cave City, Conway, Heber Springs, Jonesboro, Paragould, Searcy
* Chex-2-Cash, Hot Springs, 8 locations
Hot Springs 2, Benton, Camden, El Dorado, Magnolia, Malvern, Texarkana
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|Comment:||Threatened Check Cashers Associating With Banks.|
|Date:||Jan 8, 2001|
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