Sale-Leaseback Lenders Defy Regulation Payday Lenders Use Subterfuge to Avoid Application of Fair Regulations Promulgated Last Year by the Consumer Credit Commission

In Brief requirements for borrowers. We also Since the founding of the Republic, reviewed their advertising in the Texas has prohibited usury. Texas’ GreenSheet and the telephone book to constitution bans the practice and estab- determine if they used a disclaimer lishes the ability of the Legislature to common to payday lenders making loans regulate loan rates. The state’s Credit that are not in compliance with the Code clearly outlines the terms and regulations: “this is not a loan.” conditions of a legal small loan. Finally we reviewed deidentified Finance companies may legally consumer complaints filed with the Office charge more than 90% APR interest on of Consumer Credit Commissioner. Many small loans, including an up-front $10 fee of the complaints that were filed included to cover processing costs, and $4 per copies of “lease” agreements or other loan month per hundred borrowed. Pawn shop contract information for the cash advance loans are also expensive. But neither of companies. Consumers Union reviewed these legal short term loan options are as these lease agreements and the terms and expensive or difficult to repay as a payday conditions of the loans. While these loan. complaints, essentially anecdotal in Although they walk and talk like nature, do not provide a statistical infor- small lenders, many payday loan compa- mation about the industry as a whole, they nies claim that they are not loaning money show in rich detail exactly what can and holding checks as collateral, but happen to real consumers who use sale- providing services. Most of them now leaseback or other payday lenders who are claim to buy a consumer’s property and acting outside the current law. rent it back to them for a high fee. The real service, however, is a quick cash loan Overall Findings Publisher of Consumer Reports under usurious terms. In general, the lenders surveyed give Southwest Regional Office Last year the Texas Finance Commis- a borrower cash and hold a signed check 1300 Guadalupe, Suite 100 sion created a system for reasonable in the amount of the loan plus the fee as regulation of short term loans at interest collateral—the definition of a payday Austin, Texas 78701 rates comparable to other small loan loan.1 Rates range from $18.40 per $100 512-477-4431 ! 512-477-8934 operations, but payday lenders continue to per two-week term, to as high as $4.64 per Reggie James, Director loan money and collect fees outside the day (which works out to nearly $65 per embrace of the regulation. In order to curb $100 per two-week term). Rob Schneider usurious lending, the Texas Legislature But these fees are significantly higher Project Director and Contact must clarify that the sale-leaseback than allowed under the payday loan company is a payday lender subject to regulations. Last year, the Texas Office of [email protected] Subchapter F of the Finance Code and the Consumer Credit Commissioner attempted current regulations of the Finance Com- to end usurious lending by payday loan Kathy Mitchell mission. companies by instituting a regulation that Series Editor and Design requires licensing for all payday lenders Consumers Union study and caps fees. Licensed payday lenders Tim Morstad Consumers Union called 21 payday may charge a $10 fee up front, plus $4 per Author lenders in six markets to determine the $100 per month—essentially the same rate that “signature” loan companies may February 2001 current price of these loans and the charge for loans under $480. The rule also themselves as ensures that the $10 fee is only charged “loan alterna- once every 30 days (not on a renewal at tives.” day 14), and loans that roll over more than The largest twice must be turned into a declining chain payday balance loan with a repayment schedule.2 lenders now None of the companies we called make loans offered us loans in compliance with the through national rule. Instead, the companies offered cash banks—banks that that was “not a loan” or gift certificates or, take little or no in one case, a straight non-compliant loan risk but shelter payday loan. the loans from the Of the 21 companies we called who reach of state provide fast cash, 14 identified themselves interest rate limits. as “sale-leaseback” companies. A sale- These companies can leaseback arrangement looks just like a charge any amount, although other payday loan, except that the lender records consumer protections in the state regula- the serial number of two appliances. The tion related to payday loans still apply borrower signs a paper “selling” the (like renewal limitations). appliances to the lender for the amount borrowed, but keeps the appliances for a Cashing in on Sale-Leasebacks “rental” payment of (usually) $33 per In October1999, a woman walked into a hundred borrowed. sale-leaseback company in Fort Worth, Whether they advertise as a sale- Texas and borrowed $200 for a week to payday lenders in Indiana showed that 77 leaseback “alternative” or a simple pay household bills during her husband’s percent of customers roll over existing “payday” lender, most companies still temporary unemployment. She entered loans, and the average duration of a loan, offer long term loan extensions that keep into a sales-leaseback agreement in which including extensions, is between 3 1/2 to 4 families paying the high loan (or lease) fee the company “purchased” her television 1/2 months.4 Consumers are often unable every two weeks. Most companies and VCR for $200 and then “leased” the to repay the entire amount in two weeks advance the money over a 14-day or 15- items back to the woman for $66 every and extend the loan several times until day period, then required payment of week. She supplied the serial numbers of they have paid more in fees than originally another fee or they would cash the original the appliances, signed a few papers, and borrowed. check. One company advances the cash on left a personal check as security. Consumer complaints to the OCCC a daily basis, for a minimum of three days After the first week, the woman was reveal that consumers are actually engaging or a maximum of 21 days, charging unable to repay the amount of cash in long-term financial commitments. Lease customers a daily fee. This company will borrowed, had to extend the loan, and agreements have an “automatic renewal also extend the loan period at the option of even borrowed an additional $100. This option” built into them that allows custom- the borrower. continued for five weeks until the woman, ers to renew the lease at the end of the 14- Regulations require lenders to turn seeking help, finally contacted the Office day period for an additional fee.5 long term extensions into declining of Consumer Credit Commissioner. She Some companies allow customers to balance loans. But sale-leaseback “loan had already paid $563 in “rent” on the turn over the title to their car as collateral alternative” companies get around the loan and still had not paid anything to get a larger amount of cash quickly. regulations by insisting that they do not towards the principal to “repurchase” her The lease process is the same as a tradi- make loans. Of the sale-leaseback “leased” property.3 tional sale-leaseback, but the lease operations we identified, seven specify in Although formally a “lease” arrange- payments are large and the burden of a their advertising that “this is not a loan,” ment, this consumer was caught in the non-declining debt even greater. and the Yellow Pages now sports a new same trap as so many others since the tide One borrower turned over his truck title section entitled “Loan of payday lending swept the state in the to Quick Cash in order to qualify for a loan Alternatives.” last decade. She could not keep up with of $500. According to the lease agreement, Two more the fees, and behind the fees was a this sale-leaseback lender charged $125 sale- principal balance that never declined no every two weeks with a four week mini- leaseback matter how many payments she made. mum. After quickly getting in too deep, his compa- Sale-leaseback operators claim their mother wrote to the Better Business Bureau, nies agreements are short-term solutions to which forwarded her letter to the Consumer identify cash-flow problems. But, a study of Credit Commissioner.

Payday Loans, February 2001 Page 2 Consumers Union SWRO Sale-Leaseback Companies Dominate Short Term Loan Market (all prices quoted over the phone during a one-week period, February 2001)

Name of Rollovers Cnity Trype of Loa Deisclaime Fme Ter Company Allowed? Cnash Now Ayusti Pnayda n0ot a loa $s33/$10 2sweek ye Early Payday Akustin Srale Leasebac n0o disclaime $s33/$10 2sweek ye Advance Andvance Cash Ayusti Peayda a0dvanc $s33/$10 2sweek ye EnZ PaydayAdvance Akusti Snale Leasebac n0ot a loa $s18.40/$10 2sweek ye Mnoney Center Hkousto Snale Leasebac n0ot a loa $s19/$10 2sweek ye Xnpress Cash Hkousto Seale Leasebac L0oan Alternativ $s30/$10 2sweek ye Anlliant Funding Hyousto Prayda n0o disclaime $s27/$10 2sweek ye Innstant Cash Hkousto Snale Leasebac n0ot a loa $s34/$10 2sweek ye Tohe Cash Source Ekl Pas Seale Leasebac L0oan Alternativ $s30/$10 2sweek ye Coash and Go Eel Pas Grift certificat n0o disclaime $s30/$10 2sweek ye Coash n Flash Eel Pas Grift certificat n0o disclaime $s30/$10 2sweek ye Advance Cash Dkallas Snale Leasebac n0ot a loa $s40.24/$10 2sweek ye Leasing Atlas Finance Dkallas Srale Leasebac n0o disclaime $s33/$10 2sweek ye Service $4.64per day/$100 3s-21 days ye Fsast Buck Dkalla Srale Leasebac no disclaime equal to $64.94/$100 over two weeks EsZ Cash Today Dkalla Snale Leasebac n0ot a loa $s33/$10 2sweek ye Csash on the Spot Dkalla Snale Leasebac n0ot a loa $s33/$10 2sweek ye Sspeedy Money Dkalla Srale Leasebac n0o disclaime $s20/$10 2sweek ye Ionstant Cash Syan Antoni Pnayda n0ot a loa $s33/$10 2sweek ye Chash on the Spot Fkort Wort Srale Leasebac n0o disclaime $s33/10 2sweek ye Ihnstant Cash Fyort Wort Pnayda n0ot a loa $s33/$10 2sweek ye Mhr. Cash Fkort Wort Snale Leasebac n0ot a loa $s33/$10 2sweek ye Tkotals 1"4 sale leasebac 1e0 "not a loan $s32.07 averag 2sweek ye

Payday Loans, February 2001 Page 3 Consumers Union SWRO “embrace the subterfuge of payday lenders avoid the application of renaming the loan transac- state usury laws. While DFG purports only tion in order to avoid to act as an agent for a national bank in its regulatory oversight by the payday loan transactions, it recently Office of Consumer Credit settled a class-action lawsuit against Eagle Commissioner.” The National Bank and DFG for $5.5 million Subcommittee report notes dollars. The suit alleged various violations that companies do not accept of state and federal usury and consumer return of the property at the end protection laws by both companies.13 of the lease, but only accept cash According to statements filed with the or lease renewal like any other Securities and Exchange Commission, the payday lender. The Subcommittee agreement between Ace and Goleta recommended that Texas law be National Bank gives Ace “substantially all amended to define a sale-leaseback of the interest received by Goleta from the transaction as a loan and require federal borrowers, and subjects the Company Truth in Lending disclosures.9 [Ace] to substantially all of the risk of The Sunset Staff Report on the Texas nonpayment by the borrowers.” [emphasis Finance Commission found similar added] To further distance Goleta from problems with sale-leaseback transactions. the payday lending practices it facilitates, Among recommendations for increasing the agreement makes Ace solely respon- “My son borrowed $500 and [as of consumer protection through stronger sible for substantially all third party two months later] he paid four payments regulatory authority, the Report specifi- claims that may arise as a result of the totaling $440. Each payment, only $5 cally proposed strengthening the Office of bank loans. went toward principal...I paid $560 more Consumer Credit Commissioner’s Goleta collects only a service fee, 10 to get his title released...these people are oversight of sale-leaseback loans. takes no risk and collects no interest. Yet robbing people without a gun.”6 Ace may use this arrangement to avoid the The payday loan rule is designed to National Banks application of state usury limits. Since the ensure that borrowers do not get caught in The two largest chains of check- Goleta Agreement was implemented a cycle of non-declining debt. Under the cashing stores in the U.S. both offer (March 2000) Ace has expanded its rule, a payday loan that is renewed twice payday loans through a national bank that payday loan services from 339 stores to 14 must be turned into a declining balance is exempt from state usury limits. Ace 992 stores. Ace makes loans averaging loan.7 But sale-leaseback companies Cash Express, with more than a thousand $266 and collects an average finance 15 renew their agreements week after week stores across the country and hundreds in charge of nearly $40. Under Texas rules, and month after month and the consumer Texas (its biggest market), offers payday a regulated payday lender could charge no may never be able to “buy back” those loans through an agreement with Goleta more than $15.32 for the same average 11 appliances. National Bank. The Dollar Financial size loan. Although sale-leaseback companies Group (DFG), the nation’s second largest Banks rely on Section 85 of the claim they are not lenders, five of the chain offering National Bank Act companies we called advertise in the services under a “My son borrowed $500 and [as of which authorizes national banks to phone book under the “loan” section, next variety of store two months later] he paid four pay- names, offers export high to traditional small loan and pawn ments totaling $470.....I paid $560 8 payday loans interest rates from companies. more to get his title released.… While the companies require custom- through Eagle one state into 12 ers to bring in the serial numbers, make, National Bank. ..these people are robbing people another state that and model of various appliances, the In both cases, without a gun.” may have usury 16 lenders most often do not ask to see the the payday lender laws. Many appliance being purchased and leased. offers loans up to states have no Nor do they appear to require proof that $500 with a term of 14 days. DFG allows maximum interest rate, and banks may these items have not been “sold” to a maximum of four extensions. Ace has charge any rate they can get. someone else. no renewal maximum, but requires that The practical effect of the federal pre- The Texas State Committee on borrowers pay down at least five percent emption is to allow Texas payday lenders Economic Development’s Subcommittee of the principal balance in order to extend to import the banks’ interest rates from on Consumer Credit Laws researched the the loan. other states and bypass Texas’ limit on issue of sale-leaseback loans and issued a The agreement between payday interest rates. Serious consumer protection report in September 2000. The Subcom- lenders and a national bank may be little concerns arise in this lending environ- mittee found that these companies more than a mechanism to ensure that ment. For this reason, Consumers Union is Payday Loans, February 2001 Page 4 Consumers Union SWRO one of several groups that have asked to payday loans, like the Carolina Trust signature loans are booming and interest federal officials to prohibit national banks FCU’s “Micro Loan” program. It found rates more than adequate, the OCCC from making payday loans at exorbitant that new loan products and debt counsel- crafted a very similar rate for regulated rates.17 ing programs can help credit unions adapt payday lenders. In the meantime, however, payday to meet their members need for alterna- lenders are still responsible for the terms tives to payday loan products.19 Recommendations and conditions they impose on borrowers As credit unions begin to ramp up Texas has set reasonable limits on and must abide by the payday loan their efforts to serve customers, other interest rates since it was a republic. Such consumer protections set out in regula- small loan alternatives remain available. usury limits have balanced the interests of tions (particularly the requirement that Regulated signature loans are as simple as lenders with those of borrowers and they move borrowers into a declining a payday loan, and not nearly as expen- prevent “loan sharking” and other abusive balance loan). Further, in March 2000, the sive. A consumer can walk into a signa- practices. Unfortunately, loan sharking in Federal Reserve ruled that payday lenders ture loan office and walk out with a small Texas is back as lenders use loopholes in are subject to the Truth in Lending Act loan after minimal underwriting (the the law to increase their interest charges and therefore must disclose in writing the process for determining credit-worthi- far above statutory caps. annual interest rates they are charging. ness). Like Consumers Compliance became mandatory on payday lenders, Union SWRO October 1, 2000. The rule also clearly signature loan Goleta National Bank takes no risk concurs with the defines such transactions as loans and fees companies and collects substantially no interest. Texas Sunset as finance charges, although some sale- frequently take Yet Ace may use this arrangement to Advisory Commis- leaseback companies continue to argue applications by avoid the application of state usury sion and Texas that they are not making loans.18 phone and limits. Since the Goleta Agreement Senate Economic approve the loan Development Alternatives to Payday Loans while the cus- was implemented (March 2000) Ace Committee which Payday lenders argue that they fulfill tomer waits. Like has expanded its payday loan services have concluded that a need and help poor people make it to the payday loans, from 339 stores to 992 stores, col- the sale leaseback next payday when an unexpected expense signature loans are lecting nearly $40 on average for a loophole must be arises. But in many cases, payday loan generally small, two-week $266 loan. Under Texas closed. borrowers may have other, less onerous averaging $297. rules, a regulated payday lender Unregulated options available. Companies that com- And the market is could charge no more than $15.32 payday lenders prey pete directly with sale-leaseback providers booming. Accord- on cash-strapped for the same loan. and other cash advance companies acting ing to the Office people and trap outside the law include regulated payday of Consumer them on a treadmill lenders, small loan financiers and pawn Credit Commissioner, signature lenders in of debt that they cannot get off. Such loan shops. Texas make more than 4.1 million loans abusive lending practices provide a In addition, credit unions have begun totaling $1.2 billion.20 glimpse into what might happen if Texas to respond to consumers’ small loan needs Signature loans are still expensive were to repeal its existing usury limits for with new products and services. “Most compared to credit cards or regular bank consumer loans. To protect consumers in people turn to the alternative financial loans, and lenders sometimes offer the spirit of the Texas Finance sector because they’re excluded from the borrowers frequent opportunities to Commission’s payday loan rule, Consum- services of deposit institutions,” says John refinance. When consumers refinance, ers Union SWRO recommends to: Caskey, associate professor at Swarthmore they typically return the loan principal to College, in his report “Lower Income the original Americans, Higher Cost Financial amount Consumers Union SWRO Services.” But Caskey’s study found that borrowed, thus Consumers Union SWRO one-third of households that used “fringe” slowing final ReporReportsts bankers (i.e. check cashers, pawnbrokers, repayment. But Texas eye doctors limit access to contact lens prescriptions. The Eyes Don’t Have it...Yet. payday lenders and rent-to-own shops) in no case does Bereaved families suffer even more when funeral plans go bad. Final Committal were also members of credit unions. a consumer get Texas is #1 in waste from large-scale animal production operations. Animal Factories In December of 2000, Credit Union a non-declining National Association’s Alternatives to balance loan, Inequities continue in home purchase, refinance markets. Access to the Dream 2000 Payday Lending Task Force State Issues and the costs Payday lenders disguise usury. Wolf in Sheep’s Clothing Subcommittee released a report on credit are not as high And Much More... union alternatives to payday loans. This as accumulated Individuals may order single copies of any report at no cost by calling the SWRO at 512- 477-4431 or writing to us at 1300 Guadalupe, Suite 100, Austin, Texas 78701. You may report identified credit unions that have sale leaseback download SWRO reports about Texas consumer issues at www.consumersunion.org/ developed reasonably priced alternatives fees. Because aboutcu/offices/Tx.htm. Payday Loans, February 2001 Page 5 Consumers Union SWRO 605. “Cash Til Payday Originations,” and 3 Complaint to the Office of Con- “Legal Proceedings.” sumer Credit Commissioner, 2/14/2000. 13 Ibid, “Legal Proceedings.” 4 Sunset Commission. Sunset Staff 14 Securities and Exchange Commis- Report on the Texas Finance Commission sion Form 10-Q, Ace Cash Express, for ! Keep existing consumer protections Agencies. p. 67. October 2000. the quarter ending December 31, 2000, 5 for consumer loans. Usury limits on loans Lease agreements: Cash-2-U “Quarter Comparison.” Leasing, Dallas; Instant Rental Service, 15 Ibid, “Supplemental Statistical of only a few hundred dollars are already Dallas; First Capital Leasing, Houston; Data.” quite high, and should not be increased. Hubby Leasing, Dallas. 16 The Cost of Credit, Regulation and ! Close the existing loopholes that 6 Complaint to the Office of Con- Legal Challenges, National Consumer allow abusive practices like sale lease- sumer Credit Commissioner, 9/28/98. Law Center, 2d Edition, 2000, Sec. 3.4.5, backs. Assure consumers that they will 7 Texas Administrative Code, Title 7, Interstate Banking: National Banks and pay reasonable rates, under fair terms, Part I, Chapter 1, Subchapter F. Alternate Rate Exportation. when they borrow money. Charges for Consumer Loans, 7TAC Sec. 17 Consumer Reports. Consumers 605(f)(1). Union in Action. March 2000. Vol.65, Endnotes 8 Dallas and El Paso Yellow Pages, No.3, Pg.6. 1 “Payday loan or deferred present- 2000, “Loans.” 18 Texas Senate, Committee on ment transaction means a transaction in 9 Texas Senate, Committee on Economic Development, Subcommittee which a cash advance is made in exchange Economic Development, Subcommittee on Consumer Credit Laws, Interim for the consumer’s personal check, or in on Consumer Credit Laws, Interim Report, 76th Texas Legislature, September exchange for the consumer’s authorization Report, 76th Texas Legislature, September 2000. Also Omaha World-Herald, April 9, to debit the consumer’s deposit account, in 2000. 2000, Business p. 1. the amount of the advance plus a fee and 10 Sunset Commission Staff Report on 19 Credit Union National Association, where the parties agree that the check will the Texas Finance Commission, October “Alternatives to Payday Loans: The Credit not be cashed or deposited, or that the 2000. Union Option,” December 2000. consumer’s deposit account will not be 11 Securities and Exchange Commis- 20 Office of Consumer Credit Com- debited, until a designated future date.” sion Form 10-K, Ace Cash Express, for missioner, response to Public Information Texas Administrative Code, 7TAC Sec. the fiscal year ending June 30, 2000, Act request by Consumers Union, 2/06/01. 605(b). “Bank Loans.” Annual report data, 1995-1999. 2 Texas Administrative Code, Title 7, 12 Securities and Exchange Commis- Part I, Chapter 1, Subchapter F. Alternate sion Form 10-K, Dollar Financial Group, Charges for Consumer Loans, 7TAC Sec. for the fiscal year ending June 30, 2000,

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