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Payday lenders find profitable market in Champaign-Urbana

By Dan Petrella/CU-CitizenAccess "“ Connie Harrison doesn't live like a spendthrift.

The 58-year-old University of Illinois graduate shares her modest, two-bedroom house in rural Fithian with several cats, mostly strays she's taken in over the years. She has more than 200,000 miles on her 1996 Geo Metro.

But Harrison, who works as an office coordinator at Carle Foundation Hospital's sleep disorders center, says she has a bad track record when it comes to credit and debt. This summer, she filed for bankruptcy for the fourth time since 1981.

One downfall, she said, has been a reliance on payday and consumer installment loans, which are short-term, high-interest loans that typically don't require a credit check.

The annual interest rate on a payday loan can be as high as 404 percent under Illinois law. Consumer installment loans are largely unregulated in the state, resulting in interest rates anywhere from 5 percent to more than 1,000 percent. Both of these credit products are marketed as a way to pay for unexpected expenses, such as a spike in a utility bill or an unexpected car repair.

There are eight state-licensed payday loan stores in Champaign-Urbana and an estimated 22,000 stores nationwide. Champaign-Urbana is also home to 14 consumer installment lenders. Each of the payday loan stores is also licensed to make consumer installment loans.

 

Consumer advocates say payday lenders, whose storefronts are often located in low- and moderate-income neighborhoods, rely on repeat business from customers who live paycheck to paycheck, trapping them in a cycle of debt that can be difficult to escape. The industry thrives because few affordable alternatives exist for cash-strapped borrowers who need money fast, experts say.

And although Illinois has instituted new regulations on the industry in recent years "“ a cap on fees and limits on the number of loans a borrower can take out, among other restrictions "“ lenders have responded by shifting their focus to consumer installment loans, which, until a new set of laws kicks in March 21, remain largely unregulated.

"A high-interest loan is always going to make a desperate situation worse," said Valerie McWilliams, managing attorney of the Land of Lincoln Legal Assistance Foundation.

Sixteen states and the District of Columbia have enacted interest-rate caps that have essentially banned payday loans, and the Defense Department has done the same for loans to members of the military.

The lenders, however, say they are meeting the financial needs of consumers.

"We're providing financial solutions when no one else will," said Tom Linafelt, a spokesman for QC Holdings, which operates the QC Financial and First Choice Loans stores in Champaign. Managers of local payday loan stores declined to answer questions about their business, directing inquiries to their corporate public-relations departments.

Harrison can't pinpoint exactly why she took out any of the numerous payday and consumer installment loans she's had over the years, but she said she usually borrowed the money when she got behind on credit card payments or other bills.

Despite the state regulations, Harrison currently owes more than $6,000 to about a dozen payday and consumer installment lenders, some with storefronts in Champaign-Urbana and others who lend money over the Internet.

Her payday loans are among more than 18,000 that lenders in the two cities have made since the state began tracking payday loans in 2005, according to state records.

"I realize they're high interest, and I knew that going into it, but, unfortunately, I went ahead and did it anyway," she said.

But after going through the credit counseling required for those who file for bankruptcy, she said she realizes this was a mistake.

"You don't take out another loan when you're having trouble making your bills because you just created another bill," she said.

Some call it "˜reverse redlining'

Payday loans "“ sometimes called cash advances or payday advances "“ are small loans that are typically due to be repaid when a borrower receive his next paycheck or government-benefit payment. The loans are made without regard to the borrower's credit history.

To secure the loan, the borrower writes the lender a check for the amount borrowed plus the lender's fee or gives the lender electronic access his bank account. When payday arrives, the borrower has the option of paying off the debt in person or allowing the lender to cash the check or withdraw the money from his bank account electronically.

In Illinois, the fees on payday loans are capped at $15.50 per $100 borrowed. Assuming a repayment period of 14 days, this is equivalent to an annual interest of 404 percent. The average finance charge for a payday loan in Illinois is equal to an annual interest rate of 341 percent, according to a three-year study by the state's Department of Financial and Professional Regulation.

These regulations apply to lenders with brick-and-mortar stores and those that lend money online to borrowers in Illinois.

The average interest rate on personal loan from a commercial bank is about 11 percent, and the average rate for a credit card is about 14 percent, according to the most recent statistics from the Federal Reserve.

Of the eight state-licensed payday lenders operate in Champaign-Urbana, seven are located in neighborhoods where the median household income is below the median for the Champaign-Urban area as a whole, according to data from the 2000 U.S. Census. The eighth is at 1815B Philo Road, Urbana. Income data from the 2010 census is not yet available.

"A lot of people would call it reverse redlining," McWilliams said. "Instead of avoiding certain areas for lending, they target them."

McWilliams represents low-income and elderly clients in civil cases free of charge. She said she began working to educate the public about payday lenders and other businesses in the so-called fringe financial sector about 15 years ago, when a payday-loan store opened on the University of Illinois campus and aggressively marketed itself to students.

Spokesmen for payday lenders with stores in Champaign-Urbana said their companies, like businesses in the retail sector, look to locate their outlets in highly visible strip malls in high-traffic, densely populated areas.

"We like being near where our customers live, where they work and where they shop," said Jamie Fulmer, a spokesman for Advance America, which is the nation's largest payday lender and has stores in Champaign and Urbana.

The economic makeup of the neighborhoods where the stores are located is a coincidental result of this decision-making process, the spokesmen said.

"Folks with higher incomes don't live in higher traffic areas," Linafelt said.

"˜The best customer . . . pays us back'

The industry bristles at the idea that it targets low-income borrowers.

"Critics of the industry have been successfully perpetuating the myth that the payday advance industry exploits the downtrodden," the Community Financial Services Association of America, a trade group for payday lenders founded in 1999, says on a section of its website titled "Myths vs. Reality of Payday Loans."

Targeting low-income borrowers would be bad for business, the spokesmen said.

"The best customer is a customer who comes in and pays us back and goes about their business," Fulmer said. "We don't want any customer to come into our store and get into a situation where they're not using a payday loan responsibly."

The industry's customers "represent the heart of America's middle class," and the majority earn between $25,000 and $50,000 annually, according to the industry association.

The median income of payday borrowers nationally is $30,892, according to data from the Federal Reserve Board's 2007 Survey of Consumer Finances, which were analyzed by the Center for American Progress, a left-leaning Washington, D.C., think tank.

The center found that families with payday loans tended to have less income, lower wealth and fewer assets than families without the loans and were more likely to be minorities or, like Cheryl Britton, single women.

Britton, 43, of Mahomet, is the single mother of a 12-year-old daughter. She said she started taking out payday and consumer installment loans last year because her ex-husband was behind on child support and left her with thousands of dollars in state and federal tax debt. She currently owes a total of more than $1,000 to three lenders, she said.

"I had to find some way to pay my bills," said Britton, who works for a food-distribution company and as a school lunchroom supervisor. "I got myself into deeper water because now I can't pay them back."

She can't get loans from banks or other traditional lenders because her tax debts have ruined her credit, she said. She is currently working with Land of Lincoln Legal Assistance to find a solution to her problem.

Caught between "˜a rock and a hard place'

In Illinois, about 63 percent of all borrowers who took out payday loans from February 2006 to December 2008 earned $30,000 a year or less, according to the Department of Financial and Professional Regulation report.

Payday lenders market their loans as safety nets to tide borrowers over when they face unexpected expenses or dips in income.

At the top of its website, Advance America displays scrolling images of working-class people, including one of a hardhat-wearing construction worker, which is accompanied by this message: "Your bills don't slow down just because your work does. We understand. So we're here for you with the money you need."

Problems arise, consumer advocates say, when repaying the loans leaves borrowers without enough money to pay rent or meet other financial obligations. As a result, borrowers often take out additional loans after paying off their initial debts, which is how Connie Harrison and Cheryl Britton describe their borrowing habits.

Payday borrowers are more likely to become delinquent on credit card payments and file for bankruptcy than people without payday loans, according to a study by the Federal Reserve Bank of Chicago, the Vanderbilt University Law School and the University of Pennsylvania.

Also, families with payday lenders in their areas are more likely to be late in paying other bills, to delay medical care and to lose their bank accounts involuntarily due to excessive overdraft fees, according to researchers at Harvard Business School and Northwestern University.

"A lot of people feel they're between a rock and a hard place," McWilliams said. "In spite of what the businesses say, it's never going to be a good solution."

But the industry believes its products can be good solutions for many borrowers who use them responsibly.

News stories and reports by consumer groups that focus on borrowers who have gotten themselves into financial trouble don't paint an accurate picture of the industry, Linafelt, the QC Holdings spokesman, said.

"That is a small minority of our customers," he said. "That person probably had personal financial-management problems before they came to us."

The industry would not exist if there was no consumer demand for its loans, the companies contend.

"There is a clear, undisputed demand for a short-term credit product in the marketplace," Advance America's Fulmer said.

Creating "˜churn' among payday loan customers

Critics say that much of that demand is created by the industry itself.

In a report last year, the Center for Responsible Lending, a nonprofit research and policy organization based in Durham, N.C., estimated that more than three-quarters of all payday loans nationwide each year are made to borrowers who paid off their previous loans within the past two weeks.

This practice, which the center calls "churning," produces $3.5 billion in additional fees for the industry each year, according to the report.

"The vast majority of business is generated by the borrowers' inability to repay a payday loan without taking on more payday loan debt, leaving only a small fraction "¦ not directly attributable to churning," the reports says.

Repeat borrowing has been an issue in Illinois as well.

From February 2006 to December 2008, the average payday-loan customer in the state took out six loans, according to Department of Financial and Professional Regulation.

The department denied a request, made under the Illinois Freedom of Information Act, for information detailing the number of repeat borrowers for payday-loan stores in the Champaign-Urbana area. In its denial, the department said the request was overly burdensome and would require the creation a new public record, which is not required by the act. CU-CitizenAccess appealed the decision to the public access counselor in the Illinois attorney general's office, but the denial was upheld.

The company spokesmen said customers continue walking through the doors of their stores not because of a "cycle of debt" created by payday loans but because they are satisfied with service they receive and believe the loans are less costly than the alternatives.

"That's one thing about the American consumer: They express their feelings with their feet," John Rabenold, a spokesman for Check 'N Go, said. "At the end of the day, our consumers know exactly what they're doing."

The spokesmen all cited penalty fees for bounced checks, bank overdrafts and late credit card payment as the main alternatives customers weigh when considering a payday loan.

"First and foremost, the consumers who use the product like it," Fulmer said. "They understand that reaching into their pocket to pay $15.50 to borrow $100 is less expensive than paying $35 for overdraft or $55 for a bounced check."

"˜It becomes a huge snowball'

Kathy Leary is a certified credit counselor with Central Illinois Debt Management and Credit Education who has worked with Harrison and many other local payday borrowers. Her observations mirror the findings of the Center for Responsible Lending study.

At least once a week, Leary sees a client who owes money to payday lenders, she said.

"If you see one [payday loan], you usually see multiple," she said. "They take out a second one to pay off the first, then they take out a third to pay off the second, and it becomes a huge snowball."

When Illinois began regulating its payday loan industry for the first time in 2005, many of the new rules were aimed at reducing repeat borrowing.

In addition to the fee cap, the law prevents borrowers from taking out more than two payday loans at the same time and from having loans for more than 45 consecutive days. After 45 days, borrowers must be free of payday-loan debt for seven days before borrowing more. To enforce these restrictions, payday-loan stores enter information about borrowers and their loans into a statewide database.

The regulations also require lenders to offer 56-day repayment plans without additional fees if borrowers are having trouble repaying their loans.

Using information from the database, the state began tracking data on payday loans. Since the laws took effect, there has been a steady decline in the number of payday loans made statewide.

The same is true in Champaign-Urbana. In June, local lenders made 213 payday loans with an average principal of $359. This is a 67 percent decrease from the peak of 651 loans made in June 2006.

The monthly average principal remained relatively consistent from December 2005 through June of this year, ranging from $299 to $375, according to state records.

Shifting focus in response to regulation

Consumer advocates say the decrease in payday loans is a result of lenders shifting their attention to offering more consumer installment loans, which the 2005 payday-loan reforms do not cover.

payday loans per month

Generally, the consumer installment loans have a repayment period longer than 120 days, which exempts them from the regulations.

For example, after the passage of the law, AmeriCash Loans, which was one the state's largest payday lenders, altered the terms of its loans to avoid the new restrictions, according to a 2008 report by the Woodstock Institute, a Chicago-based nonprofit research and policy organization. The company is not licensed to make payday loans under the 2005 law, according to state records.

AmeriCash Loans did not respond to numerous requests to comment for this story.

The Woodstock Institute report is based on Cook County court records, but a review of more than two dozen small claims lawsuits AmeriCash has filed against borrowers in Champaign County Circuit Court shows a similar pattern.

Before the 2005 reforms, the company typically charged an annual interest rate of about 574 percent to borrow $450 or less, according to loan documents included in small claims court records. Borrowers would either pay back the full amount borrowed plus interest after one month or make two smaller payments and a final "balloon" payment over six weeks.

The company also offered installment loans with longer terms and lower interest rates, typically for larger amounts of money.

More recently, these installment loans have become the company's focus.

While these loans have lower annual interest rates, the longer terms often mean borrowers are paying more in interest than they originally borrowed.

Take a loan made at AmeriCash's Champaign store on April 28, 2008, for example. The borrower, Carl Beach, of Rantoul, took out a $1,000 loan with an annual interest rate of 290 percent, according to court records. Beach agreed to make weekly payments of $59.30 for one year, which would bring the total due to be repaid to $3,083.60 "“ more than three times the amount borrowed. AmeriCash filed a small claims suit against him in June to recover his $1,786.22 outstanding balance plus a $350 attorney fee.

Since the 2005 reforms took effect, the average AmeriCash loan that ended up in small claims court was $855.56, according to a CU-CitizenAccess analysis of court records. The loans had an average interest rate of about 249 percent and an average finance charge of $1,525.20. (See eight cases here)

AmeriCash bar chart

Advance America began offering installment loans in Illinois in October 2006, acknowledging that it was making less money in the state and neighboring Indiana due to "material changes in enabling legislation," according to its 2007 annual report to the U.S. Securities and Exchange Commission.

New restrictions coming on consumer installment loans

While there are many types of consumer installment loans, short-term installment loans are the ones that have been the focus for payday lenders, consumer advocates say.

These loans have a median term of about nine months and a median annual percentage rate of 95 percent, although they range from 5 percent to more than 1,000 percent, according to a 2009 Woodstock Institute study. The median amount borrowed is more than $1,300, well above the typical amount for traditional payday loans, which is less than $400, according to state regulators.

In Champaign-Urbana, every licensed payday lender is also licensed to make consumer installment loans. Additionally, there are more than a dozen other state-licensed consumer installment lenders in the two cities.

Susan Hofer, a spokeswoman for the Department of Financial and Professional Regulation, said the state can't be sure that the decrease in payday loans is the result of lenders making more consumer installment loans.

"We would not have any way to know that, since only [2005 Payday Loan Reform Act] loans are required to be reported," she said in an e-mail.

That will change next year, when a new set of regulations governing consumer installment lenders takes effect.

In June, Gov. Pat Quinn signed a bill that, beginning March 21, will require lenders to enter information about their consumer installment loans into the same statewide database that tracks payday loans.

The law also sets new caps on interest rates: 99 percent for loans of $4,000 or less and 36 percent for loans greater than $4,000. The regulation also limits monthly payments to 22.5 percent of the borrower's monthly income and establishes a minimum repayment period of six months.

Rabenold, the Check 'N Go spokesman, said the new regulations add to a system that already does a good job protecting consumers.

"Illinois has a very well-regulated short-term credit industry with the government oversight that's need to protect those who need help, but otherwise makes credit products available to those who need it," he said.

Fulmer, of Advance America, said the company and other members of the Consumer Financial Services Association of America are committed to finding common ground with consumer groups to promote reasonable regulation.

"What you've seen pass and be signed into law is a result of those efforts," he said.

But critics say the new regulations don't go far enough.

McWilliams, the attorney at Land of Lincoln Legal Assistance, said she would like to see an interest-rate cap of around 35 percent on all loans.

McWilliams said she is also skeptical of the new rules because of the payday-loan companies' role in the legislative process.

"The industry is involved in the negotiations," she said. "They have a lot of lobbyists."

The changes have prompted the industry to keep an eye on its bottom line.

In its most recent SEC filing, Advance America says the new regulations will "negatively affect the profitability" of its consumer installment loans in Illinois. However, "management currently believes operations will remain economically viable in this state," according to its August quarterly report.

"The jury's still out on whether a company like Advance America can operate under those new laws and offer a product that meets the needs of consumers," Fulmer said.

"˜There aren't a lot of great options'

One of the reasons payday and consumer installment loans remain economically viable, consumer groups say, is because there are few affordable alternatives that offer the same speed and accessibility.

"There aren't a lot of great options," Kathy Sweedler, a consumer and family economics educator with the University of Illinois Extension, said. "You can't really walk into a bank, as far as I know, and say, "˜Can I have $500 for this month's rent?' "

The way to avoid payday and consumer installment loans altogether, she said, is through better long-term financial planning.

People often use payday loans for unforeseen expenses such as car repair or high utility bills, Sweedler said.

"While we call them "˜unexpected,' they're really "˜expected unexpected,' " she said. Although we don't know exactly what they will be, we know the occasional emergency will arise, she added.

"Probably the No.1 thing that can help people is if they can build up an emergency savings account," Sweedler said. "Things like savings accounts don't happen when people address crises as they arise."

After filing for bankruptcy for the fourth time, Harrison said she has learned this lesson.

This summer, for instance, she hoped to visit her elderly parents in Florida, but she decided to forgo the trip because she didn't have the money, she said.

"I'm just going to have to be strong," Harrison said. "I'm not going to buy anything on credit. That's just it. If I don't have the money, I have to save up for it."

¨ Copyright 2011 CU-CitizenAccess.