State the Issues - September 2003

State the Issues

by Jim Marchesi, Gail Burks

Since the early 1990s, the payday advance industry has seen explosive growth in the United States as a result of robust consumer demand for short-term cash loans. It is estimated there are nearly 25,000 storefronts that provide short-term loans to millions of middle-income Americans every year. This exceptional demand evolved because: consumers need short term credit; banks exited the short-term/unsecured/low-denomination loan market; and payday advances offer a convenient, less costly solution to short-term cash needs. A payday advance provides a small, unsecured, short-term cash advance until payday. Customers choose payday advance to cover small expenses and avoid costly bounced-check fees or late payment penalties and other less desirable short-term credit options.

There are many myths and outrageous stories – none of which have been verified – concerning payday advances, which opponents have attempted to use to discredit the industry, but these arguments are not based on fact.

Myth 1 – Payday loans prey on the poor. Fact: Our customers are hard-working, middle-class people with average annual income ranging from $25,000 to $45,000.

Myth 2 – Payday loans contribute to the customer’s cycle of debt. Fact: A payday advance is a closed-end transaction for a limited time period. Payday advance transactions are for short-term needs, and are not structured to be a long-term option.

Myth 3 – Payday lenders charge outrageous rates. Fact: To our customers, the service fee is less costly than their alternatives – bounced-check fees, late payment fees and tarnished credit ratings.

Myth 4 – Payday advance customers don’t know what they are getting into. Fact: Our customers make informed decisions about our service and sign disclosure agreements as required by state and federal law that fully describe the terms and cost of the loan.

"Just as you understand that taxi services are valuable and convenient when used for short-term travel needs, but are inefficient to use for long-term travel needs, payday advance services are economical and convenient when used for short-term cash needs. The payday advance product is a dignified and cost-efficient ‘financial taxi’ to get from one payday to another when you are faced with an unexpected cash need," states the Community Financial Services Association.

Nevadans need access to short-term cash loans, and the payday advance industry meets this demand with overwhelming customer support and satisfaction. Our customers will testify how delighted and satisfied they are with the payday advance product.

It seems like such a simple, capitalistic idea – create a system that provides ready, easy credit to those who need and want it most. No hassle, no fuss. But first, an ingenious business model is needed, a model that can’t fail. First, charge high fees, because nothing in the law prohibits it. Second, ensure the system automatically results in repeat transactions. Loans must be short-term in order to accomplish this. Third, encourage consumers to write checks on accounts with no funds (post-dated checks). Fourth, threaten to prosecute them if they can’t pay. Fifth, offer customer service that is friendlier than any local church on Sunday morning.

Finally, market your business to the most vulnerable communities you can find. Study their culture, their weaknesses and their doubts. Exploit deficiencies in the system. Look for communities that have no readily available access to credit and capital. Look for people who have no access to credit and a low cash flow. Create this environment and you too can be rich. The question for our society becomes, because we can do it, should we? In our opinion, the answer is no.

This is the cycle and strategy practiced by people in the business of "fringe banking". Services offered in this industry include payday loans, check cashing, car title loans and rapid-refund loans. The providers of these services have figured out that America is a country that thrives on credit. But what happens when credit is not available to some members of society?

The Congressional drafters of the Community Reinvestment Act (CRA) recognized this in 1977 when federal law required banks to make credit and capital available to low- and moderate-income communities. Despite this law, many banks, through consolidations and mergers, have abandoned low-income communities.

While it is important that consumers have a choice when selecting a lender, it is just as important that society prevent activities that have adverse public policy consequences. We should not allow low-income communities to be robbed of precious assets. Currently, payday lenders are not regulated on a state or national level. Even if a consumer has a complaint about an institution, there is no place to turn.

Rather than create a dual lending system, let’s correct the one we have. Let’s make lending profitable for mainstream institutions and teach consumers the true facts about capital and credit.

Jim Marchesi, Gail Burks
Jim Marchesi, principal of Check City Las Vegas, is president of the Nevada Financial Services Association and a member of Community Financial Services Association, a national organization. Gail Burks is the executive director of Nevada Fair Housing Center, Inc.