Former state bureaucrat named Harry L. Hooper has a confession to make.
Hooper, a 28-year lawyer and retired U.S. Marine Corps judge advocate, was confronted with a seemingly innocuous request soon after becoming general counsel to the Florida state comptroller in 1995.
McKenzie Check Advance wondered whether it could accept post-dated checks. After some legal research, Hooper and his aides responded yes.
Hooper has regretted their answer ever since.
"We did not suspect at the time that we were launching a cottage industry of small loan operators masquerading as … check cashers," Hooper stated in an affidavit filed on behalf of debtors who are suing so-called payday lenders. One of those racketeering lawsuits, joined by state Attorney General Bob Butterworth, is pending in Hillsborough County circuit court.
In his August 2000 sworn statement, Hooper stated: "I have become a student of this question as a result of my experience in this area. I believe as a former general counsel of the Florida Department of Banking and Finance, and as an attorney who performs pro bono service at Legal Services of North Florida, that payday lending is an evil that strikes at the heart of Florida's most unfortunate citizens. I believe payday lending is predatory lending."
That did not dissuade the Florida Legislature from legalizing the practice last year.
Advance America, which acquired McKenzie Check Advance, and other payday lenders no longer need the blessing of Harry Hooper or any other state official to engage in what would otherwise be usury. In Florida, lenders normally cannot charge more than 18-percent interest on most legitimate credit transactions. The new law lifts the interest ceiling to an annualized rate of 390 percent for payday lenders.
Payday lenders can thank their Tallahassee lobbyists. They included Holland & Knight law firm heavyweights Martha Barnett, a former American Bar Association president, and Curt Kiser, an ex-state legislator from Pinellas County.
Roger B. Handberg, an assistant state attorney general who investigates economic crimes, said the new statute attempts to address one of the worst sides of payday lending. "The real problem is the rollovers, which put people into these downward spirals of debt," said Handberg.
Under the law, borrowers must wait 24 hours after repaying one payday loan before signing for another. Theoretically, that prevents borrowers from continuing to renew or "roll over" loans from one payday to the next, incurring escalating fees and interest charges along the way.
"If they have to have these loans at all, I guess this law is not that bad," said Handberg, who is leading a Butterworth probe of four payday lenders.
But payday lenders are way ahead of Florida regulators.
Consumer advocates say Advance America and other lenders are pairing up with national banks to circumvent recent state regulatory action and legislation.
"Big payday lenders don't want to comply with state laws designed to limit their
triple-digit interest rates," said Jean Ann Fox at the Consumer Federation of America. "So they are renting bank charters in a cynical attempt to avoid state consumer protections."
Payday loans — officially known now as "deferred presentment" loans in Florida — are made for up to $500 to borrowers who need immediate cash and acknowledge their bank account has insufficient funds at the time.
Borrowers write a personal check, which is sometimes post-dated. For a fee, usually $15 for every $100 in principal, borrowers sign a pledge to make good on their check within two weeks, or by next payday.
Should they have to extend the repayment period, borrowers are socked with annualized interest charges of up to 390 percent. Should a check be cashed on an account holding insufficient funds, borrowers get hit with overdraft penalties by their bank as well as new collection fees by the lender.
Neil J. Gillespie's experience with Ace Cash Express Inc. in his hometown of St. Petersburg illustrates a few of the pitfalls of borrowing from payday lenders.
In March 1998, Gillespie wrote a personal check for $336.94 in order to borrow $300 from an Ace store in South St. Petersburg. He promised to make good on the check within two weeks. When time was up, Gillespie replaced that check with a new one for the same amount and Ace let him roll over his debt for two more weeks by forking over another $36.94, this time in cash.
Gillespie is suing Ace. Butterworth has intervened on behalf of Gillespie, a payday loan victim from Tampa by the name of Eugene R. Clement, and other Ace customers.
According to court records, Gillespie rolled over payday loans at two of Ace's St. Petersburg stores more than a dozen times between March and October of 1998. By the time Gillespie got squared with Ace, he had paid $517 in interest on four $300 loans he received over the course of seven months.
His lawyer, William J. Cook of Tampa, calculated that Gillespie was charged an annualized interest rate of more than 260 percent. Ace has maintained that the extra charges were check-cashing fees, not usurious interest. But Cook argued that Gillespie didn't receive money most times when he came in with a new check to roll over a payday loan. Ace kept his checks and it was Gillespie who paid to extend the loan.
Payday loan customers often frequent more than one store. "When we found a person who had one of these loans, they had four or five others with different lenders," said Handberg, the assistant attorney general. A woman suing Advance America in Orlando federal court dealt with eight payday lenders during two-and-a-half years of trying to catch up on personal bills.
Does this sound like loan sharking? Plaintiff's attorneys eager to win class-action status for their court complaints wouldn't discourage the analogy.
In contrast to the underworld, however, payday lenders don't threaten to send a leg-breaker after deadbeats. Ace and other lenders have warned that they will sic the cops on writers of rubber checks. Ace dunned Clement by citing a worthless-check law and noting that those convicted of the statue can lose their driver's license in Florida.
Handberg said he has yet to find a local prosecutor who has accepted a worthless-check case from a payday lender. For starters, post-dated checks are considered worthless on their face and are not covered by the law.
Cook has accused Ace of misrepresenting the worthless-check law to Clement and invoking the potential of criminal prosecution without legal foundation. By doing so, Cook argued, Ace deceived Clement and other payday loan customers.
Payday lenders believe their critics couldn't be more wrong.
Ronald J. Schmitt, an Ace regional vice president, made the case for his business in an affidavit that was filed in court to counter Cook's allegations.
"Ace offers an attractive alternative to customers with no bank account or relatively small balances," stated Schmitt, echoing the defenses offered by automobile title lenders and other exploiters of the working poor. "Unlike many banks, Ace is willing to assume the risk that a check they cash will bounce."
Schmitt's October 2000 sworn statement goes on to claim that Ace's "deferred-deposit program" never accepted post-dated checks, collected check-cashing fees in violation of state law, nor referred a tardy customer to law enforcement for prosecution.
Ace directed questions to the Community Financial Services Association of America, a trade group for the payday lending industry in Alexandria, Va.
Patrick Mitchell, an association spokesman, said Ace doesn't belong to the group, which requires members to follow a "best practices" policy when collecting on payday loans. Mitchell didn't know if Ace adheres to any of the "best practices," but he said the association prefers to maintain a public-relations distance from Ace.
Regulatory filings with the federal Securities and Exchange Commission show that being poster boy for bad industry behavior has cost Ace. The Irving, Texas, company is the nation's largest payday lender with around 1,000 outlets in 30 states.
Ace is fending off lawsuits not only in Florida but in Arkansas, Indiana, Louisiana, Maryland and its home state. Attorneys general in Colorado and Florida are suing Ace too.
Schmitt stated in his affidavit that Ace ceased writing loans secured by deferred-deposit checks — with its own financial resources — in April 2000. But regulators in Maryland and Ohio are pressing for sanctions against Ace for using California's Goleta National Bank to escape their state rules for payday loans.
Ace informed investors in an annual report to the SEC last June that it anticipates additional lawsuits and expects that its defense against them "will require substantial time and attention" and "significant amounts for legal fees and other litigation-related costs."
Yet there is a surge of money washing in from payday lending that will help cover the lawyer bills.
Ace revenue for the 12 months that ended June 30 was up 40 percent. Increases in loan fees and interest made up two-thirds of the $56-million jump in revenue. Straight check-cashing income accounted for just 28 percent of the revenue increase.
But didn't Schmitt state under oath that Ace has left the payday lending business? Yes and no. The Ace annual report to the SEC states that the loan fees and interest collected through June 30 "primarily reflect the company's participation interest in Goleta loans."
Ace and other payday lenders have repositioned themselves as conduits for small, unsecured consumer loans that are written by national banks. Goleta backs up payday loans for Ace while People's National Bank in Texas is behind Advance America's payday loans, according to consumer groups.
Florida Assistant Attorney General Handberg said customers filling out payday loan applications at Ace will see the Goleta name at the top of the paperwork. By the end of the business day, though, Goleta will have sold their loans to Ace.
"The payday lender is renting the bank charter," said Handberg. The loan is written by a national bank chartered by the federal government. So, payday lenders claim, the transaction is out of the regulatory grasp of a state banking overseer.
"There's so much money in this," said Handberg. "That is why they're always going to be creative."
Discovering legal loopholes has made payday lending one of the most profitable spheres of consumer finance, according to a recent report by the Consumer Federation of America and the U.S. Public Interest Research Group.
The report, titled Rent-a-Bank Payday Lending: How Banks Help Payday Lenders Evade State Consumer Protections, found an industry soaring in a downcast economy. In 2001, the industry estimated that 10-million American households will pay $2.4-billion in fees for two-week loans.
The groups conducted a survey of 235 payday lenders in 20 states and the District of Columbia. The groups found two stores in Georgia charging 910 percent annualized interest, although the rate for small, short-term loans is supposed to be capped at 58 percent there.
An Advance America store in Tampa, the only one surveyed in the Bay area, quoted the state's legal ceiling of 390 percent.
Just one-third of stores disclosed "a nominally accurate" annual percentage rate in their charts or brochures. Fewer than one quarter of the stores accurately disclosed both their fees and their annual percentage rate.
The report cited a North Carolina study last year estimating that payday lenders make 90 percent of their income from repeat business. Rollover waiting periods are easily evaded by payday lenders who permit borrowers to repay a loan with cash. Then, customers immediately write a new check to start another debt cycle.
The industry quickly challenged the report and accused the consumer groups of working against greater customer choice in everyday finance.
"Critics of payday advance continue to advance the myths surrounding this popular financial service in an effort to influence politicians and threaten this link for millions of middle-income Americans," said William M. "Billy" Webster IV, president of the trade association, who holds the same title with Advance America.
Even if payday lenders follow Florida's new law, monitoring multiple loans to a single borrower — with an eye toward halting rollovers — poses a regulatory nightmare for state Comptroller Robert F. Milligan.
The industry uses an Atlanta area company to track payday loans by borrower as a risk-assessment tool, said Handberg. Milligan could tap that resource. But the company's data is derived from a self-reporting system among lenders that may not be tight enough for government regulators.
Milligan aide Rick White said the comptroller's office has hired a company to design a state database of payday borrowers.
The Consumer Federation and PIRG were heartened by a federal judge's ruling in Jacksonville last June. In sending a lawsuit against Ace back to state court, the judge ruled that the payday lender's relationship with a national bank did not preclude it from state oversight.
Federal bank and thrift regulators have cautioned financial institutions about getting too close to payday lenders.
"They have issued mild warnings that these arrangements might be risky," said Lynn Drysdale, a Jacksonville legal aid attorney who secured the federal judge's ruling cheered by the consumer groups. "But they haven't really addressed what the payday lenders think to be clever arrangements to get around the state laws."
Ultimately, the Consumer Federation's Fox said, Congress may need to step in to thwart payday lenders' using national banks as a regulatory fig leaf.
U.S. Rep. Bobby L. Rush, a Chicago Democrat, has filed such legislation. "The horror stories in my district are numerous," Rush said at a February 2000 press conference. "People have to file bankruptcy, homes and cars are repossessed, and sometimes borrowers are threatened with criminal charges. The payday lenders say they're just providing a service and charging a fee for that service. But their lending practices are nothing more than loan sharking."
So far, congresswomen Corrine Brown (D-Jacksonville) and Carrie P. Meek (D-Miami) are the only members of the Florida delegation to sign on as co-sponsors.
U.S. Sen. Paul S. Sarbanes (D-Md.) is agitating for bank reform to curtail the lending abuses, too.
If Congress is anything like the Florida Legislature, though, it could be years before working-class consumers gain protection against payday lenders.
Check-cashing companies have poured almost $120,000 into the coffers of Florida political candidates and parties since Harry Hooper's fateful 1995 decision. Leading the parade was Advance America, the Spartanburg, S.C., payday lender, which gave $89,250.
Needless to say, the politicians and political parties taking the industry money don't have to pay it back — at least in U.S. currency.
Contact Staff Writer Francis X. Gilpin at 813-248-8888, ext. 130, or frangilpin@weeklyplanet.com.
This article appears in Jan 3-9, 2002.