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Installment Lending: The Next Step

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By PAUL BURTON

Payday lending is a tough business, and it’s getting tougher. But lenders are proving they’re pretty tough, too. Current challenges range from technical to legal to political, and lenders are finding solutions for these seemingly intractable problems – including a move to longer-term lending.

“The industry has a lot of smart and creative people,” says Jeremy T. Rosenblum, a Ballard Spahr LLP attorney who represents payday lenders.

Political and regulatory pressure is accelerating industry changes. Amid calls for curbs or even the abolishment of payday lending, some companies are looking toward recrafting themselves, possibly through short-term installment lending.

To Bob Wolfberg, payday lending has often been a term of convenience. “I have always felt there is no line between payday lending and short-term installment lending. I never felt there was a difference between the two,” says Wolfberg, co-president of PLS Financial Services Inc. of Chicago.

Wolfberg and his brother, Dan, got into the business in the 1990s and operate more than 300 payday loan stores in eight states.

As legislation heads to Illinois Gov. Pat Quinn’s desk that would cap payday loans at 99 percent, Wolfberg envisions the creation of a six-month payday loan, fully amortized or self-liquidating.

“We believe our customers like fully amortized notes,” Wolfberg says.

That’s exactly what’s happening in Colorado, where Gov. Bill Ritter the last week in May signed a bill that replaces payday loans with notes involving six- to 12-month terms. The measure also lowers interest rates.

But in Ohio, the move toward installment loans has stirred up further legislative moves.

“Right now, there is no ‘payday loan’ statue in Ohio, so what companies have done is migrate to two other statutes,” says Robert M. Grieser, vice-president of government affairs for 20-year-old CheckSmart of Dublin, Ohio. Grieser cites the Small Loan Act and the Mortgage Loan Act. “What former payday companies have done is use and become licensed through one of those two statutes.”

But legislation to further restrict payday loans is pending the Ohio Senate after the House passed Bill 486, by a 61-39 vote, to close up what critics of the industry say are loopholes the industry used since passage of restrictive legislation two years earlier.

So should payday lenders embrace installment loans?

“I think that’s an individual company decision,” says Jamie Fulmer, a spokesman for Advance America, which operates 2,500 stores throughout the U.S. and has locations in the United Kingdom and Canada.

“We offer payday loans and other types of loans, including small installment loans and check-cashing. We offer different products in different states. There have been a lot of alterations to the regulatory landscape, and we offer a product that meets those needs.”

Richard Kelsky, president of TellerMetrix, a New Jersey-based provider of POS software and systems, says the move to installment loans is bound to happen.

“It’s an inevitable evolution, give the legislative environment,” Kelsky says. “Anything to do with financial profit is bad.”

While short-term installment loans may take the place of payday loans where they have been legislated out of existence, Kelsky says that in other states they will be additive. Ditto for check cashers, if legislation to allow small installment loans now under consideration in non-payday loan states makes it through.

Kelsky warns that introducing installment loans will mean a big change in management. “They are very, very high-risk,” he says. Lenders will have to do more work to qualify borrowers on the front end, since it may take longer to know if a loan goes bad. A borrower may one payment but no more, for instance.

And lenders will have to be very aware of state laws. Many have unexpected rules on these loans – for instance, some states don’t permit payments via ACH. And there may be limited collection rights.

While payday lenders will have to learn to make these loans differently, check cashers who get into the business without ever being involved in deferred presentment may find themselves alienating established customers. If you tell a customer who has been cashing a check with you weekly for 25 years that he doesn’t qualify for a small loan, or must dun him for payment, Kelsky points out, you probably have lost that customer.

On the other hand, he says that simply being allowed to make those loans, even if you never make a single one, would increase the value of your business 25 percent to 50 percent.

Kim Anderson, chief executive of CL Verify Credit Solutions, sees companies adjusting in a variety of ways. “Some choose to restructure their business under other available, legal frameworks. Others choose to move offshore or into more favorable regulatory environments. Some are innovating by developing new loan products that meet various portions of the growing consumer demand,” he says. The Largo, Fla., company provides real-time data for short-term and payday lenders.

“People [in the industry] are going to react in different ways,” Ballard Spahr’s Rosenblum says.

Some have rebranded themselves by selling auto title loans, though in Wisconsin, Gov. Jim Doyle in May banned auto title loans in the state by using partial veto power that enables him to edit bills and change their meanings.

From a distance, Rosenblum found that a head scratcher. “Very strange,” he says.

Frederick B. Ware doesn’t represent payday lenders, but has a problem with Doyle’s action.

“If the governor can do this to auto title lending, he can do it to any other aspect of any other business. I am not aware of any other instance that would affect an entire industry,” says Ware, of Marilyn Townsend Law Office in Madison, Wis., and a former attorney with the Securities and Exchange Commission.

“It’s potentially a terrible abuse of power and a wakeup call and a deterrent for any business wanting to set up businesses or expand in Wisconsin. It seems to me this kind of power is contrary to the very idea of a Constitution and contrary to the very idea of having legislative bodies. And I say this without regard to the merits of payday lending or auto title lending.”

The industry received another setback in Wisconsin on May 25, when the District III Court of Appeals in Wausau ruled that payday lenders cannot prohibit lenders from filing or joining class actions. The case involved Cottonwood Financial Ltd.’s The Cash Store, where Darcie Estes rolled over $1,400 a payday loan through 30 loan contracts and was assessed a 521 percent interest rate, or $4,567. Estes owed roughly $1,000 at the time of default and countersued Cottonwood.

The court wrote that the availability of class actions is often the only vehicle to protect consumer rights. “And, absent a mechanism for class proceedings, many consumers are unlikely to realize they have been wronged because they do not know the defendant’s conduct is illegal. . . . The prospect of class-wide relief provides an important deterrent effect on merchants subject to the Wisconsin Consumer Act,” the court said.

Attorney Duffy Dillon of Brennan Steil S.C. in Janesville, Wis., represented Cottonwood. “I don’t have any comment and I won’t have any,” he said.

The Internet remains a growth area. One online lender, Payday Loan Tree of Philadelphia, said in May it added as many as 30 lenders to its database, bringing its total to more than 100. “This Web site today offers the easier way to payday loans,” the company said in its announcement.

Lenders sell the immediacy the Internet offers, that borrowers are freed of such formalities of paperwork and carrying documents. “Online lending remains the fastest-growing segment of the industry. The time and place convenience to the consumer is enormous, and the demand shows no sign of easing up,” CL Verify’s Anderson says.

Incensed at what they say is their industry possibly being out of business, the Wolfbergs — whose PLS, they say, stands for people, location and service — have posted signs on their counters aimed at Washington lawmakers: “Stop the politicians from taking away your right to the personal financial service you enjoy in this store.”

The Los Angeles Times, citing copies of e-mails it received, reported that Advance America of Spartanburg, S.C., the biggest payday lender in the United States, admonished employees to tell borrowers the government is putting it out of business. While not responding to specifics, Jamie Fulmer, a spokesman for Advance America, says: “The company certainly considers it important to communicate to customers and employees to let them know if we feel pieces of legislation are going to affect their access to credit.

“It is certainly never our intention to mislead customers. Payday lending is one of the simplest, transparent and fully disclosed businesses,” Fulmer says.

The industry, though, did get a reprieve of sorts when restrictions on payday lending were dropped from financial overhaul legislation headed for President Obama.

“We had one of the best possible outcomes at the federal level,” says Steven Schein, a spokesman for the Community Financial Services Association of America, a trade association that represents the industry.

“Unfortunately, our story relates to the old saying, a truth takes longer to explain than a lie,” Wolfberg adds. “Our harshest criticism has come from officials from states that don’t even allow payday lending, such as in the Northeast, or from the people who don’t need it. I find it very condescending.”

Given the industry’s need to beat back its reputation as predatory and the specter of state and federal legislative action, Rosenblum also sees the need for human stories to get the message out.

“Look, yes, it’s easy for opponents of payday lending to find someone who has not done well with payday lending, but it’s equally true that lots of people who have needed them have benefited,” Rosenblum says, “But we need many others to say, ‘Payday lending has been a life saver for me.’

And those people can put a human face on the issue.  “Empirical studies are helpful — for example, I just saw one that showed favorable rates of foreclosure in states with payday lending as opposed to states without it — but I think it’s really critical to get people who need payday lending and use it well and responsibly to tell their stories,” says Rosenblum. “I’m a big advocate of getting people to share their experiences.”

Wolfberg says his company is far different from the image many critics seem to envision. PLS uses what Wolfberg calls the “Wal-Mart model.” Yes, that includes greeters. “Take a look at the stores in our sweet spots — Texas, California, Indianapolis, for instance — our stores are free-standing and mainly on Main.” Staffers wear uniforms, color-coded by personnel, and wear name tags.

Some lenders have established financial educational programs for short-term borrowers. CheckSmart’s Grieser sees such financial literacy campaigns as opportunities to create goodwill.

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