Friday, March 4, 2005 | 5:10 a.m.
These are steps the Nevada Legislature could approve that would better protect Nevada consumers who use payday loans:
Las Vegas resident Annika Gonzales, a 33-year-old prison-crew supervisor, needed money fast after falling behind on a power bill just before Christmas in 2003.
So she went to a payday lender, where she borrowed $150 with a promise that she would pay it back plus a $15 finance charge within two weeks.
When Gonzales could pay only the $15 finance charge but none of the principal after two weeks, she kept rolling the loan over with a new $15 finance charge each time. After five rollovers that lasted 10 additional weeks, she had paid $90 total in finance charges without reducing any of the $150 principal.
Eventually, the lender sued her last year for $1,500, an amount that included attorney's fees, court costs and interest. After the lender began garnishing her wages, she went to Clark County Legal Services and had the judgment reduced to $220. She now thinks of payday loans as "rip-offs."
"I probably should have contacted Nevada Power sooner to make a payment arrangement or managed my money more carefully," Gonzales said.
The payday lending industry is enjoying rapid growth in Nevada, and encounters such as those experienced by Gonzales -- what critics call the "debt treadmill" -- are becoming more common.
Payday loans are easy to obtain. No credit checks are necessary. All one needs is proof of a job or receiving Social Security and an active checking account. The borrower typically writes a post-dated check and repays the loan either with cash or by having the lender cash the check when the loan is due.
Critics refer to payday lenders as "legalized loan sharks." The amount Gonzales was charged equates to an annualized interest rate of 390 percent, about 20 times that of a credit card.
Critics also say that enough alternatives are available that consumers who feel they have no place else to turn do not have to get stuck with high-interest payday loans that can make their debt problems even worse.
But that hasn't stopped many people, especially those who see the loans as a last chance. With the convenience and speed with which people can get money, the business is booming.
Nevada is the perfect environment for a payday lender. The law allows lenders to operate with few regulations, and there's a ready-made clientele of service industry workers, many of whom live paycheck to paycheck.
Nevada is one of only 10 states that doesn't cap the amount of finance charges a payday lender can charge, according to the Consumer Federation of America, a Washington consumer watchdog.
In the other 26 states where payday lending is legal, there are finance charge caps that range from $11.87 per $100 loaned in Texas (an annualized rate of 309 percent) to $75 per $100 loaned in Missouri (an annualized rate of 1,980 percent), both based on a two-week loan.
Most other states do not allow the principal of a loan to exceed $500. In Nevada, it is possible to borrow much more per loan as long as the loan does not exceed one-third of the borrower's expected monthly income.
Florida and Oklahoma have payday loan databases to limit the number of loans people can have at one time and have a mandatory cooling-off period between loans. Consumers in Nevada can carry as many loans as they like from different lenders. There is no cooling-off period.
The Nevada Legislature is expected to try to address the issue of payday loans this session. There are at least three proposals -- two from assemblymen and one from the Nevada Financial Institutions Division -- that are aimed at better regulating the payday lending industry.
Critics, including Assembly Majority Leader Barbara Buckley, D-Las Vegas, say the industry preys on the poor and the least likely to be able to pay off the loans.
"They make most of their money off of people whose financial situations are desperate," said Buckley, who, as the head of Clark County Legal Services, has battled the industry over judgments and finance charges. "They can't pay the loans back, and the companies know it. It becomes a predatory way of creating a debt treadmill for the working class who have nobody else to fall back on.
"We have all of these service-industry jobs and all of these people without a safety net, without relatives to loan them the money. So the payday loan companies prey on these folks."
Industry representatives, however, say that most of their customers are middle class and gainfully employed. The lenders say their services are easy to use, and that customers come to them because they have found it increasingly difficult to get short-term loans from banks.
"Calling us legalized loan sharks is such a mischaracterization," said Jim Marchesi, owner of the Check City payday loan chain and president of the Nevada Financial Services Association, a lobby group for payday lenders.
"We provide a loan product that consumers choose to use. There is huge demand for the product. We've become the bridge lender for people who want to borrow money for a short time.
"The APR (annual percentage rate) is a terrible yardstick to use because no one keeps these loans out for a whole year."
Payday loans became popular in the early 1990s and have mushroomed in Nevada since the late 1990s. There are now more than 300 state-registered payday lending stores in Nevada, and one owner believes 125,000 Nevadans at any one time take out payday loans.
Lenders justify the high finance charges by pointing to the risk and cost of making the loans. And they say they're no worse than banks that charge for bounced checks, with an annual interest rate that can exceed what a payday lender charges.
Most importantly, payday lenders say, if they closed shop, they'd be replaced by illegal loan sharks.
But consumer groups say there's little difference, especially in Nevada, which has among the nation's loosest regulations.
"It's bad for the community as a whole if a significant number of consumers are struggling to pay off these loans instead of paying other bills, diverting all that money to payday lenders instead of putting food on the table," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America in Washington.
"This industry is doing just fine in other states that have a lot more restrictions than Nevada. The argument that putting more restrictions on them will put them out of business is untrue."
And some critics say that consumers can survive without payday loans, pointing to the 14 states where payday lending is either outlawed or severely restricted.
No payday lenders have bothered to get a license in Massachusetts because of that state's 23 percent cap on annualized interest rates on loans of up to $6,000.
Instead, the Massachusetts Office of Consumer Affairs and Business Regulation has advised consumers who need short-term emergency loans in that state to look to other sources.
The office suggests that a consumer: borrow money from friends or relatives; obtain cash advances on credit cards; get short-term loans from banks or credit unions; arrange for cash advances from employers; see if they can delay paying a noninterest bill; make pay arrangements with utility providers; ask creditors for more time to pay bills; or contact an accredited consumer credit-counseling agency for help in getting out of debt.
"Getting involved in payday loans will only worsen things for people," Chris Goetcheus, spokesman for the Massachusetts agency, said. "The rollovers are how these people make money.
"The consumers in the most desperate situation should sit down with an accredited counselor. They look at cutting down your expenses so that you can save money. The goal is to minimize your expenses to meet your income."
Finance charges
Nevada once had a usury law that limited finance charges for consumer loans. But that law was eliminated by the Legislature in 1984 to induce Citicorp to open a credit-card processing center in Las Vegas. To bring a new industry and the corresponding jobs to Nevada, lawmakers granted Citicorp's wish by lifting the ceiling on finance-charge interest rates.
Former Nevada Gov. and U.S. Sen. Richard Bryan, who governed the state then and met with Citicorp executives in New York, said eliminating the usury law was the "quid pro quo" Citicorp demanded to move to Nevada.
"They wanted the flexibility with consumer loans in case market conditions changed," Bryan said.
But without a usury law Nevada payday loan customers are worse off than consumers elsewhere, Fox said.
"They end up paying more in Nevada than consumers in the same situation who live in another state," Fox said.
Assemblywoman Chris Giunchigliani, D-Las Vegas, would like to revive the usury law, setting it at the prime rate (now 5.5 percent) plus 2 percent for consumer loans, including payday loans. She said that rate is similar to Nevada's former law.
"They shouldn't be able to profit on the backs of the middle class and poor people who cannot afford to pay," Giunchigliani said.
She can expect a stiff battle from both payday lenders and big financial institutions such as credit-card companies. Credit-card companies regularly charge an 18 percent to 25 percent annual interest rate. Payday lenders say a usury law would drive them out of business.
Because of stiff competition, Marchesi said local payday lenders have kept finance charges lower than in many states where the cap on finance charges is higher than Nevada's market rate.
"I believe the market should determine what the rate is," he said. "A cap makes no sense at all."
But the AARP, responding to the growing number of seniors who use payday loans, urges all states to implement laws that limit annualized interest rates on small loans to 36 percent.
"We need to have payday loans for people who don't have credit, but there should not be abusive practices," said Barry Gold, AARP Nevada's associate state director for advocacy. "The predatory practices of some payday lenders are intended to get people in debt.
"Two weeks to pay off a loan is not enough time for most people, and there needs to be more disclosure of the fees."
A study of short-term, high-interest lenders that was released in January by the nonprofit Nevada Fair Housing Center found that the median payday loan finance charge in Nevada is $17 for every $100 borrowed, an annualized interest rate of 443.2 percent.
But the center, which provides housing services and financial programs for lower-income clients, also found that some lenders in Nevada have finance charges of as much as $50 per $100 loan, which translates to an annualized interest rate of 1,303.6 percent.
"The way the loans are structured it sets up a situation where a person makes interest payments without reducing the principal," Jason Jarniven, a researcher for the housing center, said. "It sets up chronic repeat borrowing."
Money needs
He would get no argument from retired beauty salon owner and manager Maureen Coulter, who once managed salons on the Strip. After falling ill four years ago and draining her savings, Coulter ended up on Social Security disability. She got her first payday loan in 2003.
"I had some bills due, and I needed to buy Christmas gifts so I needed money," Coulter said. "I figured the banks wouldn't loan me money and I saw ads on TV for these lenders. You see two or three on every block.
"All I needed was my driver's license, a check and proof of my income, which was a printout from Social Security. They were more than happy to give me money."
Coulter, 61, went to three payday lenders. She borrowed $340 per month, with $60 in finance charges, from one lender. After four months of rollovers she had paid $240 in interest without reducing the principal.
From two other lenders she borrowed $250 each plus a $50 finance charge per month, but after four months of rollovers she had paid $250 each to both lenders in finance charges without reducing any of the principal. She was told she was paying an annualized interest rate of 235.5 percent.
One of the lenders from whom she had borrowed $250 a month wound up suing her for $487 for defaulting on the loan. But she was able to get that reduced to $200 when she went to Las Vegas Justice Court, accompanied by a senior advocate that she knows. When the lender appealed the judge's ruling, Coulter went to Clark County Legal Services for help and the lender dropped the appeal.
Coulter vows never to use another lender.
"They're horrible," she said. "Yes, it was my fault for dealing with them. But you're better off going to an illegal loan shark because at least you know you're dealing with a shark.
"The banks won't give people like me loans because we're not working and have no assets. But if I have to, I will just do without. You just learn to live without certain things."
Some payday loan customers report more positive experiences.
Las Vegas resident Victor Laird, a 47-year-old operations manager for a delivery service, first became a customer of Cash Cow Corp. in 1998 when his father was dying of cancer and bills were piling up.
"The most I had to borrow was $600 when I had to take my family to the funeral in San Francisco," Laird said.
Living from paycheck to paycheck, he is a repeat customer.
"I'm lucky they are there," Laird said. "If I had to pick the things I like most about them I would say the convenience and the ease with which I can go in without being bogged down with multiple credit checks.
"I use it for emergencies like paying utility bills, especially during the summertime when the bills are a lot higher. If it's Monday and a bill is due and you don't get paid until Friday, what can you do?"
But Michele Johnson sees the financial problems payday lending can cause borrowers in her capacity as president and chief executive of Consumer Credit Counseling Services of Southern Nevada. The counseling service helps individuals with mounting debt.
"The speed with which you can get $300 is much quicker than applying for a new credit card," Johnson said of payday lenders. "But it's very short-sighted borrowing. We're not doing a good job educating consumers and they have to take more responsibility for their own actions."
Payday growth
"Fringe banking" became popular in the 1960s when loan companies began sprouting around military bases. By the 1980s check-cashing services were on the Strip and in lower-income neighborhoods. They cash checks for roughly 1 percent to 10 percent of the face value of the check. Many customers are unemployed, don't have checking accounts or don't trust banks.
In the 1990s payday lenders came to Nevada, seeking to satisfy the growing demand for convenient short-term loans from consumers who had jobs or Social Security and bank accounts, but also had poor credit.
In many cases the check cashers that were already here added payday loans to their arsenal, giving them a broader base of customers to serve.
What payday lenders offer is speed and convenience. The lines at the teller windows are usually short and the customer has his cash within minutes.
Frank (not his real name) and his wife, regular customers of Check City in Las Vegas and parents of two small children, take out 20 loans a year. They borrow $300 to $500 at a time and usually pay off the loans in two weeks.
"We use the cash mainly for incidentals," Frank, a business consultant, said. "I'm out of town a lot, and my wife doesn't always have access to credit. My wife was in a situation once where she needed money for formula."
But there is also a stigma attached to payday loans, so much so that many customers don't want their employers to know that they frequent payday lenders. Other customers don't want their spouses to know.
Karen (not her real name) is an example of a borrower who doesn't want her employer to know about her payday lending. The 38-year-old Las Vegas pharmacy technician didn't have the money to pay for the alternator that needed to be replaced in her car.
So she went to a payday lender and borrowed $500 plus $150 in finance charges, which she was to repay in two weeks. After rolling over the loan five times for a total of 10 weeks beyond the expiration of her initial loan, Karen had paid $900 in finance charges without paying off any of the principal.
"I was so angry with myself," Karen said. "I wondered how I was going to get myself out of this. I know a nurse who makes $50 an hour and I was surprised to see her in the same payday loan place I was in."
Karen went to Consumer Credit Counseling Services for help rearranging her debt. The payment plan enabled her to repay the lender $80 per pay period over nine months. Her advice to individuals contemplating a payday loan: "Just don't do it. It is the worst rip-off."
"Try to talk to the people you owe and make arrangements with them," she said. "I learned to work overtime so I don't live from paycheck to paycheck now."
Popular practice
Payday lending has become so popular in Nevada, according to the housing center study, that the state has far more state-registered payday lending and check-cashing stores per 10,000 residents, 1.91, than neighboring Utah (0.56), California (0.68) Oregon (0.72) and Arizona (1.41).
The housing center found that more than 60 percent of the high-interest stores in Nevada are in neighborhoods with below-average household income. In Clark County the median household income is $44,616.
Cash Cow Corp. President David Cowles said his clientele isn't the working poor. He said he has more customers in their 30s and in the $2,000 to $2,199 net monthly income bracket than in any other age and income category.
In a 2001 analysis of 4,593 loans his company processed, Cowles said he found that 3,244, or 70.6 percent, were paid off within the initial loan period. An additional 646 loans, or 14.1 percent, were paid back after one extension. The remaining 15.3 percent required at least two extensions to be paid off.
Cowles believes anecdotally that most of his customers find payday loans to be "convenient and cost effective." He estimated that less than 10 percent are "desperate people who don't know how to manage finances."
"They often have gambling, drug or other problems and will take out multiple loans from numerous lenders until their house of cards crumbles," he said. "Those are the people used as examples by so-called consumer protection groups. They shouldn't be borrowing money in the first place."
And he also estimated that a small percentage of borrowers are "crooks."
"They'll lie on their loan application," he said. "They'll get a loan and then the next day they'll stop payment on the check or close their checking account."
Payday lenders insist that their clientele is mostly middle class. A 2002 study commissioned by the Community Financial Services Association of America -- an Alexandria, Va., payday loan trade group, found that the median income of a borrower was $34,764 and that the average age was 38.
That study found that 56 percent of the borrowers renewed their loans at least once, but that 68 percent of the renewals did not extend beyond four weeks of the expiration of the original loan.
"We don't encourage rollovers at all," Steven Schlein, a spokesman for the trade association, said. "Most of our customers pay us back on time. It's also very transitional. Most people use it only for a short period in their life."
Critics dispute the numbers and say that the industry has stretched the definition of middle class.
A December 2003 survey by the Center for Responsible Lending of Durham, N.C., a nonprofit critic of predatory lending, found that 5 million American payday loan borrowers are caught in a "debt trap" each year.
That study also found that 31 percent of the borrowers take out at least 12 loans annually, and that only 1 percent of the loans are for emergencies.
"People with long-term financial problems need to meet with a credit counselor," Fox said. "If you take out a payday loan, what are you going to do in two weeks when you aren't making any more money and need to pay the loan back?
"Payday loans don't solve your problem. They add up to whopping finance charges. The best thing is to deal directly with whatever is causing the financial crisis. You can ask creditors for more time or ask utilities to negotiate a payment plan."
Payday lenders in Southern Nevada are a mix of nationwide chain stores and mom-and-pop businesses.
A Web site run by Trihouse Enterprises Inc. of Las Vegas on behalf of payday lenders states that investors in payday loan companies can earn returns of 2.5 percent a month.
The payday lending business has become so lucrative, with 22,000 stores now operating nationwide, that some of the largest chains are listed on the New York Stock Exchange or on Nasdaq. Many of the nation's largest banks have also financed the debt of payday lenders.
One chain with stores in Southern Nevada, ACE Cash Express Inc. of Irving, Texas, has 1,301 stores nationwide and is listed on Nasdaq. For the first half of fiscal 2005 the company earned $10.9 million, up from $6.7 million in the first half of fiscal 2004. Its debt has been financed by Bank of America, Wells Fargo Bank, U.S. Bank and J.P. Morgan Chase & Co.
Loose regulations
In 1997 the Nevada Legislature first tried to corral check cashers and payday lenders by requiring them to register with the financial institutions division. But the law is toothless, according to state regulators, lawmakers and payday lenders.
Cowles of Cash Cow has been one of the law's biggest critics, and even produced a detailed report on why he thought the law was so bad.
"The language is ambiguous," Cowles said. "It talks about what if a customer defaults but it doesn't define 'default.' There is a $50,000 surety bond required. For what? And (the law, Nevada Revised Statutes Chapter) 604 is not protecting consumers in any way. Some of the things are written so poorly that companies simply disregard them."
The law does not apply to numerous payday lenders, including pawnbrokers and a person who "does not hold himself out as a check-cashing service," even if they advertise the loans.
To address that situation Buckley is proposing a new law covering all short-term lenders, including those with Web sites, that charge annualized interest of more than 40 percent on loans of less than one year.
They would not be allowed in most cases to make a loan that exceeds 25 percent of the borrower's gross income, must accept partial payments at any time without additional charges, and must allow customers in default to repay debts over two months with at least three payments.
Lenders also could not garnish wages of individuals in the armed forces or sue for triple damages under the state's bad check law. And lenders would be liable to the customer for actual and punitive damages as well as state penalties of $1,000 for each violation of the law.
"The way it is right now in Nevada it is so bad we'd be better off having payday loans banned," Buckley said. "If it was cleaned up, I still wouldn't be its biggest fan but I wouldn't be its loudest critic either if these abuses were stopped."
Carol Tidd, commissioner of the financial institutions division, which oversees short-term lenders, is proposing even tougher penalties -- $10,000 -- for violations. Marchesi's association, which will represent many of Nevada's payday lenders this legislative session, supports Tidd's proposed penalty because he said legitimate lenders would follow the law.
One of the toughest problems to address has to do with inconsistencies in the way payday lenders are licensed by a city or county and registered with the state. The purpose of licensing and registration is to hold companies accountable to consumers and to government regulators. But the industry has grown so rapidly that it has been difficult for the regulators to do their jobs. The county, Las Vegas, Henderson and North Las Vegas have business licenses for a combined 112 companies operating 255 check-cashing/ payday loan branches.
Some payday lenders licensed with a city or county are not registered with the financial institutions division, and vice versa. There are payday lenders with active business licenses that state records show to be closed. And there are payday lenders who go by one name at the state level and another name in the city or county.
Tidd proposes tightening that up and making companies register under one name, and she wants to coordinate efforts with city and county licensing departments.
Amended law
The Legislature amended the law in 1999 by restricting loans to one-third of the borrower's expected monthly net income. Lawmakers also agreed that a loan should not extend more than 10 weeks beyond its original expiration date.
But the rollover provision is full of loopholes. It does not prevent a consumer from obtaining multiple loans from different lenders as was the case with Richard Scutti, a 57-year-old Las Vegas security guard who said he got behind on bills because of a gambling problem and health issues.
At one point he owed seven lenders $4,500, more than half of which was interest, court costs and attorneys' fees after he got sued.
"It was a friend who got me into it," Scutti said. "He showed me how easy it was. I used to pay them off right away at first. But every time I lost money gambling I'd go back to them. I figured if I could borrow from one, I could go to another one. I'd start with two or three loans at a time.
"They would be on the phone all the time. They would say, 'Why don't you hock your TV or VCR or bicycle.' They would say, 'If you don't come down and make a payment, we will sue you.' "
After he was sued, $3,200 of his wages were garnished. He got that amount reduced to $2,600 after going to Clark County Legal Services, climbed out of debt by working extra shifts and began to control his gambling problem. Scutti said he no longer needs payday loans.
"If someone gambles, I would advise that they borrow money from friends or family but not loan companies because the interest is so high," Scutti said.
Another loophole in the rollover provision is that it can start anew every few weeks if the lender simply has the customer rip up the original check and write a new one. That's what happened with former customer Coulter.
Her first loan was for $250 plus a $50 finance charge, which she was to pay back within a month. She could only pay the finance charge when the loan came due so for five months straight she paid a $50 finance charge but not the principal. In five months she accumulated $250 in finance charges, equal to the initial loan amount.
"After the first month they would shred the check and then I would write another check for $300," Coulter said. "So it looks like you're getting another loan but you're not."
Many of the nation's biggest players in payday loans have set up shop in Southern Nevada. They include:
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