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					    Community Financial Services
        Association of America’s
Analysis of the Payday Advance Industry




                           2001

   CFSA, 2025 M Street NW, Suite 800, Washington, DC 20036
 Telephone: 202.367.1142 Fax: 202.3672142 Web: www.cfsa.net
ii
 Payday Advance Services:
  The “Financial Taxi” of
  America’s Middle-Class


Community Financial Services Association of America’s
     Analysis of the Payday Advance Industry




                         iii
                                                 Table of Contents

                                                                                                                Page Number

I.     Introduction ............................................................................................................ 1

II.    Payday advance customers use the service for a variety of economically-sound
       reasons ..................................................................................................................... 2

       A.        Payday advance services fill a market niche abandoned by
                 traditional lenders ....................................................................................... 3

       B.        Payday advance services are fast, convenient, and professional ............ 5

       C.        Payday advance services cost less than dishonored check fees,
                 late fees, and other contractual penalties faced by consumers ............... 7

       D.        Payday advance services are more dignified than charity, more
                 accessible than checking account overdraft protection, and more
                 desirable to consumers than credit cards, pawns, and
                 traditional small loans ............................................................................... 18

III.   Payday advance customers are middle-class, middle-aged, and
       informed working people who are satisfied with the service ........................... 21

       A.        Payday advance customers represent the heart of America’s
                 working middle-class ................................................................................. 22

       B.        Payday advance customers understand the cost of the
                 service and how to use it responsibly ....................................................... 27

       C.        Payday advance customers demonstrate a high level of
                 satisfaction with the service ...................................................................... 29

IV.    Consumers use payday advance services for small, short-term cash
       needs and are not subject to abusive collection practices ................................. 31

       A.        Existing payday advance laws provide extensive regulatory
                 oversight of the industry ........................................................................... 31

       B.        Existing payday advance laws prohibit or limit rollovers ..................... 35



                                                               iv
       C.        Existing payday advance laws (i) cap the amount of payday
                 advance debt a consumer can incur and (ii) prohibit or limit
                 multiple, concurrently-outstanding transactions. .......................................... 38

       D.        Existing payday advance laws prevent abusive collection
                 practices ...................................................................................................... 41

       E.        CFSA’s Best Practices limit rollovers where not otherwise
                 prohibited or limited by applicable law .................................................. 43

       F.        CFSA’s Best Practices prohibit abusive collection practices
                 where not otherwise prohibited by applicable law ................................. 44

       G.        CFSA’s Best Practices ensure responsible underwriting
                 practices ...................................................................................................... 45

V.     Consumers evaluate the price of payday advance services based on
       the dollar cost, not the annual percentage rate.................................................. 47

       A.        Annual percentage rate is an inappropriate “measuring stick” with
                 which to fairly evaluate the cost of payday advance services ................ 48

       B.        Payday advance laws generally limit the cost of the product
                 based on fixed dollar amounts rather than based on an annual
                 interest rate cap ......................................................................................... 52

VI.    The “most favored lender” doctrine applies to the payday advance
       industry .................................................................................................................. 57

VII.   Conclusion ............................................................................................................. 61




                                                               v
I.        Introduction.

          Payday advance services, also known as “payday loans,” “cash advances,” or “deferred

presentment services,” represent one of the fastest-growing segments of the consumer finance

industry. Over the past decade, more than thirty states have created or maintained a regulatory

environment that satisfies the robust consumer demand for payday advance services. These

states have balanced the interests of the industry with substantive consumer protections that

ensure responsible and informed use of the product. As a result, millions of satisfied consumers

have enjoyed the convenience and economic benefits of payday advance services without

complaint.

          Just as commuters understand that taxi services are valuable and convenient when used

for short-term travel needs but are inefficient for long-term travel needs, consumers understand

that payday advance services are economical and convenient when used for short-term cash

needs but are inappropriate for long-term cash needs. To America‟s middle-class, the payday

advance product serves as a dignified and cost-efficient “financial taxi” to get from one payday

to another when faced with an unexpected cash need.                                 These consumers use the product

responsibly and for the purpose for which it was intended, namely, to solve temporary cash-flow

problems by bridging the gap between paydays.

          On December 15, 1999, U.S. Senator Joseph Lieberman convened a Forum on Payday

Lending (the “Forum”) attended primarily by critics of the payday advance industry.

Community Financial Services Association of America (“CFSA”),1 the payday advance

industry‟s national trade association, appreciates Senator Lieberman‟s attention to the issues


1
 CFSA represents a majority of the estimated 9,000 payday advance locations currently operating in the United States. CFSA (i)
promulgates and enforces its Best Practices, a self-policed code of conduct designed to ensure responsible industry practices; (ii)
endorses efforts by state legislatures to enact its Model Legislation, which codifies its Best Practices and balances the interests of
the industry with those of consumers; and (iii) educates the public about the important role of payday advance services in the
broader spectrum of consumer financial services. CFSA invites interested persons to contact its national headquarters located at
1200 19th Street, N.W., Suite 300, Washington, D.C. 20036, phone number (202) 429-5165, or visit its website at www.cfsa.net.
facing the industry but believes that much of the testimony provided at the Forum by critics of

the industry was factually inaccurate, one-sided, and potentially damaging to lawmakers‟

continuing efforts to evaluate and regulate the industry in an informed, fair, and thoughtful

manner. CFSA has prepared this paper in an effort to provide lawmakers and the public the facts

about the payday advance industry and to dispel many of the myths 2 about the industry which

were perpetuated at the Forum.

II.       Payday advance customers use the service for a variety of economically-sound
          reasons.

          Consumer demand for payday advance services increased during the mid and late-1990s

concomitant with the withdrawal of traditional lenders from the small, short-term loan market

and the increase in the cost of alternative sources of short-term credit, such as returned check

charges and late charges. Consumers responded to these trends by demanding a distinct 3 type of

consumer finance product: payday advance services. Because the trends that spawned the




2
 The myths surrounding the industry distill to three basic criticisms, namely, that payday advance services “[i] are extremely
expensive for borrowers, [ii] lead to perpetual debt through loan roll-overs, and [iii] foster abusive collection practices.”
Consumer Federation of America, December 15, 1999, Written Testimony Submitted to the Forum, Page 2.

3
 Consumer advocates compare payday advance services to “salary-lending” which took place between the late 1800s and World
War II. See Consumer Federation of America, December 15, 1999, Written Testimony Submitted to the Forum, Pages 3-5.
CFSA certainly agrees that consumer demand for short-term credit has existed for centuries. See, e.g., Stephens Inc., April 1,
1999, “The Emerging Business of Deferred Presentment,” Page 3 (“The „payday advance,‟ or the more genteel „deferred
presentment‟ product, has essentially existed in some form since the dawn of money as value for services.”) However, one
should temper any claim that the modern-day payday advance industry is the progeny of the pre-World War II “salary lending”
industry with the understanding that the two products are distinguishable in several important ways.

Whereas “salary-lenders” apparently accepted formal wage assignments from their customers and secured their so-called “midget
loans” with chattel mortgages on their customers‟ household goods (CFA Written Testimony, Page 3), payday advance operators
provide a completely unsecured transaction. Whereas “salary-lenders” were apparently permitted utilize the criminal justice
system to collect defaulted debts (CFA Written Testimony, Page 4), CFSA members have voluntarily pledged not to use or
threaten to use criminal process as a collection tool. Finally, whereas yesterday‟s “salary-lenders” apparently encouraged
rollovers (defined in Section IV(B)) in an effort to increase profitability (CFA Written Testimony, Page 4), today‟s payday
advance operators are statutorily prohibited in most states from allowing customers to rollover debts and CFSA members have
voluntarily committed in the balance of the states in which they operate to limit the number of such rollovers to four.



                                                                2
payday advance industry show no signs of abating, industry analysts expect market demand for

the product to remain strong.4

            A.        Payday advance services fill a market niche abandoned by traditional
                      lenders.

            Traditional lenders have elected during the past decade to abandon the small, short-term

loan market. As one payday advance industry analyst observed, “[c]ommercial banks generally

do not make unsecured loans for less than $3,000 to $5,000 and then only to high credit quality

consumers.”5 This decision reflects the larger trend among depository institutions of under-

serving particular market segments perceived as unprofitable.6

            The fixed transactional costs of traditional lenders are higher than those of payday

advance licensees because the infrastructure of traditional lenders is designed to originate loans

much larger than a few hundred dollars and much longer than a few weeks. Traditional lenders

have been unable to reduce their fixed transactional costs in an amount sufficient for them to

profitably offer small, short-term loans and, as a result, have abandoned the market for such

loans. The following table7 surveys the small loan products offered by some traditional lenders




4
 In April of 1999, an industry analyst observed: “Over the past four years we have seen extraordinary growth in this sector with
over 6,000 storefronts now offering short-term access to funds through the deferred deposit or „payday advance‟ business.”
Stephens Inc., April 1, 1999, “The Emerging Business of Deferred Presentment,” Page 1. “We believe that the size of the market
at maturity could be 24,000 stores, generating $6 billion in fees annually.” Id. In September of 1999, the same industry analyst
continued: “We believe that the short-term loan or payday advance business has established itself and is an evolving credit form
that is here to stay,” noting that the number of storefronts offering short-term loans has grown to 10,000. Stephens Inc.,
September 28, 1999, “The Developing „Payday Advance‟ Business,” Page 1.

5
    Stephens Inc., April 1, 1999,“The Emerging Business of Deferred Presentment,” Pages 4-5.

6
 “After years of casting a wide net to lure as many consumers as possible, banks and many other industries are becoming
increasingly selective, limiting their hunt to „profitable‟ customers and doing away with loss-leaders. Wielding ever-more-
powerful computer systems, they are aggressively mining their vast databases to weed out losers, or at least charge them more,
and target the best customers for pampering.” Wall Street Journal, January 7, 1999, “Alienating Customers Isn‟t Always a Bad
Idea, Many Firms Discover.” “For banks, a typical „bad‟ customer makes frequent branch visits, keeps less than $1,000 in the
                                                         Id.

7
    This table reflects a survey conducted by a national payday advance company in January of 2000.


                                                                 3
and demonstrates that such products do not satisfy consumers‟ demand for small, short-term,

closed-ended, and unsecured loans.

                                            Traditional Lenders – Small Loans
                 Lender                                               Small Loan Conditions
    Traditional Lender 1                  · Customer must provide personal property as collateral
                                          · Lender may require another adult to co-sign
    Traditional Lender 2                  · Minimum loan amount is $2,000
    Traditional Lender 3                  · Minimum loan amount is $2,000
                                          · $60 processing fee
    Traditional Lender 4                  · Lender does not provide signature loans
    Traditional Lender 5                  · Customer must provide personal property as collateral

           Even consumer advocates concede that the payday advance industry “fill[s] a void in the

marketplace.”8 The National Consumer Law Center (“NCLC”), for instance, recognizes that “a

large number of consumers” who have been displaced by traditional lenders are “without

sufficient credit card limits or bank overdraft protection to meet their needs for relatively small

unsecured loans….” The NCLC states:

           Many mainstream institutions prefer not to write small loans because, while the
           return on a $5,000 loan is greater than if only $500 is borrowed, the originating
           and servicing costs are not significantly different. Many of the national finance
           companies, which were initially founded to meet precisely this credit need, have
           moved up and out of this type of small lending. As a result, the availability of
           small-sum, short-term credit has been severely curtailed. Much of the market for
           small unsecured loans today has been replaced by the use of checking account
           overdraft loans and credit cards, even for relatively lower income households.
           This still leaves a large number of consumers without sufficient credit card limits
           or bank overdraft protection to meet their needs for relatively small unsecured
           loans, and who no longer have access to traditional sources of small loans.9
           (Emphasis added).


8
 “Katherine Williams, president of Consumer Credit Counseling of Greater Chicago, concurs, saying that many banks have
stopped making small loans as they have merged and gotten bigger. „The payday-loan stores fill a void in the marketplace that
the banks and financial institutions have stepped away from – very small, uncollateralized loans,‟ Williams said.” (Emphasis
added). Chicago Tribune, November 18, 1999, “Payday Loans Hit Pay Dirt.”

9
    National Consumer Law Center, 1999 Supplement, “The Cost of Credit: Regulation and Legal Challenges,” Page 74.



                                                               4
            The consolidation of the banking industry, a trend that will accelerate with the recent

enactment of the Gramm-Leach-Bliley Act,10 further deprives consumers of access to traditional

sources of small loans. Such consolidation, and the attendant closing of redundant branches, has

resulted in the absence of “brick and mortar” financial services storefronts in many areas of the

country. As one industry analyst observed:

            Consumers can go to a [payday advance] store at hours that are significantly
            longer than banks and get an advance. Also, with the closure of many bank
            branches, many banks that could make a small loan are not geographically
            convenient for the consumer.11

Thus, the payday advance industry fills not only the marketplace void created by traditional

lenders‟ decision to abandon the small, short-term loan market but also the geographical void

resulting from their decision to withdraw from “brick and mortar” locations convenient to

middle-class consumers.

            B.        Payday advance services are fast, convenient, and professional.

            In a payday advance transaction, the licensee cashes a personal check tendered by the

customer and agrees in writing to defer presentment of that check until the customer‟s next

payday, which is typically ten (10) to thirty (30) days later. The amount of the customer's check

represents the sum of the Finance Charge12 paid to the licensee and the cash proceeds distributed




10
  The Gramm-Leach-Bliley Act, enacted November 12, 1999, repeals Depression-era banking laws that restricted the affiliation
of banks and securities firms and creates a new type of entity under federal banking law, a “financial holding company,” that can
engage in a wide variety of statutorily-defined activities. These activities include insurance and securities underwriting and
agency activity and merchant banking and insurance company portfolio investment activity. See U.S. Senator Phil Gramm,
November 12, 1999, “Gramm‟s Statement at Signing Ceremony for Gramm-Leach-Bliley Act.”

11
     Stephens Inc., April 1, 1999, “The Emerging Business of Deferred Presentment,” Page 4.

12
  The term “Finance Charge,” as used herein, shall have the same meaning ascribed to it in the Federal Truth-In-Lending Act
(“TILA”), 15 U.S.C. 1601, et seq., and the Federal Reserve Board regulations promulgated thereunder (“Regulation Z”), 12 CFR
226, et seq.



                                                                 5
to the customer (i.e., the Amount Financed).13 Thus, for example, if the customer writes a $115

personal check in order to receive $100 of transaction proceeds, the Amount Financed is $100,

the Finance Charge is $15, and the amount of the customer‟s check is $115.

            The streamlined underwriting process consists primarily of verifying that the applicant

has an active bank account and a steady source of income.14 Payday advance companies do not

access an applicant‟s credit report, but many companies query a consumer information database

that reports, among other things, whether the applicant currently has an outstanding transaction

with another payday advance company that also subscribes to the database.

            The industry‟s willingness to provide payday advances to applicants despite their

inadequate or tarnished credit history15 allows the industry to help many so-called “subprime”

applicants whom traditional lenders would otherwise decline based on derogatory credit report

information.          More importantly, the payday advance industry serves the increasingly large

contingent of consumers with good credit who have been displaced by commercial “prime”

lenders‟ decision to abandon the small, short-term loan market and to withdraw from

geographical areas convenient to middle-class consumers.

            In the event the licensee approves the applicant for a payday advance, the licensee

provides the applicant all disclosures required by the federal Truth-In-Lending Act (“TILA”),

including the Annual Percentage Rate (“APR”)16 and the Finance Charge. The Appendix hereto


13
     The term “Amount Financed,” as used herein, shall have the same meaning ascribed to it in TILA and Regulation Z.

14
  “A customer is generally required to provide one or two months‟ recent bank statements, a current pay stub, and provide current
proof of residence in order to receive a loan. The Company should then be able to know where to find the person, where he
works, and how he has handled his checking account in the past few weeks.” Stephens Inc., April 1, 1999, “The Emerging
Business of Deferred Presentment,” Page 3.

15
  More than 31% of consumers of all races with annual salaries of less than $45,000 have bad credit. The figure is more than
22% for those making $45,000 - $64,999 per year, and more than 20% for consumers in the $65,000 - $75,000 per annum income
range. USA Today, September 21, 1999, “Credit Problems Plague Blacks”

16
     The term “ Annual Percentage Rate,” as used herein, shall have the same meaning ascribed to it in TILA and Regulation Z.


                                                                 6
contains a sample payday advance agreement setting forth, among other items of information,

the required TILA disclosures.                  Upon the applicant‟s review and approval of the TILA

disclosures and the terms of the payday advance agreement, the customer signs the agreement

and receives the cash proceeds from the transaction. The parties generally accomplish the entire

application, underwriting, and closing process in less than fifteen (15) minutes.

          C. Payday advance services cost less than dishonored check fees, late fees, and other
             contractual penalties faced by consumers.

          Historically, many consumers have paid debts late or with dishonored checks as a way to,

in effect, secure small amounts of credit for a short period of time.17 During the past decade,

however, these practices have become prohibitively expensive. The increase in returned check

charges and late charges reflects the larger trend among depository institutions18 and credit card

companies19 of placing greater reliance on service fees as a component of earnings. Such fee

increases also reflect traditional lenders‟ recognition that “subprime” borrowers represent an

elevated credit risk.20




17
  See, e.g., Charlotte Observer, August 9, 1999, “Farewell, Float Time” (characterizing the “float time” of paper checks as “one
of consumers‟ best friends”).

18
  “Noninterest service fees – for bounced checks, certified checks, etc. – now account for a third of industry profits, totaling
$18.5 billion.” Time, April 27, 1998, “Is Bigger Really Better?” See also Chicago Tribune, February 8, 1999, “Bank Fees Here
to Stay” (“Over the last decade or so, banks have been quietly executing a major shift in the way they price their products. As
nonbank competitors have stolen some of their most lucrative business, they‟ve turned to fees as a source of income – a source
that‟s growing dramatically”) and Bank Rate Monitor, 1998, “Survey of Checking Account and ATM Pricing,” Page 21 (“... NSF
fees continue to be a significant source of checking account fee revenue for many institutions.”)

19
  “[M]any [credit card] companies receive one-third to half of their revenue from fees, not from interest.” Barron‟s, December
13, 1999, “Losing Interest: So Banks Boost Card Fees, Risking An Earnings Backlash.” “Fees can hit coming and going: when a
customer applies for a card, makes a late payment, lets the balance exceed the card‟s limit, bounces a check, [or] uses the card in
another country. Merchants, too, pay fees on card transactions. There are also fees on „cross-sold‟ products, like credit life and
auto insurance.” Id.

20
  See, e.g., Collections & Credit Risk, February, 1998, “Subprime‟s House of Cards,” Page 27 (“The industry founded on an
accounting rule – gain on sale – may be in for a big shock. As credit quality worsens and delinquencies rise, the forecast profits
on which subprime lenders literally bank can evaporate, with sometimes catastrophic results.”)



                                                                 7
            Returned check fees have increased to nearly $25 per check,21 a trend exacerbated by fee-

generating practices such as high-to-low check processing.22 The following table23 identifies

returned check charges assessed by banks across the country.

                                        Survey by State of Bank NSF Fees Per Check
      Alabama                    Arkansas            California                  Colorado               Delaware
      $24              $20       $25     $27         $13-$30             $21     $26 + $9.50            $29
      $24              $18       $23.50 $25          $10-$28             $18     $25 + $25/day          $35
      $25              $22       $22.50 $25          $17-$18             $18     $25                    $29
      $24-$28                    $22     $25         $30                 $18     $25                    $32
      $25                        $19.77 $25          $18                 $15     $25                    $30
      $22-25                     $28                 $15-$25             $16
             Florida                 Idaho                  Illinois                  Indiana           Iowa
      $40              $29       $21     $20         $20-$26             $18     $30     $17.50         $25
      $30              $29       $20     $22         $22 + $5/day        $21     $28     $15            $20
      $30              $15       $19     $15         $17.50              $27     $25     $22            $17
      $29.50           $10       $20-$25 $15         $23                 $22     $26     $25            $16.95
      $29                        $18                 $19-$24 +$3/day     $20     $24     $24            $15.90
      $29                        $12.50              $20 +$5/day         $15     $25+$25 (other
                                                     $20 +$5/day         $10     fee)
                                                     $20 +$6/day         $25
                                                     $12
            Kentucky             Louisiana                 Michigan                 Mississippi              Missouri
      $23          $17.50        $25                 $25                         $25         $20        $19.93   $15
      $22          $27           $25                 $26                         $25         $17        $20-33    $15-20
      $20.60       $28           $25                 $25                         $30         $20        $22      $15-20
      $18          $27.75        $25                 $25                         $22         $18        $15      $15
      $20-$27.50   $25           $25                 $22                         $22         $15        $25      $20
      $27 +        $20           $24                                             $22+ $5 day            $25      $20
      $5/day       $24           $25                                             $22




21
 “Nationally, big banks raised their fees for bouncing a check to $23.08 in 1999, up 10% from 1997, when big bank customers
paid only $20.91. At small banks, bounced check fees rose 4%, to $21.19 in 1999, from $20.35 in 1997. Public Interest
Research Group, 1999,“Big Banks, Bigger Fees: The 1999 PIRG Bank Fee Summary,” Page 6. See also New York Times, April
26, 1998, “Money in the Bank? What‟s It Costing?” (discussing returned check fees as high as $30 for New York City residents).

22
  “When several checks are drawn on the same account in a given day, these banks process the biggest one first, raising the odds
that some will bounce.” Wall Street Journal, February 25, 1999, “How Banks Make the Most of Bounced Checks.” “Six of the
nation‟s biggest consumer banks . . . have high-to-low processing policies in at least some of their banks. They make no
apologies for the practice.” Id. The article cites an example of a bank customer who incurred NSF fees 115 times over a period
of 30 months. See also Cincinnati Enquirer, July 24, 1998, “Banks Sued Over Bounced Check Fees” (discussing several banks‟
admitted practice of high-to-low check processing).

23
     This table reflects a survey conducted by two national payday advance companies in early 2000.


                                                                 8
        Nebraska             Nevada                New Mexico           North Carolina            Oregon
  $25                     $25     $25        $30        $22            $29-30               $25
  $25                     $25     $27        $25        $14            $28                  $25
  $18                     $25     $30        $22        $15            $27-$28              $25
  $17                     $25     $25        $18                       $27                  $22
  $20                     $15     $19        $27                       $27                  $20
                          $20                                          $28
         Ohio              Pennsylvania         South Carolina             Tennessee               Utah
  $25    $25              $30                $29-30    $28             $28    $26           $20
  $30    $26              $35                $28       $27             $28    $22           $20
  $25    $27              $32                $28       $28             $27    $27           $15
  $27.50 $27+ $5/day      $32                $25-$29                   $27    $21           $15
  $26    $26              $27                $15-$28                   $27    $25           $15
  $28    $35                                 $26-$29                   $26    $19
      Washington           Washington,            Wisconsin                Wyoming
  $25                          D.C.          $22       $25             $25 + $25 every 2
  $25                     $27                $20                       days for negative
  $25                     $29                $25                       balance
  $20                     $27-35             $25-$27                   $25
  $20                     $28                $25                       $22
                          $29                $25                       $20
                                                                       $20

        Consumers who bounce checks incur not only a dishonored check fee to their own bank

but also a returned check fee to the payee of the check. Such “merchant fees” have been on the

rise    during     the      past         decade,      as       reflected         in   the   following      table.

                         Survey by State of Merchant NSF Fees Per Check
   Alabama                    Arkansas                California              Colorado        Delaware
   $26           $26       $20                     $25         $25         $25              $25
   $25           $26       $20                     $25         $25         $25              $28
   $20           $25       $20                     $25         $25         $25              $30
   $25           $26       $20                     $25         $25         $25              $30
   $20           $25       $20                     $25         $15         $25              $25
   $25           $25       $25                     $25         $20
                                                   $25         $20
                                                   $25         $13
       Florida                   Idaho                  Illinois                 Indiana          Iowa
   $25-$50       $25       $20                     $25         $15         $50              $20
   $25-$50       $25       $25                     $20         $20         $25              $15
   $25-$50       $30       $20                     $25         $20         $25              $15
   $25-$40       $25       $20                     $20         $25         $25              $15
   $25-$40       $50       $20                     $25         $25         $20              $20
   $25                                             $25         $25         $20
                                                   $25         $20         $25
                                                   $25         $25         $25
                                                   $25         $25         $20




                                                           9
             Kentucky                   Louisiana             Michigan           Mississippi               Missouri
      $20         $20             $25                   $25                   $30                    $30
      $25         $20             $25                   $25                   $30                    $25
      $25         $20             $25                   $25                   $25                    $30
      $20         $25             $25                   $25                   $20                    $30
      $25         $20             $20                   $15                   $15                    $30
      $25         $20             $25                                         $30                    $25
      $25         $25             $15                                         $30                    $20
      $20         $30             $20                                         $25                    $20
      $20         $25             $15                                         $30                    $25
      $20         $25                                                                                $20
      $20         $10                                                                                $30
             Nebraska                 Nevada              New Mexico           North Carolina              Oregon
      $30                         $28                   $15     $30           $25        $28         $30
      $25                         $25                   $15     $25           $25        $25         $25
      $25                         $25                   $20     $25           $25        $25         $25
      $25-$35                     $25                   $20     $25           $25        $30         $25
      $20                         $25                   $20                   $20                    $25
                                  $20
                Ohio                Pennsylvania         South Carolina             Tennessee               Utah
      $30           $25           $35                   $25        $25        $25            $30     $25
      $30           $30           $25                   $25        $26        $25            $20     $20
      $30           $30           $25                   $25        $25        $25            $20     $20
      $25           $30           $25                   $25        $25        $20            $25     $20
      $25           $25           $25                   $25        $25        $20            $15     $20
      $20           $25                                 $25        $20        $30            $25
                                                        $25        $25
            Washington              Washington,             Wisconsin               Wyoming
      $40                              D.C.             $20        $20        $30
      $20                         $25                   $25        $25        $20
      $25                         $20                   $25        $25        $20
      up to $40                   $20                   $20                   $20
      $25                         $15                   $20                   $18
      $50                         $25                   $25




            When comparing the cost of payday advance services to the cost of bouncing a check,

one should also consider that consumers who write bad checks frequently write numerous

dishonored checks, not just a single dishonored check. National surveys indicate that 19% of all

Americans have written at least one bad check within the past year.24 Of those who have




24
     Wirthlin Worldwide, April 27, 1999, “National Benchmark Survey of Payday Advance Services,” Page 9.




                                                               10
bounced at least one check within the past year, 55% have bounced more than one.25 A review of

customer files by a national payday advance company in January, 2000 supports the assertion

that consumers often bounce more than one check at a time. A review of customers‟ bank

statements indicated that these consumers had previously bounced an average of one to three

checks per month.

            Having been deprived of the option of writing a dishonored check or multiple dishonored

checks as a means of securing small amounts of credit for a short period of time, consumers with

temporary cash-flow problems may be tempted to pay debts late or not pay them at all. During

the past decade, however, creditors have steepened the contractual penalties for such behavior.

Credit card late fees, for example, have risen to nearly $30. 26 Late fees charged by mortgage

companies and by auto finance companies have also risen sharply, as illustrated in the following

two tables.27

                      Survey by State of Late Fees Charged by Mortgage Companies
             Alabama                  Arkansas              California               Colorado                Delaware
      $22+($5 day late)            5.90%                 6%                $70    $40 per $1000            5-10%
      $10 - $25                    5% after 10 days      15%               5%     5%                       5% per day
      $25                          $25                   $29               5%     5%                       5%
      $18                          $25 plus 10%          $25-$30           5%
      4%                           $25                   $45               $30
      5%                                                 $70               $45
      4%                                                 $40
      5%




25
     Wirthlin Worldwide, April 27, 1999, “National Benchmark Survey of Payday Advance Services,” Page 9.

26
  “Not only has the number of fees increased but their amounts have risen, as well. Late fees, for example, have climbed to an
average of $29 today from $18 five years ago, according to Standard & Poors. Fees are among the least understood parts of
owning a credit card. Terms are often hidden in minuscule print and may change at the card company‟s whim.” (Emphasis
added). Barron‟s, December 13, 1999, “Losing Interest: So Banks Boost Card Fees, Risking An Earnings Backlash.”

27
     These two tables reflect surveys conducted by two different national payday advance companies in early 2000.




                                                                11
     Florida               Idaho              Illinois             Indiana               Iowa
$50             $29    5%               $36            5%    5%, after 10 days     5%
$38             $46    5%               $35            5%    5%, after 10 days     1.5% after 16
5%              $36    5%               $30            5%    $25                   days
$20             $30    $25              $15            5%    4%                    $5 on 16 day late
$34                    $20              $20            $20   5% of balance
$30                    4-5%             $10 after 10 days    10% after 10 days
10 days($35) over 30                    Greater $25 or 5%    $15
days($50)                                                    $6.50
      Kentucky             Louisiana         Michigan            Mississippi           Missouri
2%              $15    $25.00           5%                   $25                   $10         5%
3%              $20    $18.00           5%                   $22                   5%          5%
5%            $27.50   Greater of 5%    5%                   5%                    5%           0
$25 or 2%       $25    or $25                                5%                    5%         $25
5%               2%    5%                                    5%                    5% or $25
5%            No fee   5%                                    5%                    5% every 15
$5                     5%                                    No charge             days
$15                                                          $20                   5% 15 days
$15                                                          $20
                                                             1% up to $100
      Nebraska               Nevada        New Mexico         North Carolina             Oregon
5%                     5%               5%                   Daily interest rate   15%
5%                     $55              5%                   per day after 30      5%
5%                     $25              5%                   days                  10%
                       5%               $20                  4%
                                        $15                  4%
                                        $25                  4%
                                                             4%
         Ohio            Pennsylvania     South Carolina          Tennessee               Utah
10% after 7 days       5% of            5%                   5%                    4-5%
$15                    payment/day      5%                   5%
$15 after 10 days      4-5%             $10                  5%
$35                    5%               $20-$25              5%
5%                                      $23                  4%
5%                                      $20                  5%
1%                                      1.50%                5% at 15 days
15%                                     $20                  5% at 10 days
5%                                      4%                   5% at 15 days
     Washington          Washington,        Wisconsin             Wyoming
$54                         D.C.        $10                  5%
$50                    $20              $15                  $25
$30 + 4%               5%               5%                   $25
$35                    $20              5%
                                        5%




                                              12
           Survey by State of Late Fees Charged by Auto Finance Companies
      Alabama           Arkansas            California           Colorado           Delaware
$20        $25        10%             $10          5%      21%                  1.50%
$15        $25        5%              $15          5%      5%                   18%
$20        $25        $15             5%           $5      $25                  5%
$10                   $25             $15         $30
$10                   $20             $15         $20
$10                   $15             $75         $25
                                      $25         $35
                                      $18
      Florida              Idaho            Illinois             Indiana              Iowa
$50        $25        $10             20%          5%      $25         $10      Accrue interest
$35        $25        $5 or 5%        5%          $20      $20         $20      Accrue interest
$35        4.5%       $5 or 5%        $25        $25       $20, accrue until    Accrue interest
$32        $21        $25             $15         5%       paid
$32        $25        $15             $10         5%       $20
$20        $25        $10             $25        $10       10%
                                      $5        1.50%      10%
                                      1.50%      10%
Kentucky                Louisiana         Michigan             Mississippi           Missouri
$5        $10         5%              $15                  $22       varies     $15-25       $30
$10-25     none       $20             5%                   $20       $20        $5/day       $10
$7-12 $20 (NSF)       12%             $5 or 5%             18%       $30        10%          10%
$10       $20         5%/$15                               $5/4%     $50        $15/5%        $5
$5        $20         5%/$15                               $5/4%                5% every 10
$20       $25         5%/$15                               $5/4%                5% every 15
$15 after 10 days                                                               $15 after 14
                                                                                5% after 14
     Nebraska             Nevada         New Mexico        North Carolina            Oregon
$5/day                $15             5%                   10%       10%        20%
$5/after 5            $10 or 15%      $15                  $5        5%         5%
No late fee           $15             $15                  $55       None       5%
                      $10             $25                  $20-30 days past
                      $6              $25                  due/repossession
                      $5-15                                7%
       Ohio            Pennsylvania    South Carolina           Tennessee              Utah
$35       $50         $25             5%                   5%       10%         $15
$3-30      $30        20%             5%                   5%       10%         $20
$15       $25         12%             $25                  5%       $50         $20
$10       $25                         $25                  $15/week
No late fee after 4                   $25                  $5/day after 10
weeks                                 $25                  days
$5 weekly                             5%                   Repossession after
10% after 10 days                     5%                   3 days & $100 to
                                      $25                  get auto
                                                           $10/week
   Washington          Washington,         Wisconsin            Wyoming
$15 (10 days late)        D.C.        $10         $10      $15
$25 (15 days late)    $25             $10         $10      $25
$50                   $16             $10         $3       $25
$25                                   $15
$20                                   Interest rate goes
                                      up


                                                 13
             In addition to mortgage companies and auto finance companies, other creditors have

increased their contractual penalties for untimely payment or non-payment of monthly debts.

The following two tables28 survey the late fees charged by utility companies and by rental

property landlords.

                         Survey by State of Late Fees Charged by Utility Companies
          Alabama                 Arkansas                California                 Colorado                Delaware
 $17                          10%        $25        $15              $7        $10                      1.25%
 $5                           10%        $20        $25              $10       $20                      1.50%
 $20                          $20                   $28              $50       $5                       1.50%
 None                         10% on first $30      $0               $0
 None                         + 2% on balance       $0
 5%                                                 $6+reconnect
                                                    fee of $20-$30
                                                    $19 reconnect fee
                                                    $10-25
           Florida                  Idaho                   Illinois                 Indiana                    Iowa
 $30           $29            $10                   5%               5%        $20          5%          1.50%
 $15           $5.70          $20                   10%             10%        $15          5%          1.50%
 1.5%          1.5%           $5                    1.5%/day        1.5%       $15                      1.50%
 1.5%                                               1.5%/day        10%        3%
                                                    1.5%            1.5%       0.50%
                                                    10%                        $5 after 10 days
     Kentucky                 Louisiana             Michigan                       Mississippi                Missouri
 3%        5%                 $20                   2%                         $50         $15          1.50%     10%
 3%        $15                $20                   1.5%                       $15         $15          10%       10%
 $10      $20                 5% ($5-$25)           2%                         5%          $30          $25       1.50%
 $25      no fee              5%                                               $5          3%           1.50%     1.60%
 2%       $10                 $6.95                                            $30 & no longer          5%        $25
 10%      $13.50              5%                                               accepts checks           5%
 2%       $8                                                                                            $1.60/month
 5%       5%
 1.03%




28
     These tables reflect surveys conducted by two different national payday advance companies in early 2000.
     Nebraska                Nevada             New Mexico            North Carolina             Oregon
No late fee;             5%                 1.5%        $15         1% of bill     1%     1.5%
disconnect after 1       $25                $30         $25         1% of bill     2%     3%
week past due            2%                 $10.63                  5%                    1.5%
$5.23/day                1.5%               1.5%                    10%
        Ohio               Pennsylvania        South Carolina           Tennessee                  Utah
$15         1.50%        1.50%              $20         $20         10%          10%      10%
4.75%       10%          10%                $35         $25         10%           5%      $20
10%                      2.50%              $25, 1.50%              10%          $7.75    1.5%
$50 disconnect fee                          18% per month           $10          2.5%
$8/ collection trip                         $4 past due date        Variable-% of bill
10%/no grace                                1% of balance           notice sent then
period                                                              disconnected
    Washington             Washington,            Wisconsin             Wyoming
$0                            D.C.          1% after 10 days        1.5% /day
$0                       1.5%               1% after 10 days        $10
$40                      3%                 $5 after 10 days        1.25% /day
$15                                         1% of bill
1%                                          1.5%


             Survey by State of Late Fees Charged by Rental Property Landlords
Alabama                       Arkansas            California           Colorado            Delaware
$30                        $10                 10%            10%   $50 + $5/day         $30
$25                        $25 + $5/day        $15           10%    $40 + $5/day         $30
$30                        after 5th           $50            $25   10%                  15% after 5 days
$10                        $30 + $5/day        $50            $50
10%                        after 5th day       $30            $50
$40 (if past 10th)         $20                 $50 after 3 days
8%                         $25                 $50 after 3 days
$25+($5/day after 5th)     $15                 $50 + $5/day
$25+($5/day after 5th)                         after 5th
     Florida                   Idaho                 Illinois             Indiana                 Iowa
$50                        $25 apts, $50       $25 fee + $10/day    $50 + $125 filing    $10/day for 4 days
$50                        house + $1/day      $1/day               fee if after 12th    $40 after 5 days
$50                        $5/day              $10                  $25                  $5/day for 5 days, then
$50 then $10/day           $25                 $35 + $2/day         $25                  $6/day
$50 after the 5th          $25 apt, $50        $35                  $50 after 5 days
$45 after the 5th          house + $1/day      $25                  $20
$50                        $5 per day          $15                  $25/day after 5
$75                        $25                 $25                  days
$5 then $1 day             $50/day             $25                  $25
$75                        $100                $10                  $5/day
$50                        $25                 $5 a day             $15
                                               5% after 15 days     $20
                                               $5 per day
                                               $1 per day
                                               $25 flat fee
                                               $50
                                               $25




                                                      15
        Kentucky              Louisiana            Michigan        Mississippi              Missouri
 $25                      $50                $25                $50                  $5 on 6th + $1/ day
 $20                      $50                $25                $50                  $2/day after the 5th
 $15/day 1-3 days and     $35                                   $50                  $2/day after the 5th
 $3/day over 3 days       $5/day                                $25 after the 10th   $50
 $30 after 10 days        $5/day                                $30 after the 10th   $50
 $20 after 7 days         $5/day                                $30 after the 5th    $25 + 5%
 $2 per day                                                     $25                  $50 after 10 days
 $50                                                            $25                  $50 after 10 days
 $15                                                            10% if late          $10 after 10 days
 $25                                                            $50                  $25-then $5/day
 $5 per day                                                     $25                  $25 + $20/day
 $20+$2 per day                                                                      $25
 5%
 $50
        Nebraska               Nevada          New Mexico        North Carolina             Oregon
 $5/day                   $100               $30                5%                   $75
 $5/day after 5th up to   $60                $25                5%                   $75
 $50                      $15                0                  5%                   $50
 $25 after the 4th day,   $35 + $5/day       $25                $25
 then $10 per week        $25 + $5/day       $25                5%
                                             $30                $25
                                                                $25
                                                                $25
          Ohio              Pennsylvania      South Carolina       Tennessee                   Utah
 $80 after 3 days         $30 + $5 day       10%                10%                  $50/day
 $30 after 3 days         5% after 10 days   $35                $25                  $40/day
 $25 after 3 days         10%                5%                 $5 per day
 $50                                         $50                10%
 $50                                         $50                $10 after the 6th
 $25 after 10th then                         $70                then $4/day
 $25                                         $50                $10
 $36 (nsf fee)                               $25 per week       10%
 $25 (nsf fee)                               $20 on 6th then    10%
 $25 (nsf fee)                               $1 day             10%
 $30                                         $40                $50
 $50 then $2/day                             $35
                                             $12/day
      Washington            Washington,          Wisconsin          Wyoming
 $50+$5/day                     D.C.         $25                $50
 $25/day                  5% of rent         $25 (5-10 days)    $20/day
 $50                      $25                $25 (5-10 days)    $35
 $75 + $10/day            $10                $25
 $75                                         $10
 $50                                         $25, then $5/day



The following example demonstrates why consumers consider payday advance services an

economically-attractive “bridge” between paydays as compared to alternative sources of short-

term credit:


                                                     16
                          CONSUMER DILEMMA
                    A consumer who is between paydays and has
                    insufficient savings must immediately pay a $50 utility
                    bill and a $50 minimum payment on a credit card
                    balance.




 Option # 1                                 Option # 2                            Option # 3
$100 payday                                   2 late                             2 bounced
  advance                                   payments                               checks




$18 TOTAL
(varies by state)              $30 restart-up fee to utility company
                               $30 late fee to credit card company        $25 NSF Fee to Bank
                               $60 TOTAL                                + $25 NSF Fee from creditor
                                                                          $50 in Fees Per Check
                                 PLUS TEMPORARY LOSS                    x 2 checks
                                    OF UTILITY AND                       $100 TOTAL
                                  NEGATIVE EFFECT ON
                                    CREDIT RECORD
                                                                          PLUS STIGMA OF
                                                                         WRITING BAD CHECK




                                                17
            This example illustrates the “simple math” that hundreds of thousands of payday advance

customers perform every day, and it explains why regulators, 29 industry analysts30 and even

international observers31 agree that payday advance services constitute a valuable and

economically-sound financial services product for consumers.

            D.       Payday advance services are more dignified than charity, more accessible
                     than checking account overdraft protection, and more desirable to
                     consumers than credit cards, pawns and traditional small loans.


        Critics of the payday advance industry argue that consumers should solve their temporary

cash-flow problems with (i) “non-loan options,” such as consumer credit counseling services or

charity from private or public sources, or (ii) “credit alternatives,” such as checking account

overdraft protection, credit cards, pawns, or traditional small loans.32 This analysis incorrectly

assumes that consumers act monolithically and evaluate small, short-term credit products based

solely on price.

        “Consumers are often convenience driven, not price driven, when it comes down to

choosing between immediate consumption versus delaying consumption,”33 an industry analyst

correctly observes. Consumers assign a subjective level of importance to a number of factors,
29
   The increased banking fees for returned checks coupled with the added charges placed onto the account by the recipient of the
check, make it less expensive for a person to borrow from short term lenders than to risk having their check returned NSF. That
is not to imply that customers who abuse the system will not find themselves further in debt and unable to correct their financial
situation. Short term loans provide a service as long as they are used as intended. It is only when customers use them for
extended periods of time or for reasons other than financial hardship that problems occur.” (Emphasis added). Illinois
Department of Financial Institutions, 1999, “Short Term Lending Final Report,” Page 34.

30
  “We believe the product is a positive alternative to writing non-sufficient funds (NSF) checks.” Stephens Inc., September 28,
1999, “The Developing „Payday Advance‟ Business,” Page 1.

31
  “Pay-day opponents offer anecdotal stories of customers overwhelmed by mounting debt, such as the borrower who rolled over
loans [more than 4 times] . . .[b]ut the true social cost of pay-day lending is more ambiguous. For someone who is truly hard-up,
the only thing worse than borrowing $200 at 600% APR may not be borrowing $200 at all. In a study of poor Chicago
households, Susan Mayer, a professor at the University of Chicago, found that the ability to borrow $500 significantly lessened
the probability that the household would suffer a „spell of hardship,‟ such as not having enough money for food.” (Emphasis
added). The Economist, June 5, 1999, “Pay Dirt.”

32
     Consumer Federation of America, December 15, 1999, Written Testimony Submitted to the Forum, Page 6.

33
     Stephens Inc., September 28, 1999, “The Developing „Payday Advance‟ Business,” Page 5.



                                                                18
including price but also including convenience, location, service, privacy, and the availability of

other options. Thus, for a myriad of reasons, including many discussed below, consumers select

the dignified, convenient, and cost-competitive payday advance product as the most appropriate

short-term financing vehicle for their needs.

      CFSA agrees with CFA that consumer credit counseling services represent an important

alternative for consumers with temporary cash-flow problems. In fact, one of CFSA‟s sister

trade organizations has recently entered into a “promising”34 strategic partnership with the

Wisconsin chapter of the Consumer Credit Counseling Service (“CCCS”) to provide free CCCS

counseling to the industry‟s customers regarding the best ways for consumers to meet their

short-term cash needs.            The Wisconsin pilot program, which has inspired similar alliances

between industry trade groups and the respective Chicago and Seattle chapters of the CCCS,

serves as model of how the payday advance industry and consumer advocates should work

together to ensure that consumers faced with temporary cash-flow problems make informed and

responsible choices. CFSA intends to aggressively pursue similar arrangements in other cities

and states.

      CFSA also agrees that private and public charity sources should continue to serve an

important role in providing consumers quick access to small amounts of cash. However, many

consumers faced with temporary cash-flow problems do not want to share such problems with
friends and family and do not desire to seek public charity. Lawmakers should continue to let

such consumers meet their short-term cash needs through a dignified and private payday advance

transaction rather than through charity. CFSA believes that consumers themselves, not consumer

advocates, should quantify the monetary value of consumers‟ dignity and privacy.

34
   “Before the [Wisconsin] Legislature acts on any regulations, it should monitor the results of a promising new partnership
between most of Wisconsin‟s payday loan companies and the nationally known Consumer Credit Counseling Service, a division
of Family Service of Dane County. The Wisconsin Deferred Deposit Association, which represents the lenders, has forged an
agreement with CCCS to provide consumer debt counseling services to consumers in financial jeopardy. The credit agency will
work closely with the lenders to provide training in consumer debt management assessment – and customers will gain access to
CCCS counselors at no cost. This pilot program will identify people with credit problems before they dig a hole that‟s too deep.
That‟s good for the consumer and good for the companies, which don‟t want to make loans to people who are already in over
their heads.” (Emphasis added). Wisconsin State Journal, November 17, 1999, “Laws Won‟t Cure Ills of Debt.”


                                                               19
        Checking account overdraft protection, for the limited number of consumers, to whom such

product is available and desired, represents another valuable “tool” in the consumer‟s “financial

toolbox.” Unfortunately, given the enormous revenues generated by depository institutions from

returned check fees35 depository institutions have an inherent disincentive to offer or vigorously

market the product to their customers. Moreover, many banks require a consumer to purchase

the bank‟s “cross-sold” products – such as a savings account, an investment account, or a credit

card account – in order to qualify for checking account overdraft protection. Finally, many

consumers do not possess the credit quality needed to qualify for checking account overdraft

protection or simply do not desire to use the product for any number of subjective reasons. To

the millions of consumers with active checking accounts to whom checking account overdraft

protection is either not available or not desired, payday advance services remain an important

short-term credit alternative.

        Many consumers hesitate to use a credit card to address temporary cash-flow problems

because they recognize that they are among the “millions”36 of consumers who lack the financial

self-discipline to retire the higher-balance revolving debt of a credit card in a timely manner.

These consumers prefer the closed-end payday advance product, which requires the consumer to

retire the debt on a date-certain and thereby exercise the financial self-discipline they know they

would lack if the debt were revolving.37 Other consumers lack the credit quality to obtain a




35
     See generally, sources discussed in footnote 18.

36
   “Credit card debts are crushing millions of households and heavily burdening millions of others.” Spartanburg Herald Journal,
January 4, 1998, “When Credit Card Debt Hangs Over Your Head,” quoting Stephen Brobeck, Executive Director of the
Consumer Federation of America. “Between 1990 and 1996, the nation‟s combined credit card debt more than doubled.” Id.

37
   “Consumers use the [payday advance] service to avoid costly refinance charges for rolling over existing loans or tapping their
credit cards. We have seen focus group studies where consumers said they prefer the payday advance product over tapping their
credit availability because they didn‟t believe that they would pay back their credit card balance on their next payday, thus
experiencing significant interest charges.” Stephens Inc., April 1, 1999, “The Emerging Business of Deferred Presentment,”
Page 5.



                                                               20
credit card or have exhausted their credit limit on cards they do possess.38 For these consumers,

payday advance services constitute the best way for them to obtain small amounts of cash for a

short period of time.

       Pawn transactions require the pledging of collateral, a fact that, by itself, renders any price

comparison between such transactions and unsecured payday advance transactions unfair.

Moreover, many consumers do not wish to carry an item of personal property up to a pawnshop,

haggle over the appraisal price, and lose use of that item during the loan term. To such

consumers, payday advance services represent a competitively priced, convenient, and dignified

product alternative.

       Finally, many consumers prefer payday advance services to traditional small loan products

because such loan products are larger than the consumer either wants or needs. Here, again, the

analogy that the payday advance product constitutes the right “financial tool for the job” is

entirely apt. Consumers understand that traditional small loan products, while proportionately

less expensive than payday advance services (i.e., the APR is lower), are more expensive in

absolute terms (i.e., the Finance Charge is greater). Many consumers recognize that, in light of

their consumption habits, they will likely spend all of the proceeds of any transaction they utilize

to solve their temporary cash-flow problem. These consumers prefer payday advance services to

traditional small loans because the former product gives them the ability to solve their temporary
cash-flow problem without “getting in over their head.”


III.     Payday advance customers are middle-class, middle-aged, and informed working
         people who are satisfied with the service.


         If this paper does nothing else, it should reinforce a fact that lawmakers already know is

intuitively correct, namely, that the payday advance industry‟s millions of customers – these

lawmakers‟ constituents – are not the poor, unsophisticated, desperate, and dissatisfied souls

38
   See National Consumer Law Center, 1999 Supplement, “The Cost of Credit: Regulation and Legal Challenges,” Page 74,
discussed above in footnote 9.


                                                           21
whom the industry‟s critics portray them to be. Rather, they are the heart of America‟s working

middle-class.          Payday advance customers have enthusiastically embraced payday advance

services because they appreciate the convenience, dignity, and privacy of the product. They

have “done the math” and have determined that obtaining a small amount of cash for a short

period of time by way of a payday advance makes good economic sense. As such, they want

their lawmakers to create and maintain a regulatory environment that satisfies the robust

consumer demand for payday advance services by balancing the interests of the industry with

substantive consumer protections that ensure responsible and informed use of the product.

        A.            Payday advance customers represent the heart of America’s working
                      middle-class.
        According to U.S. Census Bureau statistics, one person in five lives in a household that

experiences at least one temporary cash-flow problem per year.39 These same U.S. Census

Bureau statistics indicate that even households with high-income levels occasionally experience

temporary cash-flow problems.40 Private surveys place the number of Americans of all income

levels who experience occasional difficulty in paying monthly bills even higher. 41 Such

temporary cash-flow problems typically arise when consumers incur an unexpected debt for

which they do not have sufficient savings,42 such as a car repair bill, an unusually-high utility

bill, an uninsured medical expense, or a security deposit for rental housing.43
39
  “In 1995, approximately 49 million people – about 1 person in 5 – lived in a household that had at least one difficulty meeting
basic needs.” U.S. Census Bureau, June 1999, “Extended Measures of Well-Being: Meeting Basic Needs.”

40
  “Results indicate that over 8 million middle-class Americans with household incomes greater than $45,000 annually are
having problems paying monthly bills.” U.S. Census Bureau, June 1999, “Extended Measures of Well-Being: Meeting Basic
Needs.”

41
  “A recent consumer survey found that 55% of Americans occasionally lack the funds to pay all their bills.” The Economist,
June 5, 1999, “Pay Dirt.” See also Wirthlin Worldwide, April 27, 1999, “National Benchmark Survey of Payday Advance
Services,” Page 10 (“More than a third of Americans (37%) have been in need of short-term cash within the last 12 months.
While lower income groups are among the most likely to need short-term cash, it is important to note that a significant portion of
middle and even upper income groups also indicate they occasionally find themselves in a position of need.”)

42
     “U.S. household savings rates at a five-decade low . . ..” Fortune, June 8, 1998, “Where Cash Is King,” Page 204.

43
   “Consumers have little in the way of a safety net with which to pay for emergencies such as medical bills, auto repairs, and
other shortfalls.” Stephens Inc., September 28, 1999, “The Developing „Payday Advance‟ Business,” Page 5.


                                                                 22
      Against the backdrop that a substantial number of Americans of all income levels

experience temporary cash-flow problems that are not adequately addressed by traditional

lenders, a national payday advance company recently commissioned a national marketing

company to provide a demographic profile of its customer base. The marketing company

conducted a “customer segment” analysis, which confirmed the long-standing opinion of

industry analysts that the payday advance industry‟s “customer is the virtual heart of

middle-class America.”44

      The payday advance company provided the names and addresses of 321,852 of its

customers to the marketing company which, in turn, placed each customer into one (1) of fifty

(50) customer segments. The marketing company‟s customer segmentation analysis integrates

behavioral, demographic, and consumer spending habits into models that accurately depict any

household in the United States. These models describe everything from age, income, and

education, to the investments and purchases a household is likely to make. According to the

marketing company, its customer segmentation analysis has been thoroughly tested and

represents one of the most sophisticated customer demographic profile systems available today.

      In its executive summary, the marketing company identified the eleven (11) customer

segments that comprise the payday advance industry‟s “primary and secondary core customers.”

That is, more payday advance customers fell into one of these eleven (11) segments than into any
of the other thirty-nine (39) customer segments. The table set forth below provides demographic

data relating the eleven (11) core customer segments of the payday advance industry, including a

column stating the weighted average of all eleven (11) segments and a column stating the U.S.

average.




44
  Stephens Inc., April 1, 1999, “The Emerging Business of Deferred Presentment,” Page 3. See also Stephens Inc., September
28, 1999, “The Developing „Payday Advance‟ Business,” Page 8. (“The average consumer using the payday advance product
appears to have an annual household income of $28,000 to $40,000. This represents the middle 20% of household incomes in
America and is very representative of the working middle class.”) (Emphasis added).


                                                            23
     Primary and Secondary Core Customer Segments of the Payday Advance Industry

Segment Name 5          11     15         17         18     23     24         25      39        40     46        Weighted USA
             Prosperous Family Great      Stars      White Settled City       Bedrock On        Trying Difficult Average Average
             Metro Mix Ties    Beginnings and        Picket In     Ties       America Their     Metro Times
                                          Stripes    Fence                            Own       Times
Median Age     34         34       35        29      35    42        33       35       42       33       28       35       36


Median Income 67,217      53,857 42,668      39,161 38,449 35,854    35,535   33,077   28,213   22,186   16,405   36,054   $38,724


% Urban        40         27       51        60      34    26        58       18       40       43       72       43       33


% Suburban     58         68       47        37      61    67        40       40       57       54       26       50       42
%Rural         2          5        2         3       6     7         3        42       3        3        2        7        25


%Married       65         65       49        57      58    57        43       59       44       47       30       52       55


%With          50         50       31        56      40    27        45       40       21       37       48       40       37
Children


% Owner        85         84       43        61      70    73        68       71       43       49       36       60       64
Occupied
Median         168,518    107,291 133,930    108,634 81,302 84,203   70,717   72,457   90,333   51,840   44,042   88,851   100,699
Property Value
in $
% Attended     27         21       37        21      23    31        23       20       50       22       16       27       28
College
%Obtained       21        12       18        9       9     12        9        8        13       5        4        11       13
Bachelor Degree
%Obtained     9           5        8         3       4     6         5        4        7        3        2        5        7
Master Degree
% Occupation is 17        12       14        9       10    12        9        9        12       7        5        10       12
Executive/Mgr.



      The marketing company describes the eleven (11) core customer segments of the payday

advance industry as follows:
                     5         PROSPEROUS METRO MIX. These are typically married couples with young children
                               living in suburban and urban areas. These families have high income and education
                               levels and are homeowners who work in white-collar occupations. Renters pay the third
                               highest median rent. They are more likely to have home equity loans and they have the
                               highest share of second mortgages.

                     11        FAMILY TIES. These households are generally families with children, living in
                               suburban areas in the west. Their median household income is 40% above average,
                               however, due to their large household size, their per capita income is below average.
                               This segment tends to have a great deal invested in their homes in the form of remodeling
                               expenses.

                     15        GREAT BEGINNINGS. Households with one or two young adults who rent in urban
                               and suburban areas. Their household income is slightly higher than average as is the
                               percent that have college degrees and white-collar occupations. They are among the top


                                                                24
                      five segments to use their personal computer primarily for e-mail, change residence last
                      year, and use their ATM/debit card to make purchases.

               17     STARS AND STRIPES. These are young families with a relatively large number of
                      children, ranking second in household size. They live in urban and suburban areas and
                      have average household incomes. However, they have per capita income 30% below
                      average. They work in blue-collar occupations and are more likely to shop at Target and
                      use their personal computers to play games.

               18     WHITE PICKET FENCE. These are typically suburban families with one or two
                      children. They have household income just below the national average, live in
                      owner-occupied housing, and work in blue-collar occupations. They are more likely to
                      drive mini-vans, go bowling, purchase lottery tickets, and use their personal computer to
                      play games.

               23     SETTLED IN. These are primarily older couples, with no children in the household, or
                      single person households. They live in suburban areas, have medium levels of income
                      and education and a high likelihood of being retired. This segment is in the top five
                      segments in redeeming coupons and ranks second in the share of civilian veterans.

               24     CITY TIES. These are families with a relatively large number of older children. They
                      have medium-low income and education levels. The concentration of these households
                      in urban areas is 75% above national average and very high in the Southeast. They tend
                      to have blue-collar occupations and take public transportation to work.

               25     BEDROCK AMERICA. This segment consists of families with children, located
                      primarily in rural areas. They have low incomes and education levels, are homeowners
                      with low property value, and work in blue-collar occupations ranking sixth in precision
                      products and crafts. About 60% of these households have two or more vehicles. This
                      segment is also more likely to watch primetime television.

               39     ON THEIR OWN.             These are typically young adults and seniors, living in
                      renter-occupied households, located in urban and suburban areas, especially in warm
                      weather areas such as Las Vegas, Arizona, and Florida. These households typically
                      contain one to two persons, have a low level of income, and many work in white-collar
                      specialty and blue-collar service occupations.

               40     TRYING METRO TIMES. This segment typically consists of younger single adults and
                      seniors, located in urban and suburban areas. Children are present in 36% of the
                      households. They are typically renters, with very low income and education, and work in
                      blue-collar occupations. They are more likely than average to smoke cigarettes and shop
                      at convenience food marts.

               46     DIFFICULT TIMES. These are primarily families with a relatively large number of
                      children, very low income and education levels (half have not completed high school),
                      mostly renters, who work in the service and other blue-collar occupations. This segment
                      has the largest share subscription to voice mail, call blocking, and three-way calling.
                      They also watch a great deal of daytime television.

    The marketing company‟s customer segment analysis dispels many myths perpetuated by

consumer advocates about the typical payday advance customer. Contrary to allegations from
critics that the industry targets the elderly, the core payday advance customer is younger (age 35)
                                                   25
than the average U.S. consumer (age 36).45 Contrary to allegations that the industry targets the

uneducated and unsophisticated, the likelihood that a core payday advance customer has attended

college, possesses a bachelor degree or a master degree, or works in an executive/managerial

position is nearly the same as that of the average U.S. consumer. Contrary to unsupported

assertions that the industry targets the poor and necessitous, the core payday advance customer

earns nearly the same median income ($36,054) as the average U.S. consumer ($38,724).46

        Statistics gathered by state regulators confirm the accuracy of the foregoing customer

segmentation analysis. In the fall of 1999, the Illinois Department of Financial Institutions (the

“DFI”) issued a written report in which it compared the location of the “short-term lenders” it

regulates with U.S. Census Bureau data indicating, for each of the state‟s counties, the average

personal income of persons residing within the county.                               The Illinois DFI found a direct

relationship between the average personal income of the state‟s counties and the density of

“short-term lenders” located within such counties. The Illinois DFI described its finding that the

state‟s most affluent counties had the greatest density of “short-term lenders” as follows:


            The following exhibit of county data demonstrates that the short term loan
            industry is not targeting areas of specific personal income levels. We have
            combined data generated from the U.S. Census Bureau and the Bureau of
            Economic Analysis to verify that areas with the lowest personal income
            levels are not being inundated by the presence of these businesses. The
            counties with the densest population of short term lenders are usually the
            counties with the highest average personal income levels.47 (Emphasis
            added).

45
  All figures discussed in this paragraph are taken from the above table, specifically (i) the column providing the weighted
average of the eleven (11) core customer segments for each demographic category and (ii) the column setting out the U.S.
average for such categories.

46
   One should not mistake the socio-economic profile of check cashing customers (i.e., those who do not maintain an active
checking account and need to cash payroll, government benefit, or other third-party checks) with that of payday advance
customers. While some providers of payday advance services also offer check cashing services on their menu of products, most
mid-sized and large payday advance companies are mono-line companies that specialize in payday advance services and do not
offer other consumer finance products. See, e.g., Stephens Inc., September 28, 1999, “The Developing „Payday Advance‟
Business,” Page 8 (stating that the number of mono-line storefronts is “in the 5,000 to 6,000 range,” out of a total of 8,000 -
10,000 payday advance storefronts).

47
     Illinois Department of Financial Institutions, 1999, “Short Term Lending Final Report,” Page 10.


                                                                 26
        The Illinois DFI also reported statistics indicating that “less than 1%” of the customers of

“short-term lenders” file for bankruptcy protection.48                         These statistics are not unusual.             In

Tennessee, a state with one the nation‟s highest bankruptcy rates and one of the first states to

enact industry-specific legislation, only 3% of pending Chapter 13 bankruptcies for the year

1999 in Middle Tennessee listed any debt owed to a payday advance company. 49 Statistics

indicating that payday advance services do not materially contribute to consumer bankruptcies

track bankruptcy debtor surveys indicating that the most common immediate cause of

bankruptcy is a creditor‟s foreclosure on collateral, a collection tactic that never occurs in

connection with unsecured payday advance transactions.50

        The empirical evidence simply does not support industry critics‟ claims that the payday

advance industry targets the poor and contributes to consumer bankruptcy. In fact, the data

discussed above compel the opposite conclusion. CFSA regrets that the Forum elected to focus

on the aberrational behavior of a few consumers51 to inform itself and the public about the

payday advance industry. CFSA suggests that policymakers rely less on anecdotes and sound

bytes and more on the wealth of data and facts that have been diligently gathered by state

regulators and other objective observers about the industry over the last several years.




48
     Illinois Department of Financial Institutions, 1999, “Short Term Lending Final Report,” Page 21.

49
     Nashville Tennessean, April 18, 1999, “„Payday Loans‟ Cited in Bankruptcies.”

50
   “As in previous surveys, debtors reported that the most common immediate cause of bankruptcy, the factor that „pushed them
over the edge,‟ was collection tactics, especially foreclosure, repossession, and wage garnishment.” VISA, 1999, Annual Debtor
Survey, Page 2. The same debtor survey indicates that only 27.3% of bankruptcy debtors cited an over-extension of credit as the
main reason for filing bankruptcy. Other common reasons included medical problems, unemployed, divorce, and failed business.
Id.

51
   More importantly, as discussed in Section IV(A), the Forum focused on consumer behavior occurring prior to enactment of
industry-specific legislation, which legislation exists today and which legislation would have prevented the instances of
irresponsible use of the payday advance product described to the Forum.



                                                                 27
      B.            Payday advance customers understand the cost of the service and how to use
                    it responsibly.

      The middle-aged, middle-class working people who comprise the payday advance

industry‟s customer base thoroughly understand the cost of the product and how to use it

responsibly. Payday advance customers receive all disclosures required by TILA, including the

Annual Percentage Rate and the Finance Charge.52                             Pursuant to CFSA‟s Best Practices, a

self-policed53 code of conduct designed to ensure responsible industry practices among CFSA‟s

members, consumers also receive a conspicuous notice stating that payday advance services

should be used for short-term cash needs only. The TILA disclosure requirement and the

“heightened” disclosure requirement are memorialized in the following CFSA Best Practices:

           Best Practice 1: Full disclosure. A member will comply with all applicable state or
           federal disclosure requirements. In the absence of specific state regulation, a member
           must fully disclose to the customer all details of the payday advance transaction. A
           contract between a member and the customer must fully outline the terms of the payday
           advance transaction. Members agree to disclose the cost of the service fee both as a
           dollar amount and as an annual percentage rate (APR).

           Best Practice 3: Truthful advertising. A member will not advertise the payday advance
           service in any false, misleading, or deceptive manner.54 CFSA supports as a guideline for
           truthful advertising the advertising regulations contained in the Federal Truth-In-Lending
           Act.

      As a result of this extensive array of disclosure requirements, consumers understand
perfectly well the cost of the payday advance product and how to use it responsibly. Indeed,


52
  State and federal agencies monitor and enforce payday advance licensees‟ compliance with such cost of credit disclosures. In
many states, the state regulatory agency must pre-approve the form of the payday advance agreement to ensure its compliance
with state and federal credit disclosure laws. Additionally, the Federal Trade Commission retains jurisdiction to enforce
compliance with the Truth-In-Lending Act by providers and advertisers of credit.

53
   CFSA‟s Best Practice 9 reads: “Self-policing of the industry. A member will participate in self-policing of the industry. A
member will be expected to report violations of applicable law to CFSA, which will in turn bring the matter to the attention of the
violator. If the violation does not cease, the violator will be reported to the state regulatory authority. Each member company
agrees to maintain and post its own toll-free consumer hotline number in each of its outlets.”

54
  State unfair and deceptive acts and practices statutes (“UDAP” statutes) also prohibit misleading, deceptive, or false
advertising in connection with payday advance services.


                                                                28
they probably understand payday advance services better than most other financial services

products on the market, a fact evidenced by the remarkable popularity of the product and the lack

of complaints registered by its consumers.


      C.           Payday advance customers demonstrate a high level of satisfaction with the
                   service.

      Because consumers thoroughly understand the cost and proper use of payday advance

services, they demonstrate a high level of satisfaction with the product. Across the country, state

regulators report very few consumer complaints relating to the payday advance industry,

particularly when one compares the number of such complaints to the millions of payday

advance transactions completed each year by satisfied customers. For example:

 Florida. “The [Florida] Office of the Comptroller received 34 hotline complaints on
     check-cashing – a figure that includes payday advance operations – in the past two years.
     And most of those involved one company in Tallahassee that was making payday advances
     without a license.”55 (Emphasis added).

 Illinois. “In the past two years the Department has received a total of twenty-one complaints
     regarding short-term loan licensees . . . Out of the twenty-one complaints brought to our
     Department‟s attention, eleven were determined to be unfounded and resolved through a
     careful explanation of the Consumer Installment Lending Statutes. The remaining ten
     complaints were resolved through our Department‟s mediation with the customer and
     licensee.”56

 New Mexico. “During the period of January 1, 1999 through August 10, 1999, the
     Consumer Protection Division of the [New Mexico] Attorney General‟s Office received
     more than four hundred (400) consumer complaints involving credit practices. … Thirty-nine
     (39) complaints involve direct extensions of credit made by finance companies, title loan
     companies or payday lenders. … The largest number of complaints (16) involved car title

55
  The Tampa Tribune, November 21, 1999, “Cash Crunch; People are Flocking to Payday Advance Shops, Despite the Fact that
Some Get in Over Their Heads.”

56
   Illinois Department of Financial Institutions, 1999, “Short Term Lending Final Report,” Page 32. See also Chicago Tribune,
November 18, 1999, “Payday Loans Hit Pay Dirt” (“In Illinois, the Department of Financial Institutions oversees the industry,
and officials there say they rarely get complaints about payday loans. „We receive intermittent complaints, but we haven‟t
received an enormous amount by any means,‟ said Mary Kendrigan, Spokeswoman for the department.”).



                                                              29
       loans. … The second largest group of complaints (14) concerned „A‟ small loan companies.
       … There were 5 complaints against „B‟ small loan companies. … The smallest group of
       complaints (4) involved payday lenders.”57 (Emphasis added).

 North Carolina. In North Carolina, consumers have filed only eighteen (18) consumer
       complaints since October of 1997, when the payday advance law became effective. 58

 Ohio. “Richard Keck, Ohio‟s chief examiner for consumer finance, confirmed that his office
       has not had many complaints about the [payday advance] companies.”59

 South Carolina. South Carolina consumers have registered only five (5) complaints about the
       state‟s 451 payday advance licensed offices since that state‟s payday advance law went into
       effect.60

 Tennessee. Of the 1.22 million payday advance transactions completed since October of
       1997, when the Tennessee payday advance statute went into effect, consumers have filed
       only twenty-three (23) written complaints about payday advance licensees.61 That number
       represents a fraction of one percent of all of the payday advance transactions completed
       during that period.

 Washington. According to a 1998 report and a January 25, 2000 letter from the state
       regulator, Washington consumers registered two (2) complaints relating to check cashers and
       sellers (which includes payday advance companies) in 1995, five (5) such complaints in
       1996, one (1) in 1997, two (2) in 1998, and only one (1) in 1999.62

        Some consumer advocates question the integrity of such consumer complaint statistics by

belittling the consumers they ostensibly represent. The Consumer Federation of America, for

instance, argues that consumers lack the sophistication and financial wherewithal to register their

complaints about the payday advance industry with state regulators. Not only does no evidence

57
     New Mexico Financial Institutions Division, 2000, “Consumer Lending Study Committee Report,” Page 15.

58
  North Carolina Office of the Commissioner of Banks , December 21, 1999, Letter from Daniel E. Garner, Agency Legal
Specialist.

59
     Cincinnati Post, June 19, 1999, “The Money Trap.”

60
  South Carolina Board of Financial Institutions, November 18, 1999, Letter from George R. Powell, Assistant Director of
Consumer Finance Division.

  Tennessee Department of Financial Institutions, 1998, “Report to the 101st General Assembly on the Deferred Presentment
61

Services Act,” Pages 6-9.

62
  Washington Department of Financial Institutions, Division of Consumer Services, January 25, 2000, Letter from Whittier
Johnson, Program Manager; January 27, 1998, “Closed Check Casher/Seller Complaints” Report, Page 1.


                                                             30
exist to support this argument, but CFA‟s own consumer surveys contradict the proposition that

consumers do not complain about credit products with which they are dissatisfied.

      CFA‟s surveys indicate that consumer complaints registered with state regulators have risen

sharply in recent years and that credit/lending problems are among the most frequent

complaints.63 These surveys establish that consumers who possess the demonstrated ability to

articulate complaints about other credit products with which they are dissatisfied do not

complain about the payday advance product because they understand and enjoy the simplicity,

convenience, privacy, and cost-effectiveness of the product.


IV.      Consumers use payday advance services for small, short-term cash needs only and
         consumers are not subject to abusive collection practices.


      Existing payday advance laws, enhanced by CFSA‟s Best Practices, ensure consumers‟

responsible use and licensees‟ responsible provision of the service. Existing laws provide

extensive regulatory oversight and, in most states, (i) prohibit or limit rollovers, (ii) cap the

amount of payday advance debt a consumer may incur and prohibit or limit multiple

concurrently-outstanding transactions, and (iii) prohibit use of the criminal justice system to

collect debts.       CFSA‟s Best Practices enhance existing payday advance laws by limiting

rollovers and prohibiting use of the criminal justice system as a collection tool even where

applicable payday advance laws do not require such consumer protections.




63
  “In its eighth annual survey of consumer complaints, the National Association of Consumer Agency Administrators (NACAA)
and the Consumer Federation of America (CFA) found that, between 1996 and 1998, complaints to state and local consumer
agencies rose 49 percent...” National Association of Consumer Agency Administrators and Consumer Federation of America,
November 23, 1999, “Complaints to State and Local Consumer Agencies Rise Significantly, But Not the Budgets of These
Agencies.” The survey identified a credit/lending problem as the fifth highest issue about which consumers complain to state
regulators. Id.


                                                            31
         A.        Existing payday advance laws provide extensive regulatory oversight of the
                   industry.


      The perception still exists among many members of the public that state regulatory agencies

do not closely monitor the activities of the payday advance industry. Nothing could be further

from the truth. State banking or financial institutions agencies possess substantial licensing,

auditing, and administrative disciplinary powers to regulate the payday advance industry and

ensure its compliance with applicable consumer protection laws.

      Where a provider of payday advance services operates pursuant to a state statute, such

provider must first obtain a license issued by the state regulatory agency charged with

administering the statute.64 Consequently, this paper frequently refers to providers of payday

advance services as “licensees.” Statutes authorizing payday advance services provide state

regulators significant statutory powers with which to administer and enforce such statutes,

including several or all of the following:


      Requiring licensees to submit to, and pay for, periodic audits to ensure compliance with
         applicable state laws;

      Requiring the licensee to provide a surety bond and demonstrate a minimum net worth;

      Examining the moral character and financial services experience of the licensee‟s
         principals and performing a criminal background check on such persons; and

      Requiring licensees to complete and file periodic written reports regarding business
         operations.


      CFSA supports strict licensure requirements, which act as barriers to entry for irresponsible,

financially unsound, or otherwise unfit license applicants. CFSA further supports vigorous state

regulatory oversight of the payday advance industry. Indeed, vigorous enforcement of existing


64
  One caveat: although the Hawaii Check Cashing Act authorizes payday advance services and charges the Department of
Commerce and Consumer Affairs with enforcement of the statute, the statute does not require licensure for providers of the
product.



                                                              32
payday advance laws prevents nearly all of the instances of irresponsible use of the payday

advance product about which consumer advocates complain.

        Consider, for example, the Florida consumer who testified at the Forum that he repeatedly

rolled-over a payday advance transaction in 1996 and thereby incurred substantial expense.65 By

way of a letter to all payday advance licensees dated May 5, 1998, the Florida Department of

Banking and Finance prohibited rollovers of payday advance debt.66 Thus, the rollovers that the

Florida consumer described could not legally occur in Florida today, and the Florida customer‟s

testimony serves only to buttress CFSA‟s argument that irresponsible use of payday advance

services is best prevented through enactment of balanced, industry-specific legislation that

provides the substantive consumer protections endorsed by CFSA.

        In its Written Testimony Submitted to the Forum, the Consumer Federation of America tells

the story of a Kentucky borrower who incurred substantial expense with the payday advance

product by rolling over a transaction “for 6 months.67 Because the article cited by CFA as the

source of this story is dated February 18, 1998, CFSA assumes that such rollovers took place

prior to February of 1998.68 By way of a letter to all payday advance licensees dated June 11,

1998, the Kentucky Department of Financial Institutions confirmed that the Kentucky Check

Cashing Act, as amended effective April of 1998, prohibits rollovers.69 Thus, the Kentucky

customer‟s rollovers that the CFA described could not legally occur today. CFA‟s anecdote
serves only to reinforce the propriety of lawmakers‟ enactment of the 1998 bill that amended

65
     Forum on Payday Lending, December 15, 1999, Transcript of Proceedings, Pages 4-8.

66
  Florida Department of Banking and Finance, May 5, 1998, Letter to Check Cashing and Foreign Currency Exchange Act
Licensees. See also Table of State Laws – Rollovers Prohibited, below.

67
     Consumer Federation of America, December 15, 1999, Written Testimony Submitted to the Forum, Page 4.

68
  Consumer Federation of America, December 15, 1999, Written Testimony Submitted to the Forum, Page 4. The CFA cites as
the source of this story Page 6 of its November, 1998 report entitled “The Growth of Legal Loan Sharking: A Report on the
Payday Loan Industry,” which, in turn, cites a Bank Rate Monitor Online article dated February 18, 1998.

69
   Kentucky Department of Financial Institutions, June 11, 1998, Memorandum to Check Cashing Act Licensees. See also Table
of State Laws – Rollovers Prohibited, below.



                                                              33
Kentucky‟s payday advance statute and prohibited rollovers, a bill that the industry

enthusiastically supported and that consumer advocates opposed.

      The CFSA also describes in its Written Testimony Submitted to the Forum a Tennessee

consumer who rolled-over a payday advance transaction for “over 15 months.”70 Because the

lawsuit pleading cited by CFA as the source of this anecdote was filed on March 5, 1996, CFSA

assumes that such rollovers took place prior to March of 1996.                             The Tennessee Deferred

Presentment Services Act, which became effective in October of 1997, prohibits rollovers. Thus,

the Tennessee customer‟s rollovers that the CFA describes could not legally occur today.

According to the Tennessee Department of Financial Institutions, state regulators did not possess

sufficient regulatory oversight powers to prevent irresponsible use of payday advance services

until lawmakers enacted the 1997 Tennessee payday advance statute.71

      One does not make the case for abolition of the industry by advancing “horror stories” of

consumers who use the payday advance product irresponsibly during a time period when the

industry was not subject to the industry-specific legislation or in a jurisdiction where the industry

is not currently subject to such legislation. Instead, such stories only strengthen CFSA‟s position

that state lawmakers can best prevent irresponsible use of the payday advance product by

enacting balanced and industry-specific legislation that authorizes, licenses, and tightly regulates

the industry.
      More often than not, examples of irresponsible use of payday advance services – described

with hyperbolic alarm by consumer advocates – take place due to the absence, not the presence,

of the type of balanced, industry-specific legislation that CFSA endorses. The history of the

industry has shown that the passage of industry-specific legislation in a previously unregulated

70
  Consumer Federation of America, December 15, 1999, Written Testimony Submitted to the Forum, Page 4. The CFA cites as
the source of this anecdote Page 6 of its November 1998 report entitled “The Growth of Legal Loan Sharking: A Report on the
Payday Loan Industry,” which, in turn, cites a pleading in a lawsuit filed in Tennessee state court on March 5, 1996.

71
  “Most of the abuses that existed prior to the effective date of the Act have now been addressed through the examination
process. … Moreover, now the Department has jurisdiction over this industry, consumers now have an agency with which they
may seek assistance when dealing with this industry.” Tennessee Department of Financial Institutions, 1998, “Report to the
101st General Assembly on the Deferred Presentment Services Act,” Page 11. .


                                                            34
or under-regulated state benefits consumers. It forces unscrupulous operators out of the state,

reduces the cost of payday advance services to consumers, allows consumers to benefit from

substantive consumer protections codified in the legislation, and brings professional multi-unit

regional and national companies to the state to offer the service.

        B.           Existing payday advance laws prohibit or limit rollovers.


        In addition to providing extensive regulatory oversight, statutes authorizing payday advance

services typically limit or prohibit rollovers. As used in this paper, the term “rollover” means

any refinance of a payday advance debt or any extension or deferral of the Payment Due Date 72

of such transaction for an additional Finance Charge. According to industry practice, a customer

rolls-over a payday advance debt by (i) paying the interest due on the Payment Due Date of the

transaction and (ii) entering into a subsequent transaction that has an identical Amount Financed,

an identical Finance Charge, and a Payment Due Date that is tied to the customer‟s next payday,

which is typically ten to thirty days later.

        Thus, even where rollovers are permitted by applicable law and by CFSA‟s Best Practices,

rollovers never result in the compounding of interest. For example, a customer who rolls-over a

payday advance transaction with an Amount Financed of $100, a Finance Charge of $15, and a

Payment Due Date on January 1, would typically pay $15 on January 1 and enter into a second

transaction, pursuant to a separate written agreement containing a new set of TILA disclosures,
with an Amount Financed of $100, a Finance Charge of $15, and a Payment Due Date of January

15.

        The following two tables summarize the state payday advance statutes that prohibit or limit

rollovers.




72
     The term “ Payment Due Date,” as used herein, shall have the same meaning ascribed to it in TILA and Regulation Z.




                                                               35
                              Table of State Laws – Rollovers Prohibited
    State                                             Provision Prohibiting Rollovers
Arkansas      • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
              §6(M) of the Arkansas Check-Cashers Act.
              • Licensee may not defer or extend the payment due date of a transaction. §6(M) of the Arkansas
              Check-Cashers Act.
California    • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
              §1789.33(e) of the California Check Cashers Law.
              • Licensee may not defer or extend the payment due date of a transaction. §1789.33(e) of the California
              Check Cashers Law.
Colorado      • Neither licensee nor its affiliates may allow a customer to retire an existing debt with the proceeds from a
              new transaction. Rule 7(2)(c) promulgated pursuant to the Colorado Uniform Consumer Credit Code.
              • Neither licensee nor its affiliates may extend or defer the payment due date of a transaction. §7(2)(c)
              promulgated pursuant to the Colorado Uniform Consumer Credit Code.
Florida       • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
              Department of Banking and Finance Letter dated May 5, 1998 issued pursuant to the Florida Check Cashing
              and Foreign Currency Exchange Act.
              • Licensee may defer or extend the payment due date of a transaction, so long as the debt is treated as a
              revolving debt subject to interest at the rate of 18% per annum following the payment due date. Department
              of Banking and Finance Letter dated May 5, 1998 issued pursuant to the Florida Check Cashing and Foreign
              Currency Exchange Act.
Hawaii        • Operator may not allow a customer to retire an existing debt with the proceeds from a new transaction.
              §4(d) of the Hawaii Check Cashing Act.
              • Operator may not defer or extend the payment due date of a transaction. §4(d) of the Hawaii Check Cashing
              Act.
Iowa          • Neither licensee nor its affiliates may allow a customer to retire an existing debt with the proceeds from a
              new transaction. §533D.10(1)(e) and §533D.10(2) of the Iowa Delayed Deposit Services Act.
              • Licensee may not defer or extend the payment due date of a transaction. §533D.10(1)(e) and §533D.10(2)
              of the Iowa Delayed Deposit Services Act.
              • Additionally, a one (1) day “cooling off” period is required between depositing or redeeming a customer‟s
              check and accepting a new check for deferred deposit from the same customer; provided, however, that no
              “cooling off” period is required if the two (2) customer checks do not aggregate to more than $500. Iowa
              Division of Banking Interpretive Bulletin No. 1 dated September 16, 1997.
Kansas        • Neither licensee nor its affiliates may allow a customer to retire an existing debt with the proceeds from a
              new transaction. §16a-2-404(4) of the Kansas Uniform Consumer Credit Code.
              • Neither licensee nor its affiliates may defer or extend the payment due date of a transaction. §16a-2-404(4)
              of the Kansas Uniform Consumer Credit Code.
Kentucky      • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
              §368.100(15) of the Kentucky Check Cashing Act and Department of Financial Institutions Memorandum
              dated June 11, 1998.
              • Licensee may not defer or extend the payment due date of a transaction. §368.100(15) of the Kentucky
              Check Cashing Act and Department of Financial Institutions Memorandum dated June 11, 1998.
Minnesota     • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
              §47.60(2)(f) of the Minnesota Small Loan Act.
              • Licensee may not extend or defer the payment due date of a transaction. §47.60(2)(f) of the Minnesota
              Small Loan Act.
Mississippi   • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
              §75-67-519(5) Mississippi Check Cashers Act.
              • Licensee may not defer or extend the payment due date of a transaction. §75-67-519(5) of the Mississippi
              Check Cashers Act.




                                                        36
    State                                              Provision Prohibiting Rollovers
Montana        • Neither licensee nor its affiliates may allow a customer to retire an existing debt with the proceeds from a
               new transaction. §13(9) and §13(11) of the Montana Deferred Deposit Loan Act.
               • Licensee may defer or extend the payment due date, so long as licensee does not charge an additional fee
               therefor. §13(11) of the Montana Deferred Deposit Loan Act.
Nebraska       • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
               §45-919(1)(e) of the Nebraska Delayed Deposit Services Licensing Act.
               • Licensee may not defer or extend the payment due date of a transaction. §45-919(1)(e) of the Nebraska
               Delayed Deposit Services Licensing Act.
North Carolina • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
               §53-281(e) of the North Carolina Check Cashing Business Act and Paragraph 4 of the Office of
               Commissioner of Banks‟ Declaratory Ruling dated November 30, 1998.
               • Licensee may not defer or extend the payment due date of a transaction. §53-281(e) of the North Carolina
               Check Cashing Business Act and Paragraph 4 of the Office of Commissioner of Banks‟ Declaratory Ruling
               dated November 30, 1998.
Ohio           • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
               §1315.39(A)(5) and §1315.41(D) of the Ohio Check Cashing Loan Act.
               • Licensee may not defer or extend the payment due date of a transaction §1315.39(A)(5) and §1315.41(D) of
               the Check Cashing Loan Act.
               • Additionally, a one (1) day “cooling off” period is required between depositing or redeeming a customer‟s
               check and accepting a new check for deferred deposit from the same customer. §1301:8-9-05(B)(1) of the
               Division of Financial Institutions administrative regulations promulgated pursuant to the Ohio Check Cashing
               Loan Act.
South Carolina • Neither licensee nor its affiliates may allow a customer to retire an existing debt with the proceeds from a
               new transaction. §34-39-180(F) of the South Carolina Deferred Presentment Services Act.
               • Neither licensee nor its affiliates may defer or extend the payment due date of a transaction. §34-39-180(F)
               of the South Carolina Deferred Presentment Services Act.
Tennessee      • Neither licensee nor its affiliates may allow a customer to retire an existing debt with the proceeds from a
               new transaction. §45-117-112(q) of the Tennessee Deferred Presentment Services Act.
               • Neither licensee nor its affiliates may defer or extend the payment due date of a transaction. §45-117-112(q)
               of the Tennessee Deferred Presentment Services Act.
Washington     • Licensee may not allow a customer to retire an existing debt with the proceeds from a new transaction.
               §208-630-085(2)(a) of the Washington Check Cashers and Sellers Act.
               • Licensee may defer or extend the payment due date of a transaction, so long as licensee does not charge the
               customer a fee therefor. §208-630-085(2)(d) of the Washington Check Cashers and Sellers Act.
Wyoming        • Licensee may not allow the customer to retire an existing debt with the proceeds from a new transaction.
               §40-14-364 of the Wyoming Uniform Consumer Credit Code.
               • Licensee may not defer or extend the payment due date of a transaction. §40-14-364 of the Wyoming
               Uniform Consumer Credit Code.


                                  Table of State Laws – Rollovers Limited
     State                                               Provision Limiting Rollovers
Idaho           • As a general rule, the licensee may not allow a customer to retire an existing debt with the proceeds of a
                new transaction more than three (3) times on the basis that such conduct would be unconscionable; provided,
                however, that even a single rollover may be considered unconscionable “if it clear to the lender that there is
                no reasonable probability of payment in full by the debtor.” Page 2 of State Enforcement Policy #99-1.
                • As a general rule, the licensee may not defer or extend the payment due date of a transaction more than
                three (3) times on the basis that such conduct would be unconscionable; provided, however, that even a single
                rollover may be considered unconscionable “if it is clear to the lender that there is no reasonable probability
                of payment in full by the debtor.” Page 2 of State Enforcement Policy #99-1.



                                                          37
      State                                               Provision Limiting Rollovers
Illinois        • “Rollovers” (i.e., apparently including both refinances and deferrals/extensions) are expressly authorized;
                provided, however, that (i) licensee may not allow the customer to rollover the same debt more than three (3)
                times and (ii) licensee may not allow a customer to rollover a debt that is delinquent either three (3) deferral
                periods or forty-five (45) days, whichever is longer. Paragraphs 4 and 5 of licensee‟s Other Business
                Authorization issued pursuant to the Illinois Consumer Installment Loan Act.
Louisiana       • Licensee may allow a customer to retire an existing debt with the proceeds from a new transaction so long
                as 25% of the funds used to retire the existing debt come from a source other than the proceeds of the new
                transaction. §9:3578.6(7) of the Louisiana Deferred Presentment and Small Loan Act.
                • Licensee may not defer or extend the payment due date of a transaction. §9:3578.6(7) of the Deferred
                Presentment and Small Loan Act.
Nevada          • Licensee may allow a customer to retire an existing debt with the proceeds from a new transaction any
                number of times so long as the payment due date of the last refinance transaction is not later than ten (10)
                weeks following the payment due date of the original transaction. §5.5(5) of AB431 (enacted but not yet
                codified), amending the Nevada Check Cashing and Deferred Deposit Services Act.
                • Licensee may defer or extend the payment due date of a transaction any number of times so long as the
                payment due date of the last deferral/extension is not later than ten (10) weeks following the payment due
                date of the original transaction. §5.5(5) of AB431 (enacted but not yet codified), amending the Nevada Check
                Cashing and Deferred Deposit Services Act.
Utah            • Licensee may not allow a customer to “rollover” a transaction debt more than twelve (12) weeks from the
                date the first customer contract was executed. §7-23-105(2) of the Utah Consumer Credit Code. This
                provision implicitly authorizes five (5) refinances or deferrals/extensions, assuming a deferral period of
                fourteen (14) days for each transaction.

       C.          Existing payday advance laws (i) cap the amount of payday advance debt a
                   consumer can       incur and       (ii) prohibit or limit multiple,
                   concurrently-outstanding transactions.


       Existing state laws further ensure responsible use of the payday advance product by limiting

  the amount of payday advance debt a consumer can incur and by limiting the ability of a

  consumer to receive multiple, concurrently-outstanding payday advance transactions from the

  same licensee or, in some instances, from any other licensee. The following table summarizes
  the state statutes that (i) cap the amount of payday advance debt a consumer can incur and/or (ii)

  prohibit or limit the number or aggregate amount of multiple, concurrently-outstanding

  transactions.


                     Table of State Laws – Payday Advance Debt Capped and
              Multiple, Concurrently-Outstanding Transactions Prohibited or Limited
    State                 Provision Prohibiting or Restriction Multiple, Concurrently-Outstanding Transactions
Arkansas       • The maximum amount of a single customer‟s check is $400. §6(M) of the Arkansas Check-Cashers Act.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
               customer is $400. §6(M) of the Arkansas Check-Cashers Act.
               • The maximum number of concurrently-outstanding checks held by the licensee from the same customer is one
               (1). §6(M) of the Arkansas Check-Cashers Act.

                                                           38
     State               Provision Prohibiting or Restriction Multiple, Concurrently-Outstanding Transactions
California    • The maximum amount of a single customer‟s check is $300. §1789.33(a) of the California Check Cashers Law.
              • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
              customer is $300. §1789.35(e) of the California Check Cashers Law.
              • The maximum number of concurrently-outstanding checks held by the licensee from the same customer is one
              (1). §1789.35(e) of the California Check Cashers Law.
Colorado      • The maximum amount of a single customer‟s check is $500. Rule 7(2)(b) promulgated under the Colorado
              Uniform Consumer Credit Code.
              • The maximum aggregate amount of concurrently-outstanding checks held by the licensee or its affiliates from
              the same customer or any person sharing a bank account with that customer is $500. Rule 7(2)(b) promulgated
              under the Colorado Uniform Consumer Credit Code.
              • The maximum number of concurrently-outstanding checks held by the licensee or its affiliates from the same
              customer or any person sharing a bank account with that customer is two (2). Rule 7(2)(b) promulgated under the
              Colorado Uniform Consumer Credit Code.
Hawaii        • The maximum amount of a single customer‟s check is $300. §4(c) of the Hawaii Check Cashing Act.
              • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
              customer is $300. §4(d) of the Hawaii Check Cashing Act.
              • The maximum number of concurrently-outstanding checks held by the licensee from the same customer is one
              (1). §4(d) of the Hawaii Check Cashing Act.
Iowa          • The maximum amount of a single customer‟s check is $500. §533D.10(1)(b) of the Iowa Delayed Deposit
              Services Act.
              •The maximum aggregate amount of concurrently-outstanding checks held by the licensee or its affiliates from the
              same customer is $500. §533D.10(1)(b) and §533D.10(2) of the Iowa Delayed Deposit Services Act and State
              Interpretive Bulletin No. 1 dated September 16, 1997.
              • The maximum number of concurrently-outstanding checks held by the licensee or its affiliates from the same
              customer is two (2). §533D.10(1)(a) and §533D.10(2) of the Iowa Delayed Deposit Services Act and State
              Interpretive Bulletin No. 1 dated September 16, 1997.
Kansas        • The maximum Amount Financed for a single transaction is $300, which amount is indexed to the Consumer
              Price Index and is subject to adjustment every April 30. §16a-2-404(1)(c), §16a-2-401(2)(a), and
              §16a-2-401a(4)(a) of the Kansas Uniform Consumer Credit Code.
              • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
              customer is $300 (exclusive of the Finance Charge). §16a-2-404(1)(c), §16a-2-401(2)(a), and §16a-2-401a(4)(a)
              of the Kansas Uniform Consumer Credit Code.
Kentucky      • The maximum amount of a single customer‟s check is $500. §368.100(10) and (11) of the Kentucky Check
              Cashing Act and Page 1 of the State‟s June 11, 1998 Memo.
              • The maximum aggregate amount of concurrently-outstanding checks held by the licensee or any other licensee
              from the same customer is $500. §368.100(10) and (11) of the Kentucky Check Cashing Act.
              • The maximum number of concurrently- outstanding checks held by the licensee or any other licensee from the
              same customer is two (2). §368.100(10) of the Kentucky Check Cashing Act and Page 2 of State‟s Memo dated
              June 11, 1998 (“[l]icensees may have as many as two (2) transactions outstanding with a customer, as long as the
              total amount outstanding does not exceed $500”).
Louisiana     • The maximum Amount Financed for a single transaction is $350. §9:3578.3(2)(c) of the Louisiana Deferred
              Presentment and Small Loan Act.
              • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
              customer is $395 (i.e., the $350 Amount Financed plus the $45 Finance Charge). §9:3578.3(2)(c) of the
              Louisiana Deferred Presentment and Small Loan Act.
Minnesota     • The maximum amount Financed of a single transaction is $350. §47.60(2)(f) of the Minnesota Small Loan Act.
              • The maximum aggregate amount of concurrently-outstanding checks held by The licensee from the same
              customer is $376 (i.e., the $350 Amount Financed plus the $26 Finance Charge). §47.60(2)(f) of the Minnesota
              Small Loan Act.
Mississippi   • The maximum amount of a single customer‟s check is $400. §75-67-519(2) of the Mississippi Check Cashers
              Act.
              • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
              customer is $400. §75-67-519(2) of the Mississippi Check Cashers Act.
                                                        39
     State                  Provision Prohibiting or Restriction Multiple, Concurrently-Outstanding Transactions
Missouri       • The maximum Amount Financed for a single transaction is $499.99. §408.500(1) of the Missouri Small, Small
               Loan Act.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
               customer is $499.99 (exclusive of the Finance Charge). §408.500(1) of the Missouri Small, Small Loan Act.
Montana        • The maximum Amount Financed for a single transaction is the lesser of (i) $300 or (ii) 25% of the customer‟s
               net monthly income. §13(6), §10(2), and §13(10) of the Montana Deferred Deposit Loan Act.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
               customer is the lesser of (i) $400 (i.e., the $300 Amount Financed plus the $100 Finance Charge) or (ii) 25% of
               the customer‟s net monthly income (exclusive of the Finance Charge). §13(10) and §12(2) of the Montana
               Deferred Deposit Loan Act.
               • The maximum number of concurrently-outstanding checks held by the licensee from the same customer is two
               (2). §13(10) of the Montana Deferred Deposit Loan Act.
Nebraska       • The maximum amount of a single customer‟s check is $500. §45-919(1)(b) of the Nebraska Delayed Deposit
               Services Act.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee or its affiliates from
               the same customer is $500. §45-919(1)(b) of the Nebraska Delayed Deposit Services Licensing Act.
               • If the customer maintains a joint checking account, the $500 limit applies to each signator independently. Thus,
               for example, The licensee could hold concurrently outstanding checks from each of two (2) joint account holders
               in the aggregate amount of $1,000. State‟s Interp. Op. No. 2 issued pursuant to the Nebraska Delayed Deposit
               Services Licensing Act.
               • The maximum number of concurrently-outstanding checks held by the licensee or its affiliates from the same
               customer is two (2). §45-919(1)(a) of the Nebraska Delayed Deposit Services Licensing Act.
Nevada         • The maximum Amount Financed for a single transaction is an amount equal to one-third of the customer‟s net
               monthly income during the term of the transaction. §5.5(2) of AB431 (enacted by not yet codified), amending the
               Nevada Check Cashing and Deferred Deposit Services Act.
               • The maximum aggregate Amount Financed for multiple transactions is an amount equal to one-third of the
               customer‟s net monthly income. §5.5(2) of AB431 (enacted but not yet codified), amending the Nevada Check
               Cashing and Deferred Deposit Services Act.
North Carolina • The maximum amount of a single customer‟s check is $300. §53-281(b) of the North Carolina Check Cashing
               Business Act and Paragraph 6 of the State‟s Declaratory Ruling dated November 30, 1998.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee or its affiliates from
               the same customer is $300. §53-281(b) of the North Carolina Check Cashing Business Act and Paragraph 6 of the
               State‟s Declaratory Ruling dated November 30, 1998.
               • If the customer maintains a joint checking account, the $300 limit applies to each signator independently. Thus,
               for example, The licensee could hold concurrently outstanding checks from each of two (2) joint account holders
               in the aggregate amount of $600. Paragraph 6 of the State‟s Declaratory Ruling dated November 30, 1998 issued
               under the North Carolina Check Cashing Business Act.
Ohio           • The maximum Amount Financed for a single transaction is $500. §1315.39(A)(4) of the Ohio Check Cashing
               Loan Act and §1301:8-9-01(C) promulgated by the Department of Financial Institutions.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
               customer is $575 (i.e., the $500 Amount Financed plus the $75 Finance Charge). §1315.39(A)(1) and
               §1315.41(D) of the Ohio Check Cashing Loan Act and §1301:8-9-01(C) promulgated by the Department of
               Financial Institutions.
               • The maximum number of concurrently-outstanding checks held by the licensee to the same customer is one (1).
               §1315.41(D) of the Ohio Check Cashing Loan Act.
Oklahoma       • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
               customer is $230 (i.e., the $200 Amount Financed plus the $30 Finance Charge). 14A Okl. St. 3-508B(1) of the
               Oklahoma Uniform Consumer Credit Code.
               • It is unclear to the author how to reconcile the subparagraphs of 14A Okl. St. 3-508(1) -- which set forth
               authorized transaction fees for amounts financed up to $200 -- with the introductory paragraph of 14A Okl. St.
               3-508B -- which states that said section applies only to amounts financed up to $100.
South Carolina • The maximum Amount Financed for a single transaction is $300. §34-39-180(B) of the South Carolina Deferred
               Presentment Services Act.
                                                           40
     State                 Provision Prohibiting or Restriction Multiple, Concurrently-Outstanding Transactions
South Carolina • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
               customer is $345 (i.e., the $300 Amount Financed plus the $45 Finance Charge). §34-39-180(B) and (E) of the
               South Carolina Deferred Presentment Services Act.
Tennessee      • The maximum amount of a single customer‟s check is $500. §45-17-112(o) of the Tennessee Deferred
               Presentment Services Act.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee or its affiliates from
               the same customer is $500. §45-17-112(o) of the Tennessee Deferred Presentment Services Act.
               • The maximum number of concurrently-outstanding checks held by the licensee or its affiliates from the same
               customer is two (2); provided, however, that the licensee may not require a customer to tender two (2)
               concurrently- outstanding checks if the licensee‟s intent is to obtain a Finance Charge higher than that to which it
               would be entitled if the customer had tendered only one (1) check in an amount equal or greater than the
               aggregate of the two (2) smaller checks. §45-17-112(o) and §45-17-112(r) of the Tennessee Deferred
               Presentment Services Act.
               • The determination of whether the licensee‟s acceptance of two (2) concurrently-outstanding checks constitutes
               an attempt to obtain a Finance Charge higher than that to which it would otherwise be entitled is a fact-intensive
               inquiry, informed by: (i) whether the two (2) customer‟s checks are sequential in number, (ii) the time elapsed
               between the two (2) transactions, and (iii) whether there is evidence which suggests any pattern of activity
               violative of the enabling statute. State Letter to Tennessee Cash Advance Association.
Texas          • The maximum Amount Financed for a single transaction is $470. Texas Credit Letter (Volume 18, Number 36,
               dated March 9, 1999), Art. 5069-3A.401 of the Texas Credit Code, and §342.301 of the Texas Finance Code. See
               §341.202, §341.203, and §341.204 of the Texas Finance Code for method of calculating the CPI adjustments.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
               customer or that customer‟s spouse (7 TAC 1.8(b)) is $470 (exclusive of the Finance Charge). Texas Credit Letter
               (Volume 18, Number 36, dated March 9, 1999); Art. 5069-3A.401 and Art. 5069-3A.851(a) of the Texas Credit
               Code; and §342.301 and §342.651(a) of the Finance Code. See §341.202, §341.203, and §342.204 of the Texas
               Finance Code for method of calculating the CPI adjustments.
               • The maximum number of concurrently-outstanding checks held by the licensee from the same customer or that
               customer‟s spouse is one (1). Art. 5069-3A.851 of the Texas Credit Code and §342.651(a) of the Texas Finance
               Code.
Washington     • The maximum Amount Financed for a single transaction is $500. §31.45.010(4) of the Washington Check
               Cashers and Sellers Act and §208-630-005 promulgated thereunder.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
               customer is $575 (i.e., the $500 Amount Financed plus the $75 Finance Charge). §208-630-085(2)(c)
               promulgated under the Washington Check Cashers and Sellers Act.
Washington, • The maximum amount of a single customer‟s check is $1,000. §20(c)(1) and (4) of the Washington, D.C. Check
D.C.           Cashers Act.
               • The maximum aggregate amount of concurrently-outstanding checks held by the licensee from the same
               customer is $1,000. §20(c)(4) of the Washington, D.C. Check Cashers Act.



         D.          Existing payday advance laws prevent abusive collection practices.


         In addition to prohibiting or limiting rollovers and capping the amount of payday advance

   debt a customer can incur, statutes authorizing payday advance services also frequently prohibit

   a licensee from using the criminal justice system to collect debts.                        The following table

   summarizes the state payday advance laws that prohibit a payday advance licensee from using or
   threatening to use the criminal justice system as a collection tool.
                                                            41
                         Table of State Laws – Restrictions on Collection Activity
    State                                        Provision Restricting Collection Activity
Arkansas       • Licensee may not use or threaten to use criminal process to collect a payday advance debt, unless the debt
               resulted from the customer closing the account or stopping payment on the customer‟s check. §6(H) of the
               Arkansas Check-Cashers Act.
California     • Licensee may not use or threaten to use criminal process or the civil treble damages statute to collect a
               payday advance debt. §1789.33(b) and §1789.35(f) of the California Check Cashers Law.
Colorado       • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §5-5-107(2) of
               the Colorado Uniform Consumer Credit Code.
Hawaii         • Operator may not use or threaten to use criminal process or the civil treble damages statute to collect a
               payday advance debt, unless the debt resulted from the customer‟s closing the account or stopping payment
               on the customer‟s check. §4(e) and §6(d) of the Hawaii Check Cashing Act.
Idaho          • A licensee may not use or threaten to use criminal process to collect a deferred presentment services debt.
               Enforcement Policy #99-1.
               • A licensee may not recover attorney‟s fees or recover damages under the civil treble damages statutes.
               Enforcement Policy #99-1.
Indiana        • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §24-4.5-5-107
               of the Indiana Uniform Consumer Credit Code.
Iowa           • License may not use or threaten to use criminal process to collect a payday advance debt. Iowa
               Department of Justice Informal Advisory Opinion No. 87A dated February 18, 1999.
               • Iowa‟s “mini-FDCPA” applies to first-party collection activity. §357.7102 -§357.7103 of the Iowa
               Consumer Credit Code.
Kansas         • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §16a-5-107(2)
               of the Kansas Uniform Consumer Credit Code.
Kentucky       • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §368.100(16) -
               (17) of the Kentucky Check Cashing Act.
Louisiana      • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §9:3578.6(5)
               of the Louisiana Deferred Presentment and Small Loan Act.
               • Louisiana‟s “mini-FDCPA” applies to first-party collection activity. §9:3562, et seq. of the Louisiana
               Consumer Credit Law.
Mississippi    • Licensee may not use or threaten to use criminal process to collect a payday advance debt.
               §75-67-515(10) of the Mississippi Check Cashers Act.
Montana        • Licensee may not use or threaten to use criminal process or the civil treble damages statute to collect a
               payday advance debt. §13(2) of the Montana Deferred Deposit Loan Act.
Nevada         • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §5.5(1) of
               AB431 (enacted by not yet codified), amending the Nevada Check Cashing and Deferred Deposit Services
               Act.
               • Licensee may not publish or post a list of customers who have written bad checks and may not “harass”
               the customer‟s employer to collect the customer‟s bad check. NAC 604.200(1)(g) and (i) of the
               administrative regulations promulgated by the Financial Institutions Division pursuant to the Nevada
               Check Cashing and Deferred Deposit Services Act.
               • Licensee may not “advertise for sale or threaten to advertise for sale and bad check as a means to enforce
               payment of the check....” (NAC 604.200(1)(i)); provided, however, that the aforesaid provision does not
               prohibit a licensee from selling receivables to a bad debt buyer or assigning past due receivables to a
               third-party collector (NAC §604.200(2)).
North Carolina • Licensee may not use or threaten to use criminal process to collect a payday advance debt. Paragraph 8 of
               Office of Commissioner of Bank‟s Declaratory Ruling dated November 30, 1998.
Oklahoma       • Licensee may not use or threaten to use criminal process to collect a payday advance debt. 14A Okl. St.
               5-107(2) of the Oklahoma Uniform Consumer Credit Code.



                                                           42
    State                                         Provision Restricting Collection Activity
South           • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §34-39-180(G)
Carolina        of the South Carolina Deferred Presentment Services Act and §37-5-107 of the South Carolina Consumer
                Protection Code.
Tennessee       • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §45-17-112(i)
                of the Tennessee Deferred Presentment Services Act.
Texas           • The administrative regulations promulgated under the Texas Credit Code apply to first-party collectors in
                addition to third-party collectors. These regulations largely mirror the federal FDCPA but are somewhat
                more restrictive. For instance, a payday advance licensee may not solicit payment of a debt from any
                person not obligated on the debt (e.g., the customer‟s spouse, parent, etc.)
Utah            • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §70C-7-105
                of the Utah Uniform Consumer Credit Code.
Wyoming         • Licensee may not use or threaten to use criminal process to collect a payday advance debt. §40-14-507(b)
                of the Wyoming Uniform Consumer Credit Code.


        The tables set forth above establish that existing laws governing payday advance services
  create a comprehensive framework of regulatory oversight and provide substantive consumer

  protections that ensure responsible use of the product and prevent abusive collection practices.

  CFSA members believe that two of these consumer protections – limiting rollovers and

  refraining from use of the criminal justice system to collect debts – are so fundamental to

  consumers‟ welfare that they should be universally applied to all payday advance transactions,

  even those taking place in states where the applicable law does not require such protections.


        E.          CFSA’s Best Practices limit rollovers where not otherwise prohibited or
                    limited by applicable law.


        In most of the states, in which the industry exists, the state statute authorizing payday

  advance services prohibits rollovers entirely or limits the number of permissible rollovers. In the
  remaining states in which the industry exists, most customers do not rollover their payday

  advance debts. The Colorado Office of the Attorney General, for instance, found that in 1998

  only 21.92% of the total “post-dated check” loans were rolled-over. In 1997, consumers

  rolled-over only 15.5% of such loans.73




  73
    Colorado Office of the Attorney General, 1998, 1997, “Post-Dated Check Cashers/Supervised Lenders‟ Annual Report.”
  (providing data on payday advance transactions taking place during calendar year 1997).


                                                             43
      In the few states where existing law does not prohibit or limit rollovers, the following CFSA

Best Practices discourage the customer from carrying the debt for a long period of time:


     Best Practice 4: Encourage consumer responsibility. A member will implement policies and
     procedures to inform consumers of the intended use of the payday advance service. These
     policies will include notifying consumers that a payday advance is a short-term cash flow
     tool not designed as a solution for longer-term financial problems.

     Best Practice 5: Limit/prohibit roll-overs. Although a payday advance is a short-term
     solution to an immediate need, we recognize that a short-term cash flow problem may take
     several pay periods in order to correct itself. In states where roll-overs are prohibited by
     applicable law, a member will not under any circumstances allow a customer to do roll-overs.
     In states where a roll-over is permissible, a member will follow applicable state law but in no
     case allow a customer to roll-over a transaction more than four times.

     Best Practice 6: Right to rescind. A member will give its customers the right to rescind, at
     no cost, a payday advance transaction on or before the close of the following business day.


      These CFSA Best Practices advance the theme that rollover caps and heightened disclosures

– not annual interest rate caps – represent the key to ensuring short-term and cost-efficient use of

payday advance services.                Upon performing an exhaustive review of the payday advance

industry, state regulators in New Mexico74 and Illinois75 issued findings and recommendations in

their respective reports echoing this same theme.




74
   “The Director intends to promulgate a regulation requiring the prominent display of signage posted in each lending location
that retails very small, short term, closed-end loans that includes easily understood information describing the loan product, the
costs, the repayment requirements, and consequences of not repaying the loan. Additionally, such signage will include an active
toll-free telephone number for consumers to access to ask questions, discuss issues and resolve disputes.” New Mexico Financial
Institutions Division, 2000, “Consumer Lending Study Committee Report,” Director‟s Recommendation No. 6

75
   “„It seems to us that in lieu of any (additional) regulation, the focus needs to be on consumer education,‟ she [a spokesperson
for the Illinois Department of Financial Institutions] said. „We‟re working to get the message out that short-term loans,
especially payday loans, are not a bad tool if people use them as they were intended to be used, which is as a stop gap measure
when people are experiencing a short-term financial crunch.‟” Chicago Tribune, November 18, 1999, “Payday Loans Hit Pay
Dirt” (Emphasis added).



                                                                44
      F.           CFSA’s Best Practices prohibit abusive collection practices where not
                   otherwise prohibited by applicable law.


      Other CFSA Best Practices reflect CFSA members‟ commitment to avoiding the abusive

collection practices that consumer advocates frequently (but erroneously) associate with the

industry. As demonstrated above, in most of the states in which the payday advance industry

exists, the state statute authorizing payday advance services prohibits a licensee from using the

criminal justice system to collect delinquent debts. In the balance of the states in which the

industry exists, the following Best Practices ensure that CFSA members perform their collection

activity in a fair and professional manner:


      Best Practice 7: Appropriate collection practices. A member must collect past due
      accounts in a professional, fair and lawful manner. A member will not use unlawful threats,
      intimidation, or harassment to collect accounts. CFSA believes that the collection
      limitations contained in the Fair Debt Collection Practices Act (FDCPA)76 should guide a
      member‟s practice in this area.

      Best Practice 8: No criminal action. A member will not threaten or pursue criminal
      actions against a customer as a result of the customer‟s check being returned unpaid or the
      customer‟s account not being paid.


      CFSA recognizes that consumers patronize its members‟ stores in large part because of the

respectful and personalized service consumers receive there. Collecting delinquent debts in a

fair and professional manner delivers on CFSA members‟ promise to their customers to provide

the kind of respectful and personalized service that has made their stores “neighborhood

financial service centers” for America‟s middle-class.




76
   15 U.S.C. §1691, et seq. CFSA members use the FDCPA as a collection practices guide even though the statute applies only
to those collecting debts owed to another (so-called “third-party collectors”) and does not apply to those collecting their own
debts (so-called “ first-party collectors”). Consumer advocates widely credit the FDCPA with preventing abusive collection
practices within the third-party collection industry. See, e.g. Wall Street Journal, November 20, 1997, “As Many People Sink
Into Debt, One Group of Workers Prospers.” (Quoting consumer advocate who opines that the FDCPA has caused the
third-party collection industry to “clean up its act quite a bit.”)



                                                              45
        G.            CFSA’s Best Practices ensure responsible underwriting practices.


        In order to further ensure responsible and short-term use of payday advance services, CFSA

follow responsible underwriting practices.                      Members of CFSA underwrite payday advance

transactions in a manner that strikes the appropriate balance between (i) ensuring that the

customer possesses enough income to retire the entire debt on the original Payment Due Date,

thereby avoiding the customer‟s need to rollover the debt or default on the debt, and (ii)

providing the customer convenient access to enough cash to solve the customer‟s temporary

cash-flow problem.

        Through its collective experience over the past decade, the payday advance industry has

determined that a licensee can generally accomplish both goals by advancing to the customer up

to 25%- 50% of the customer‟s next bi-weekly77 paycheck, net of the payday advance Finance

Charge, FICA and income tax deductions, health insurance premiums, savings/retirement

contributions, and other items automatically deducted by the employer from the customer‟s next

paycheck.

        Given the responsible underwriting practices its members have historically followed and

continue to follow, CFSA objects to the exhibit to the Forum entitled “Ability to Repay Payday

Loan Scenarios – Allowable Loan” (hereinafter the “Forum Exhibit”). The Forum Exhibit sets

out the income and expense data contained in the Bureau of Labor Statistics‟ Consumer
Expenditure Survey (hereinafter the “CES”)78 and analyzes the ability of consumers with

household incomes of $25,000 and $35,000 to repay a payday advance debt.

        The Forum Exhibit employs a flawed analysis by assuming that the only money available to

a consumer to repay a payday advance debt is the consumer‟s bi-weekly household income, net

of the taxes, savings, and essential expenditures identified in the Forum Exhibit (hereinafter
77
  For customers who are paid on a monthly basis, the industry‟s general underwriting guidelines cap the Amount Financed at an
amount equal to 12½ % - 25% of the customer‟s next monthly paycheck, net of the payday advance Finance Charge, FICA and
income tax deductions, health insurance premiums, savings/retirement contributions, and other items automatically deducted by
the employer from the customer‟s next paycheck.

78
     The Forum Exhibit does not indicate the year of the CES.


                                                                46
collectively the “Essential Expenditures”). In fact, a consumer may repay a payday advance debt

from a source of money other than the customer‟s next paycheck, which source, for one reason

or another, was not immediately available when the consumer entered into the payday advance

transaction.

     More importantly, one should not calculate the amount the consumer‟s bi-weekly household

income available to retire a payday advance debt by netting out the Essential Expenditures. The

error in this analysis is demonstrated by Forum Exhibit‟s own figures. According to the Forum

Exhibit, consumers with an annual household income of $25,000 run a net deficit of $28 every

two weeks, even before paying expenses for clothing, education, entertainment, personal and life

insurance, reading, personal care products and services, housekeeping supplies, tobacco, and

alcohol.

     If the Forum Exhibit‟s logic holds – namely, that a consumer should be ineligible for a

payday advance unless the consumer‟s bi-weekly household income, net of the Essential

Expenditures, is sufficient to retire the entire debt – then every consumer in the country with an

annual household income of $25,000 and less would be ineligible for a payday advance. Such a

result would effectively remove this credit option from the very consumers to whom the payday

advance product is the most valuable. Such a result would still fail to explain how a consumer –

who experiences a bi-weekly cash-flow deficit even before incurring the expense for which the
consumer needs the payday advance – will obtain the cash to pay either (i) the expense itself or

(ii) the cost of the short-term credit vehicle used in lieu of a payday advance to pay the expense

(e.g., returned check fees, contractual default penalties such as late fees, credit card interest, etc.)

     Indeed, extending the Forum‟s analysis to its logical conclusion, if consumers with annual

household incomes of $25,000 and less are unable to service a payday advance debt because they

experience negative bi-weekly cash-flow, then such consumers would similarly be unable to

service the debt of any credit product for the same reason. CFSA does not believe that an

analysis which, when fully applied, bars all Americans with annual household incomes of
$25,000 and less from all forms of consumer credit usefully informs the debate about the payday
                                                   47
advance industry.           Instead, this debate should be informed by the millions of middle-class

consumers who believe that they, not consumer advocates and not the government, should

determine how to best manage their personal finances.


V.         Consumers evaluate the price of payday advance services based on the dollar cost,
           not the annual percentage rate.


      Because annual percentage rate constitutes an inappropriate “measuring stick” with which

to fairly evaluate the cost of payday advance services, consumers generally evaluate the price of

the service based on the dollar cost of the service compared to the dollar cost of available

short-term cash alternatives. Similarly, payday advance laws generally limit the cost of payday

advance services based on fixed dollar amounts rather than based on an annual interest rate cap.


      A.           Annual percentage rate is an inappropriate “measuring stick” with which to
                   fairly evaluate the cost of payday advance services.


      Given the small, short-term nature of payday advance services, utilizing Annual Percentage

Rate as a “measuring stick” with which to evaluate the cost of the product is “inadequate and

misleading”79 and “clearly illogical.”80 The New Mexico Financial Institutions Division, after

conducting an exhaustive review and analysis of the consumer loan industry, including the

payday advance industry, concluded the following:


                   The short term, small closed-end loan has demonstrated its ability to
                   function in the lending marketplace and is successful when appropriately
                   used as a short-term product. These loans are not designed for nor should

79
  “The federal Truth in Lending Annual Percentage Rate calculation and disclosure by itself is inadequate and misleading as the
sole disclosure for the actual cost of very small, short-term, closed-end loan products.” (Emphasis added). New Mexico
Financial Institutions Division, 2000, “Consumer Lending Study Committee Report,” Director‟s Finding No. 6.

80
   “Expressing the terms of this type of transaction [a payday advance transaction] as an Annual Percentage Rate (APR) is not a
fair comparison. An APR is a calculation made over a 12 month/365 period. To attempt to compare the costs of a transaction
that has a maximum life of 30 days and calculate it as though it has a 365 day life, is clearly illogical.” (Emphasis added).
California Assembly Committee on Consumer Protection, Governmental Efficiency and Economic Development, April 15, 1999,
“Analysis of AB425” Page 4.



                                                              48
                    be used for long term purposes and cannot successfully be used to address
                    long term family budgeting and credit needs. An industry report proposes
                    the analogy of using these loans as one would use a taxi. It would make
                    sense to hire a taxi to go across town but not to travel across the country.81

      The Annual Percentage Rate figure misleads consumers because it assumes a fact that is

necessarily untrue, namely, that the licensee will collect a year‟s worth of high-APR Finance

Charges. In fact, the licensee collects only approximately two-weeks‟ worth of such Finance

Charges. A consumer‟s payday advance debt cannot remain outstanding for an entire year

because existing payday advance laws, enhanced by CFSA‟s Best Practices, require the

consumer to retire the entire debt either on the original maturity date or, at the latest, after the

fourth rollover.

      Providers of payday advance services must recover the same fixed transactional costs (e.g.,

salaries, bad debt,82 rent, computer software, general and administrative overhead, etc.) that

providers of larger, long-term credit products must recover. These fixed transactional costs,

when recovered over the life of a credit transaction with a term of a year or longer, cause the

Annual Percentage Rate of the transaction to increase only marginally. In contrast, when such

costs are recovered over the life of a two-week payday advance transaction, the Annual

Percentage Rate of the transaction increases dramatically.83

      Fortunately for payday advance customers, the high Annual Percentage Rate of payday

advance services does not fairly reflect the cost of the product. Instead, the high Annual

Percentage Rate merely reflects the inverse relationship between the Annual Percentage Rate and

the term of a credit transaction. Such inverse relationship between the Annual Percentage Rate
81
   New Mexico Financial Institutions Division, 2000, “Consumer Lending Study Committee Report,” Page 5 (Summary
Conclusion).
82
   The unsecured payday advance product produces higher bad debt expenses than other sub-prime credit products that are
secured. See, e.g., The Economist, June 5, 1999, “Pay Dirt” (“John Caskey, a professor at Swarthmore College in Pennsylvania
who has long studied the „alternative financial sector,‟ reckons that sub-prime lenders charge high rates primarily because their
transactions are small and the risk of bad cheques is high.”)

83
   “A given unit cost of a transaction will translate into a much larger interest rate in a small loan with a short maturity date than
it would on a larger loan with a longer maturity. It may, for example, cost $10 to make a one month $50 loan and $100 to make a
one year $1,000 loan. Expressed as annual percentage rates, the cost of the former loan is much higher than that of the latter.”
Professor Caskey, John P., October 1996, “Consumer Financial Services and the Poor,” Page 58.



                                                                 49
and the term of a credit transaction similarly manifests itself in other types of short-term credit

transactions. For example:


        If a credit card company charges a $20 minimum finance charge84 for a $100 cash
         advance obtained from a credit card and the consumer pays-off the cash advance and the
         finance charge in fourteen (14) days, the Annual Percentage Rate of the transaction
         would be 521.43%.

        If a bank charges a $25 NSF check fee on a $100 dishonored check and consumer
         pays-off the check and the NSF fee in fourteen (14) days, the Annual Percentage Rate of
         the transaction would be 651.79%.

        If a credit card company assesses a $30 late fee on an account with a $100 balance and
         the consumer pays-off the balance and the late fee in fourteen (14) days, the Annual
         Percentage Rate of the transaction would be 782.14%.


      Payday advance customers prefer the “apples to apples” comparison of the dollar cost of

payday advance services to the dollar cost of available short-term credit alternatives. Consumers

who make this comparison demonstrate a high degree of satisfaction with the price of the payday

advance product. Payday advance customers refuse to make the “apples to oranges” comparison

of the Annual Percentage Rate of a two-week payday advance transaction to the Annual

Percentage Rate of a loan product with a term of a year or longer. Consumers recognize that

their payday advance transaction will not remain outstanding for a year or longer and, as such,

they do not generally assign a great deal of importance to the Annual Percentage Rate figure

disclosed in the written agreement.85

      The American Association of Retired Persons (“AARP”), in its Written Testimony

Submitted to the Forum, provides the following analysis of the Annual Percentage Rate of a
84
   “ Star Bank in Cincinnati, for example, charges a minimum $20 for cash advances, which are often repaid in days or weeks.”
April 26, 1998, New York Times, “That Layered Look In Cash-Advance Fees.”
85
   “ Some short term loan customers consider the use of these loans to be a cash-flow decision rather than a loan or credit
decision. A portion of the other customers are small business owners who come to a short term loan company to meet payroll
needs or to purchase material needed to complete a job. These customers utilize the service in order to avoid the traditionally
higher banking fees that could arise from bouncing a check. These customers do not pay much attention to the prominently
placed Annual Percentage Rate required on all loans. They are only concerned with the cost of borrowing their principal
balance.” (Emphasis added). Illinois Department of Financial Institutions, 1999, “Short Term Lending Final Report,” Page 29.



                                                               50
hypothetical rollover transaction and, in so doing, illustrates why one should not evaluate the

cost of payday advance services based solely on Annual Percentage Rate:


             For example, if a consumer is charged 15% on a $200 loan, the borrower
             receives $170 in cash, and lender keeps the $30 charge. The APR on this loan
             is 458%. However, if the consumer cannot repay the loan in two weeks, an
             additional charge of $30 is imposed to extend the loan term, raising the loan
             amount to $230 and the APR to 917%.86 (Emphasis added).

Although AARP states that the licensee charges a $30 rollover fee “to extend the loan term,”

AARP fails to take the extended loan term into account when calculating the Annual Percentage

Rate of the rollover transaction. Thus, AARP arrives at the erroneous Annual Percentage Rate

figure of 917% by calculating the Annual Percentage Rate of a two-week transaction with an

Amount Financed of $170 and a Finance Charge of $60. AARP should have calculated the

Annual Percentage Rate of a four-week transaction (i.e., the original two-week term plus the

two-week extension term) where the consumer pays $60 to borrow $170. This calculation yields

an Annual Percentage Rate of 460.08%.87

      The AARP‟s innocent88 error illustrates the fallacy of the myth that one may fairly evaluate

the cost of payday advance services based solely on Annual Percentage Rate. If this myth were

true, then the cost of a payday advance transaction retired on its original maturity date would be

no greater than the cost of a payday advance transaction rolled-over dozens of times because the



86
  American Association of Retired Persons, December 15, 1999, Written Testimony Submitted to the Forum, Page 3.
87
   One calculates the Annual Percentage Rate of a payday advance transaction with an Amount Financed of $170, a Finance
Charge of $60, and a term of 28 days as follows. Multiply $60 by 365 days, then divide that product (i.e., 21,900) by 28 days,
then divide that result (i.e., 782.14) by $170. This calculation yields 4.6008, or an Annual Percentage Rate of 460.08%.

88
   CFSA will assume that a second error in AARP‟s Written Testimony Submitted to the Forum is innocent as well. In Page 4 of
its Written Testimony, the AARP (i) implies that the industry argues that payday advance services should be exempted from
“basic APR disclosures” and (ii) asserts that such argument is “disingenuous.” AARP misrepresents the industry‟s position.
CFSA does not argue that the payday advance industry should be exempted from any of TILA‟s disclosure requirements,
including disclosure of Annual Percentage Rate. See CFSA‟s Best Practices 1 and 3, set out in full in Section III(B). CFSA
argues, instead, that the APR figure its members willingly disclose pursuant to TILA is misleading when applied to the payday
advance product because the APR calculation assumes a fact that is necessarily untrue, namely, that the transaction will remain
outstanding for an entire year such that the payday advance company will collect a year‟s worth of high-APR Finance Charges.



                                                               51
Annual Percentage Rate of the two transactions would be the identical.89 Payday advance

customers, of course, recognize that the two transactions are not comparably priced. They

understand this fact because they are sophisticated enough to evaluate the price of the payday

advance product in an economically-rational manner, based on the dollar cost of the transaction

rather than based on the Annual Percentage Rate of the transaction.

        In its Written Testimony Submitted to the Forum, the Consumer Federation of America

argues that increased market competition among payday advance licensees will not depress

prices as the industry matures.90 This conclusion, in addition to turning on its head literally

centuries of supply and demand theory, contradicts the opinion of objective observers of the

industry. An investment banker that analyzes the industry opines that, as the payday advance

industry matures, banks and traditional lenders will enter the market with a lower-priced product

that represents a hybrid between payday advance services and checking account overdraft

protection.91

        The hybrid product offered by traditional lenders will “segment” the market by forcing

payday advance licensees to either decrease their prices or lose price-sensitive customers to the

hybrid product.           This trend tracks the documented “product segmentation” trend that the

sub-prime auto finance, rent-to-own, and sub-prime small loan markets have previously

experienced.         Thus, if lawmakers allow the payday advance industry to mature, “product




89
  As stated in Section IV(B), this paper defines a rollover as a non-amortizing transaction wherein the customer pays the interest
when due but does not pay down the principal. A rollover does not allow for the compounding of interest.

90
     Consumer Federation of America, December 15, 1999, Written Testimony Submitted to the Forum, Pages 6 -7.

91
  “The payday loan product evolution should continue, and we eventually expect to see segmentation within the product,
whereby banks will offer the product to their customers at rates that are significantly less than current rates. We believe that the
higher credit quality bank customer will effectively be offered overdraft protection or a derivative thereof and, hence, a lower fee.
The evolution to banks offering this product will likely marginally impact the industry by removing some of the better customers
and may marginally increase the overall loss rate. This phenomenon is analogous to the better quality auto, rent-to-own, and
small loan sub-prime customers being afforded credit by banks or other non-bank lenders.” Stephens Inc., September 28, 1999,
“The Developing „Payday Advance‟ Business,” Page 8.



                                                                52
segmentation” will produce a hybrid product that will compete with today‟ s payday advance

product on price, convenience, availability, and other factors.


        B.             Payday advance laws generally limit the cost of the product based on fixed
                       dollar amounts rather than based on an annual interest rate cap.


        Because Annual Percentage Rate constitutes an inappropriate “measuring stick” with which

to fairly evaluate the cost of payday advance services, state laws authorizing payday advance

services generally limit the cost of the product based on fixed dollar amounts rather than based

on an annual interest rate cap.92 Payday advance companies can also provide the product in an

economically-viable manner in states where the cost of consumer loans, including payday

advance services, is limited by the market rather than by artificial interest rate caps. 93 States that

continue to subject payday advance services to an annual interest rate cap effectively prohibit the

industry under that state‟s laws which often results in payday advance companies entering into

strategic partnerships with banks to allow the banks to export the “interest rate” laws of the

bank‟s home state into the state in which the consumer resides.94

        The following table summarizes the state payday advance statutes that allow payday

advance companies to provide the product in an economically-viable manner. These statutes

either (i) limit the cost of payday advance services based on fixed dollar amounts rather than

based on an annual interest rate cap or (ii) do not cap interest rates for consumer loans, including
payday advance services.



92
  As set forth in the Table of State Laws – Authorized Finance Charges, set forth below, the following states limit the cost of
payday advance services based on fixed dollar amounts rather than based on an annual interest rate cap: Arkansas, California,
Colorado, Florida, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska,
North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Washington, Washington, D.C., and Wyoming.

93
  As set forth in the Table of State Laws – Authorized Finance Charges, the following states do not cap annual interest rates for
consumer loans, including payday advance services: Delaware, Idaho, Illinois, Nevada, New Hampshire, New Mexico, Oregon,
South Dakota, Utah, and Wisconsin.

94
     See Section VI.


                                                               53
                        Table of State Laws – Authorized Finance Charges
    State                          Provision Authorizing Finance Charge                              Finance Charge
                                                                                                     for an Amount
                                                                                                    Financed of $100
Arkansas     The authorized Finance Charge is an amount equal to the sum of (i) 10% of the         $22.22
             customer‟s check and (ii) $10. §4(c)(2) of the Arkansas Check-Cashers Act.
California   The authorized Finance Charge is an amount equal to 15% of the customer‟s check. $17.65
             §1789.35(d) of the California Check Cashers Law.
Colorado     The authorized Finance Charge is $25 or an amount equal to 25% of the customer‟s Market rate,
             check, whichever is less. Administrative Rule 7(2)(a) promulgated pursuant to the      typically $15 - $20
             Colorado Uniform Consumer Credit Code.
Delaware     The authorized Finance Charge is any fee agreed to in writing. §2229 of the            Market rate,
             Delaware Licensed Lenders Act and §80-822-003(2)(a) of the Delaware                    typically $15 - $20
             Administrative Code.
Florida      The authorized Finance Charge is an amount equal to the sum of (i) 10% of the          $16.67
             customer‟s check or $5, whichever is greater, and (ii) a $5 verification fee.
             §560.309(4)(c) of the Florida Check Cashing and Foreign Currency Exchange Act
             and §3C-560.801 of the Florida Administrative Code.
Hawaii       The authorized Finance Charge is an amount equal to 15% of the customer‟s check. $17.65
             §4(c) of the Hawaii Check Cashing Act.
Idaho        The authorized Finance Charge is any fee agreed to in writing. §28-42-201(1) of the Market rate,
             Idaho Credit Code.                                                                     typically $15 - $20
Illinois     The authorized Finance Charge is any fee agreed to in writing. 205 ILCS 670/15(a) Market rate,
             of the Illinois Consumer Installment Loan Act                                          typically $15 - $20
Indiana      The authorized Finance Charge is a minimum Finance Charge of up to $33 for both Market rate,
             “consumer loans” (§24.4.5-3-201(6)) and “supervised loans” (§24-4.5-3-508(6) and typically $15 - $20
             (7)). See §24-4.5-1-106(2) of the Indiana Uniform Consumer Credit Code and 750
             IAC 1-1-1 for Consumer Price Index adjustments.
Iowa          The authorized Finance Charge is an amount equal to the sum of (i) $15 per $100 of $17.65
             the customer‟s check on the first $100 of the customer‟s check and (ii) $10 per $100
             of the customer‟s check on all additional amounts above the first $100 of the
             customer‟s check. §533D.9(1) of the Iowa Delayed Deposit Services Act.
Kansas       The authorized Finance Charge is (i) a $5 administrative fee if the Amount Financed $15.00
             is $50 or less, (ii) a $5 administrative fee plus an amount equal to 10% of the Amount
             Financed if the Amount Financed is more than $50 but equal to or less than $100, (iii)
             a $5 administrative fee plus an amount equal to 7% of the Amount Financed if the
             Amount Financed is more than $100 but equal to or less than $250, or (iv) a $5
             administrative fee plus the greater of $17.50 or 6% of the Amount Financed if the
             Amount Financed is more than $250. §16a-2-404(c) of the Kansas Uniform
             Consumer Credit Code.
Kentucky     The authorized Finance Charge is an amount equal to $15 per $100 of the customer‟s $17.65
             check. §368.100(2) of the Kentucky Check Cashing Act.
Louisiana    The authorized Finance Charge is an amount equal to 16.75% of the Amount               $16.75
             Financed. §3578.4(A) of the Louisiana Deferred Presentment and Small Loan Act.
Minnesota    The authorized Finance Charge is (i) a $5.50 administrative fee for Amounts Financed $15.00
             ranging from $0.01 - $50.00, (ii) an amount equal to 10% of the Amount Financed
             plus a $5 administrative fee for Amounts Financed ranging from $50.01 - $100.00,
             (iii) an amount equal to 7% of the Amount Financed or $10, whichever is greater, plus
             a $5 administrative fee for Amounts Financed ranging from $100.01 to $250.00, and
             (iv) an amount equal to 6% of the Amount Financed or $17.50, whichever is greater,
             plus a $5 administrative fee for Amounts Financed ranging from $250.01 - $350.00.
             §47.60(2)(a) of the Minnesota Small Loan Act.


                                                       54
    State                           Provision Authorizing Finance Charge                             Finance Charge
                                                                                                     for an Amount
                                                                                                    Financed of $100
MississippiThe authorized Finance Charge is an amount equal to 18% of the customer‟s check.        $21.95
           §75-67-519(4) of the Mississippi Check Cashers Act.
Missouri   The authorized Finance Charge is any fee contained in the licensee‟s fee schedule,      Market rate,
           which fee schedule has been filed with and approved by the Missouri Department of typically $15 - $20
           Financial Institutions (the “State”). The State‟s determination of whether to approve a
           submitted fee schedule is informed by the existing market rates for payday advance
           services in states contiguous to Missouri. §408.500(1) of the Missouri Small, Small
           Loan Act.
Montana    The authorized Finance Charge is an amount equal to 25% of the customer‟s check. $33.33
           §12(2) of the Montana Deferred Deposit Loan Act.
Nebraska   The authorized Finance Charge is an amount equal to 15% of the customer‟s check. $17.65
           §45-918 of the Nebraska Delayed Deposit Services Licensing Act.
Nevada      The authorized Finance Charge is any fee agreed to in writing. The Nevada              Market rate,
           Check-Cashing and Deferred Deposit Services Act, NAC 604.101 et seq. and §99.050 typically $15 - $20
           of the Nevada Usury Act.
New        The authorized Finance Charge is any fee agreed to in writing. §399-A:3(1)(a) of the Market rate,
Hampshire New Hampshire Small Loan Act.                                                            typically $15 - $20
New Mexico The authorized Finance Charge for transactions provided under the general usury         Market rate,
           statute is any fee agreed to in writing. New Mexico Small Loan Act, §58-15-1, et        typically $15 - $20
           seq.; New Mexico Usury Act, §56-8-11.1, et seq.; and New Mexico Attorney General
           Opinion No. 85-1.
North      The authorized Finance Charge is an amount equal to 15% of the customer‟s check. $17.65
Carolina   §53-281(e) of the North Carolina Check Cashing Business Act.
Ohio        The authorized Finance Charge is an amount equal to the sum of (i) interest in the     $15.00
           amount of 5% per month or any fraction of a month and (ii) a loan origination fee in
           the amount of $5 per $50 of the Amount Financed. §1315.40(A) and §1315.39(B) of
           the Ohio Check Cashing Loan Act.
Oklahoma The authorized Finance Charge is: (i) an amount equal to 20% of the Amount                $14.00
           Financed for Amounts Financed ranging from $0.01 - $29.99, (ii) an acquisition
           charge in an amount equal to 10% of the Amount Financed plus an installment
           account handling charge of $3.00 per month for Amounts Financed ranging from
           $30.00 - $35.00, (iii) an acquisition charge in an amount equal to 10% of the Amount
           Financed plus an installment account handling charge of $3.50 per month for
           Amounts Financed ranging from $35.01 - $70.00, (iv) an acquisition charge in an
           amount equal to 10% of the Amount Financed plus an installment account handling
           charge of $4.00 per month for Amounts Financed ranging from $70.01 - $100.00, (v)
           an acquisition charge in an amount equal to 10% of the Amount Financed plus an
           installment account handling charge of $4.50 per month for Amounts Financed
           ranging from $100.01 - $150.00, or (vi) an acquisition charge in an amount equal to
           10% of the Amount Financed plus an installment account handling charge of $5.00
           per month for Amounts Financed ranging from $150.01 - $200.00. 14A Okl. St.
           3-508B of the Oklahoma Uniform Consumer Credit Code.
Oregon     The authorized Finance Charge is any fee agreed to in writing. §725.340(1) of the       Market rate,
           Oregon Consumer Finance Act.                                                            typically $15 - $20
South      The authorized Finance Charge is an amount equal to 15% of the Amount Financed. $15.00
Carolina   §34-39-180(E) of the South Carolina Deferred Presentment Services Act.
South      The authorized Finance Charge is any fee agreed to in writing. §54-4-44 of the South Market rate,
Dakota     Dakota Installment Loan Act.                                                            typically $15 - $20



                                                       55
       State                               Provision Authorizing Finance Charge                                   Finance Charge
                                                                                                                  for an Amount
                                                                                                                 Financed of $100
Tennessee   The authorized Finance Charge is an amount equal to the lesser of (i) 15% of the                    $17.65
            customer‟s check or (ii) $30. §47-17-112(b) of the Tennessee Deferred Presentment
            Services Act.
Texas       The authorized Finance Charge is: (i) if the Amount Financed is less than $30, an       $14.00
            acquisition charge in an amount equal to 20% of the Amount Financed; (ii) if the
            Amount Financed is $30 or more but less than $35, an acquisition charge in an
            amount equal to 10% of the Amount Financed plus an installment account handling
            charge of $3 per month; (iii) if the Amount Financed is $35 or more but less than $70,
            an acquisition charge in an amount equal to 10% of the Amount Financed plus an
            installment account handling charge of $3.50 per month; (iv) if the Amount Financed
            is $70 or more but equal to or less than $100, an acquisition charge in an amount
            equal to 10% of the Amount Financed plus an installment account handling charge of
            $4 per month; or (v) if the Amount Financed is more than $100 but less than $470,*
            an acquisition charge of $10 plus an installment account handling charge of $4 per
            month for each $100 of the Amount Financed. Art. 5069-3A.402 of the Texas Credit
            Title; §342.302 of the Finance Code; and 7 TAC 1.601. *See latest version of Texas
            Credit Letter for maximum Amount Financed.
Utah        The authorized Finance Charge is any fee agreed to in writing. §70C-2-101 of the        Market rate,
            Utah Consumer Credit Code.                                                              typically $15 - $20
Washington The authorized Finance Charge is an amount equal to 15% of the Amount Financed. $15.00
            §31.45.073(2) of the Washington Check Cashers and Sellers Act.
Washington, The authorized Finance Charge is an amount equal to the sum of (i) 10% of the           $16.67
D.C.        customer‟s check or $4, whichever is greater, and (ii) a verification fee of (a) $5 for
            customer checks ranging from $0 - $250.00, (b) $10 for customer checks ranging
            from $250.01 - $500.00, (c) $15 for customer checks ranging from $500.01 - $750.00,
            or (d) $20 for customer checks ranging from $750.01 - $1,000.00. §18 and §20(c)(1)
            of the Washington, D.C. Check Cashers Act.
Wisconsin The authorized Finance Charge is any fee agreed to in writing. §138.09(7)(bp) of the Market rate,
            Wisconsin Precomputed Loan Law and §421.201(2)(bn) and §421.201(3) of the               typically $15 - $20
            Wisconsin Consumer Act.
Wyoming     The authorized Finance Charge is the greater of (i) a minimum Finance Charge of $30 Market rate,
            or (ii) interest in the amount of 5% per month on the Amount Financed. §40-14-362 typically $15 - $20
            of the Wyoming Uniform Consumer Credit Code.


        Like most of the existing payday advance laws cited above, CFSA‟s Model Legislation

adopts the approach that the cost of payday advance services should be limited by fixed dollar

amounts rather than by an annual interest rate cap. CFSA unveiled its Model Legislation at the

1999 Annual Convention of the American Legislative Exchange Counsel (“ALEC”), the nation‟s

largest bi-partisan, individual membership association of state legislators.95



95
     CFSA‟s President, Billy Webster, was a keynote speaker at this convention, held in Nashville, Tennessee.



                                                                56
        In November of 1999, ALEC‟s Commerce and Economic Development Taskforce

Committee (the “Committee”) approved CFSA‟s Model Legislation, with minor modifications,

as model legislation for regulating the payday advance industry.96 ALEC‟s full board of directors

subsequently adopted the legislation recommended by the Committee. Given the historical

influence of ALEC model legislation on state legislatures,97 ALEC‟s embrace of CFSA‟s Model

Legislation portends well for the future acceptance by state legislatures of the idea that the cost

of payday advance services should not be limited by an annual interest rate cap.


VI.         The “most favored lender” doctrine applies to the payday advance industry.


        Although state laws provide most of the regulatory oversight of payday advance licensees,

several federal laws also impact the industry. As mentioned above, the Truth-In-Lending Act

requires certain disclosures regarding the cost of credit. The Equal Credit Opportunity Act 98

prohibits discrimination on certain prohibited bases in connection with credit transactions. The

Fair Debt Collection Practices Act, also discussed above, does not apply to payday advance

licensees collecting their own debts but does serve as a model for CFSA members regarding how

they should collect delinquent accounts in a fair and professional manner. 99 Federal law impacts

the payday advance industry in one other important way, namely, by giving a payday advance

company the ability to act as a marketer-servicer for a federally-insured bank which “exports”



96
   The Taskforce removed from CFSA‟s Model Bill the provision limiting the cost of payday advance services based on fixed
dollar amounts and, by default, authorized the customer and the licensee to agree in writing to any fee for payday advance
services. The Taskforce‟s modification of CFSA‟s Model Legislation conforms to ALEC‟s historical position that the free
market – not artificial interest rate caps or fixed dollar amount caps – should limit the cost of consumer credit products.

97
   “In the legislative sessions of 1996, there were 639 introductions [of state legislation] which followed ALEC models. Of
these, 132 were enacted, for a passage rate of more than 20%.” American Legislative Exchange Council, January 7, 2000,
Website section entitled “ALEC‟s Legislative Network.” at www.alec.org.

98
     Title VII of the Consumer Credit Protection Act and Regulation B (12 C.F.R. Part 202).

99
     15 U.S.C. 1692, et seq.



                                                                57
favorable lending laws from the state in which the bank is domiciled to consumers residing in

other states.

        Federal and state courts have consistently held that the National Bank Act (the “NBA”) 100

treats federally chartered banks and the Depository Institutions Deregulation and Monetary

Control Act of 1980 (the “ DIDA”)101 treats state chartered banks and other financial institutions

accepting federally-insured deposits as “most favored lenders.” As a result, such institutions

may properly charge interest on loans at a rate equal to the “interest rate” allowed lenders in the

state where the bank is domiciled.102

        A bank‟s “most favored lender” status is exportable across state lines in the sense that the

bank may export the “ interest rate” authorized by the bank‟s home state with respect to loans

made to borrowers residing in other states. It is upon this basis that banks export their credit card

“interest rates” from their home state to other states where cardholders reside.                                        No legal

distinction exists between the ability of banks to export the credit card law of their home state

and the ability of banks to export the payday advance law of their home state because, in both

instances, the law being exported from the bank‟s home state relates to the “interest rate”103 of the

loan.

100
      12 U.S.C. §§ 85-86.

101
   Pub. L. No. 96-221, 94 Stat. 161 (1980), codified throughout Title 12 of the U.S. Code, e.g., § 1831d(a) (state commercial
banks); § 1463(g) (savings and loans); § 1785(g) (federally insured credit unions); and § 1735f-7a (mortgages).

102
   Marquette Nat‟l Bank v. First of Omaha Service Corp., 439 U.S. 299, 58 L. Ed. 2d 534, 99 S. Ct. 540 (1978) and Smiley v.
Citibank (S.D.), N.A., 517 U.S. 735, 135 L. Ed. 2d 25, 116 S. Ct. 1730 (1996). See also, Greenwood Trust Co. v. Massachusetts,
971 F. 2d 818 (1st Cir. Mass. 1992), cert. denied, 506 U.S. 1052, 122 L. Ed. 2d 129, 113 S. Ct. 974 (1993); Tikkanen v. Citibank
(South Dakota) N.A., 801 F. Supp. 270 (D. Minn. 1992); and Copeland v. MBNA Am. Bank, N.A., 907 P.2d 87 (Colo. 1995),
cert. denied, 517 U.S. 1243, 135 L. Ed. 2d 189, 116 S. Ct. 2496 (1996).

103
    Although a particular fee or charge must constitute an “interest rate” under the NBA or the DIDA as a condition of being
exportable under the “most favored lender” doctrine, this burden is certainly met in the case of the Finance Charge assessed in
connection with payday advance services. Indeed, the types of fees and charges that a bank may export from its home state
include many items other than simple interest, such as late charges (see, e.g., Goehl v. Mellon Bank (DE), 825 F. Supp. 1239
(E.D. Pa. 1993) and Nelson v. Citibank N.A., 794 F. Supp. 312 (D. Minn. 1992)); credit card over the limit (“OTL”) fees ( see,
e.g., Watson v. First Union Nat‟l Bank, 837 F. Supp. 146 (S.D. Cal. 1993) and Hill v. Chemical Bank, 799 F. Supp. 948 (D.
Minn., 1992)); cash advance fees (see, e.g., Fisher v. First Nat‟ l Bank, 548 F. 2d 255 (8th Cir. Neb. 1977)); methods of
computing interest (see, e.g., First Nat‟l Bank v. Nowlin, 509 F.2d 872 (8th Cir. Ark. 1975)); bonus or commissions paid to
lenders (see, e.g., Cronkleton v. Hall, 66 F. 2d 384 (8th Cir. Neb. 1933), cert. denied, 290 U.S. 685, 78 L. Ed. 590, 54 S. Ct. 121


                                                                58
      Banks domiciled in states with favorable lending laws can export such laws across state

lines through a network of stores located in foreign states and owned by the bank‟s strategic

partner, which is typically a check-cashing company or mono-line payday advance company.

Such strategic partnerships are not unique to the payday advance industry.                                    In fact, this

exportation model has been utilized by providers of refund anticipation loan (“RALs”), credit

card companies and mortgage lenders for more than a decade.

      Courts established the legality of this practice through a series of cases dealing with the

issue of whether the strategic partner‟s stores are considered (i) “branch” offices of the bank, in

which case the “most favored lender” doctrine would not apply to the loans, or (ii) independent

marketer-servicers, in which case the “most favored lender” doctrine would apply to the loans

such that the “interest rate” law of the bank‟s home state would control. In a leading case, Cades

v. H&R Block, 43 F. 3d 869 (4th Cir. S.C. 1994), cert. denied, 515 U.S. 1103, 132 L. Ed. 2d

255, 115 S. Ct. 2247 (1995), the court approved the practice of a bank providing RALs through a

network of stores located in foreign states and owned by a tax preparation company. See also,

Christiansen v. Beneficial Nat‟l Bank, 972 F. Supp. 681 (S.D. Ga. 1997) (Delaware-domiciled

bank did not create “branch” offices in the consumer‟s home state by extending RALs through

the offices of a tax preparation company; consequently, the law of the bank‟s home state

preempted the law of the consumer‟s home state).
      Federally-insured banks use the “most favored lender” doctrine to meet flourishing

consumer demand for payday advance services in states where the product is subject to a per

annum interest rate cap. Although consumer advocates criticize recent court decisions applying

the “most favored lender” doctrine to the store network exportation model described above, they

concede that such exportation of favorable payday advance laws takes place today in states

where lawmakers have not yet enacted state legislation that specifically authorizes and regulates

the payday advance industry.

(1933)); and closing costs (see, e.g., Northway Lanes v. Hackley Union Nat‟l Bank & Trust, 464 F. 2d 855 (6th Cir. Mich.
1972)).


                                                              59
            The National Consumer Law Center (the “NCLC”), for example, concedes that federal and

state courts have interpreted the NBA and the DIDA in a manner that allows the types of

strategic partnerships described above.104 According to the Consumer Federation of America,

“[p]artnerships between banks and companies in the fringe bank market are a growing trend in

the payday loan field.”105 While lamenting that “[f]ederal legislation is needed to prevent the use

of national bank and thrift charters to evade state small loan rate caps and usury laws,” CFA

concedes that banks “partnering with check cashers, pawnshops, and other fringe bankers”

currently provide the payday advance product in several states with unfavorable payday advance

laws.106

            CFSA believes that each state should enact its own payday advance legislation that both

authorizes licensees to provide the product in an economically-feasible manner and requires the

important consumer protections endorsed by CFSA. The enactment of such legislation in the

states that do not yet have favorable payday advance laws will obviate the need for banks to

utilize the “most favored lender” doctrine to meet increasing consumer demand for the product.

            Conversely, a particular state‟s refusal to enact favorable payday advance legislation will

not prevent the introduction or continued existence of the product in that state. Rather such

refusal will only encourage banks‟ successful utilization of the “most favored lender” doctrine to

meet consumer demand. The New Mexico Financial Institutions Bureau recently described this
phenomenon as follows:


              Ultimately the cost of lending and the borrowing market determines the
              availability of and the price of credit. Artificial limitations on interest rates and

104
    “Another insidious example of the tentacle of the exportation octopus concerns finance companies obtaining national bank
status. They operate their main bank office in a state that exempts payday loans from small loan act restrictions (including usury
caps) and then make these loans through a national network of check-cashers.” National Consumer Law Center, 1998
Supplement, “The Cost of Credit: Regulation and Legal Challenges,” Footnote 33.

105
   Consumer Federation of America, September 1999, “Safe Harbor for Usury: Recent Developments in Payday Lending,”
Pages 9-10.

106
      Id.



                                                               60
            fees below market reality can only reduce or even eliminate availability of credit.
            Artificial limitations set in a particular jurisdiction will be overcome by the
            exportation of deregulated rates and fees. Those jurisdictions that are not subject
            to artificial limitations can access the borrowing base and lend under terms
            outside of the local set limitations. In this scenario for New Mexico, local
            licensed and regulated lending operations would be replaced by lenders who take
            applications locally but grant credit and fund loans from outside of the state so as
            to bypass the artificial limitations.107

Thus, a state‟s refusal to enact balanced payday advance legislation ultimately hurts consumers

because banks providing the product pursuant to the “most favored lender doctrine” will not be

subject to the vigorous price and service competition that exists in states where numerous payday

advance companies operate pursuant to favorable state law.


VII.        Conclusion.


        American consumers have spoken. Their robust demand for payday advance services and

their remarkable satisfaction with the product demonstrate that they want lawmakers to create

and maintain a regulatory environment that balances the interests of the industry with substantive

consumer protections ensuring responsible and informed use of the product. As the Chicago

Tribune recently observed:


              The payday loan business is booming in Illinois and the reason is that these
              niche lenders focus on a market segment ignored by just about everyone else –
              working people who find themselves needing a couple of hundred dollars in a
              hurry. . . [A customer] put it best. “If you don‟t get there in time and do what
              you are supposed to do, there can be problems.” That is absolutely true.
              Responsible adults must meet their obligations. . . But provided customers are
              adequately informed about what those obligations are, they and these companies
              should be free to go about their business. People need money quickly for a
              short period of time for all kinds of reasons – and there should be a way for
              them to get it. It would be a travesty if, to protect those who aren‟t responsible,
              the do-gooders closed off this source of cash for the rest.108

107
      New Mexico Financial Institutions Division, 2000, “Consumer Lending Study Committee Report,” Director‟s Finding No.
13.

108
      Chicago Tribune, August 13, 1999, “Payday Lending Fills a Need.”



                                                              61
    The payday advance industry has listened to its customers.           As a result, CFSA has

voluntarily adopted a series of consumer protections that ensure responsible and informed use of

the product, including, among others: providing a free right of rescission, limiting rollovers,

providing conspicuous notice that the product should be used for short-term cash needs only, and

prohibiting abusive collection practices.

    State lawmakers have also listened to consumers. In 1996, state lawmakers in California,

Ohio and Wyoming enacted the type of balanced, industry-specific regulation endorsed by

CFSA.      The following year, lawmakers in North Carolina and Tennessee enacted

industry-specific legislation that authorizes the payday advance industry and provides

substantive consumer protections ensuring responsible and informed use of the product. In 1998,

state lawmakers in the District of Columbia, Kentucky, Mississippi, Nevada, and South Carolina

did the same.    Then, in 1999, state lawmakers in Arkansas, Hawaii, Louisiana, Montana,

Mississippi (removed sunset provision), and New Hampshire created a regulatory environment

favorable to payday advance services. With favorable reports about the industry issuing from

regulatory agencies in states such as New Mexico, Tennessee, and Illinois and with the American

Legislative Exchange Council‟s embrace of CFSA‟s Model Legislation, CFSA expects this trend

to both continue and accelerate.


        CFSA invites state and federal lawmakers to continue to listen to consumers by visiting

payday advance stores located within lawmakers‟ respective voting districts. Such visits will

allow lawmakers to talk directly to their constituents, without the filter of consumer advocates

who seek to substitute their judgment for the judgment of millions of consumers who want

payday advance services to remain a legitimate, popular, and valuable part of the consumer

financial services landscape.




                                                62

				
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