Payday Lenders: The industry, leaders, owners, and regulation

Payday Lenders: The industry, leaders, owners, and regulation 

Lothringer 


written by Lori Lothringer, Ph.D., AFC 

research support provided by Alexander Woodard 

Introduction 

I sometimes despondently joke, if I wanted to provide my three children financial security ‐ 

given the current economic conditions, I would buy one a payday lender, another a storage unit 

facility, and the last, a pawn shop. My oldest son, the prodigious payday lender, could provide 

loans to those who need ‐what George Carlin so eloquently described a few years back as 

stuff… more stuff. My other son, the sultan of storage, would make his millions selling people 

space to put the stuff they bought but no longer have room for. Finally, my daughter, the 

purveyor of pawn shops, would secure her fortune paying pennies on the dollar buying the stuff 

people no longer want to store thus providing the resources needed to buy more stuff they 

can’t afford hence sending them back to her brother the payday lender to begin the cycle yet 

again. The only problem with this financial plan is that the stuff more and more people find 

themselves buying today with the resources procured from payday lenders, is not really stuff 

that isn’t needed or stuff that can be stored, but rather, essentials critical to daily life –items 

such as milk, bread, diapers, and medications. 

Growth of the Industry 

For those who find themselves in such unfortunate circumstances, they will have no problem 

locating a lender as the payday loan industry has rapidly expanded over the last several years 

reflective of the economic strains on middle and low‐income households. Although very few 

payday lenders existed in the U.S. in the 1990s, by 2006, there were more than 15,000 industry 

participants and $25 billion in outstanding loans. During that same period in Nebraska, the 

number of payday lenders increased from 43 to more than 200 where the greatest proliferation 

of such businesses was seen in rural communities. 

How They Make Money 

Payday lenders, formally known as delayed deposit services, make money by providing 

customers cash for postdated checks. To illustrate, let’s say it’s a week until payday and Mary 

needs $500 to make her car payment and buy groceries. A typical payday lender in Nebraska 

might require Mary write a check for $575. What this means is Mary is paying an annual 

percentage rate of 780% (in some states, this amount can approach 1000%). If Mary is 

representative of the average customer, this is not the first time she has used a payday lender 

and there is a high probability she will not have the resources on payday to cover the check, 

thus necessitating a loan renewal. It is not uncommon for a customer to have numerous such 

rollovers during the course of the year. If Mary needs to renew her loan, let’s say for a 10‐week 

period, at an APR of 780%, she would pay a total of $1,250 for the original $500 loan. It is not 

surprising that academic research indicates there is a relationship between the use of payday 

lenders and bankruptcy. 

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Lothringer 

Who are the Payday Lenders? 

Thoughts of the neighborhood payday lender might conjure up images of small‐scale, 

independently owned facilities operating out of a low‐rent strip mall where the signs 

advertising FAST CASH look hand‐made. Don’t be fooled. This is a lucrative industry dominated 

by large publicly traded companies including Cash America International, Inc. with a net income 

(NI) of more than $79 million and Advance America, Cash Advance Centers, Inc. with a net 

income of approximately $54 million. Other leading industry participants include World 

Acceptance Corporation (NI ≈ $53 million), EZCORP, Inc. (NI ≈ $52 million), First Cash Financial 

Services, Inc. (NI ≈ $35 million), and QC Holdings, Inc. (NI ≈ $14 million). 

Who are the Executive Leaders? 

Similar to other large corporate entities, the leadership of these organizations is educated and 

credentialed. Many have vast experience in public accounting and investment banking and 

hold advanced degrees from prestigious institutions such as Yale. Payday lender board 

members have served as executives and on boards of other well‐known corporations including 

RadioShack, Toys “R” Us, and Ryan’s Family Steak House as well as non‐profit boards such as 

the YMCA. Further, many have significant ties to the health care industry with organizations 

such as GE Healthcare and UnitedHealth Group. Their leadership experience also includes roles 

in government and politics, where they possess years of experience in organizations such as the 

Federal Deposit Insurance Corporation (FDIC). Examples of high‐level governmental leadership 

roles include William M. Webster (Founder, Director, and Chairman of the Board at Advance 

America Cash Advance Centers, Inc.) who served as Assistant to the President and Chief of Staff 

to the U.S. Department of Education during the Clinton administration 

Who are the Institutional Investors? 

The size and ownership of the industry is both startling and unsettling for many. This billion 

dollar business counts as its major investors Barclays Global Investors UK Holdings Ltd. who has 

approximately $177 million invested in securities associated with payday loan organizations and 

The Vanguard Group, Inc. with roughly $115 million of similar industry assets. Other large 

institutional holders include Thomas W. Smith with over $79 million invested in the industry. 

Smith is the senior partner of Prescott Investors and serves as chairman of the board of the 

National Center for Policy Analysis (NCPA) a nonprofit organization whose stated goal is to 

develop and promote private alternatives to government regulation and control, solving 

problems by relying on the strength of the competitive, entrepreneurial private sector. Banking 

organizations, also large institutional owners of payday lenders, include Bank of New York 

Mellon Corporation with approximately $25 million invested in payday lending interests, JP 

Morgan Chase & Company holding about $21 million in such investments, and Bank of America 

Corporation with roughly $2 million in similar assets. Finally, and perhaps most troubling, are 

public funds invested in the industry such as CALPERS (California‐Public Employees Retirement 

System) that holds slightly more than a quarter of a million dollars in public employee 

retirement resources in the form of payday lender investments. 

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Lothringer 

Who are the real owners? 

For those readers who consider themselves conscientious investors, those who have avoided 

the tobacco and gaming stocks and instead embraced the eco‐friendly green funds, now might 

be a good time to determine if you are in fact an innocent participant in the predatory lending 

industry via your employer’s 401k or 403b plan. The chart below lists the twenty largest mutual 

fund holders of what the investment community refers to as consumer finance companies who 

offer short‐term small loans to consumers – AKA… payday lenders. Reflective of the 

institutional ownership, The Vanguard Group, Inc. has the largest number of individual mutual 

fund holdings with ownership interests in the payday loan industry. Illustrating the dynamics of 

diversification, Vanguard has holdings in all of the largest payday loan organizations. Another 

disconcerting issue presented in the table is the approximate $8 million in the College Retirement 

Equities Fund‐Stock Account TIAA‐CREF has invested in the two largest payday loan organizations, 

Cash America International, Inc. and Advance America, Cash Advance Centers, Inc. For many in 

the academic, medical, cultural, and research fields ‐who spend their lives committed to the helping 

others while entrusting their retirement security to TIAA‐CREF, this presents an obvious ethical conflict 

of interest. 

Payday Loan Industry: Top 20 Mutual Fund Investors 

Fund Shares Value Industry 

Holdings 

3 

Reported 

Columbia Acorn Fund 1,545,000 $55,620,000 WRLD 9/30/08 

Vanguard Explorer Fund, Inc. 587,686 $38,868,799 QCCO 10/31/08 

Oppenheimer Main Street Small Cap Fund 177,300 $29,965,821 WRLD 9/30/08 

Vanguard Small‐Cap Index Fund 145,703 $27,256,624 WRLD 9/30/08 

IShares Russell 2000 Index Fund 193,870 $23,002,862 WRLD 10/31/08 

Columbia Acorn USA Fund 407,900 $14,684,400 WRLD 9/30/08 

IShares S&P Small Cap 600 Index Fund 170,845 $13,956,807 WRLD 10/31/08 

Harbor Small Cap Value Fund 385,662 $13,640,864 CSH 10/31/08 

DFA U.S. Micro Cap Series 177,000 $13,571,709 WRLD 8/31/08 

Pacific Advisors Small Cap fund 400,000 $13,250,000 EZPW 9/30/08 

Vanguard Total Stock Market Index Fund 186,950 $10,981,762 FCFS 9/30/08 

Columbia Fds Ser Tr I‐Columbia Small Cap Core Funds 177,170 $10,596,237 QCCO 9/30/08 

Vanguard Strategic Equity Fund 563,426 $10,592,408 EZPW 9/30/08 

American Century Small Company Fund 266,565 $9,607,002 CSH 9/30/08 

American Beacon Small Cap Value Fund 204,100 $9,466,443 WRLD 11/30/08 

AXA Premier VIP Multimanager Small Cap Value Portfolio 330,000 $8,554,500 EZPW 9/30/08 

College Retirement Equities Fund‐Stock Account 195,529 $8,139,901 CSH 9/30/08 

Bridgeway Funds Inc‐Small Cap Value Fund 396,000 $7,444,800 EZPW 9/30/08 

American Century New Opportunities II Fund 360,769 $6,782,457 EZPW 9/30/08 

Allianz Funds‐NFJ Small Cap Value Fund 2,230,900 $6,670,391 AEA 9/30/08 

AEA: Advance America, Cash Advance Centers Inc. CSH: Cash America International, Inc. EZPW: EZCORP Inc. 

QCCO: QC HOLDINGS, INC. WRLD: WORLD ACCEPTANCE C 

Source: Yahoo Finance


Lothringer 

The Movement to Regulate 

It is estimated that more than 10 million American households utilize payday lenders each 

year. Considering the previously mentioned exorbitant APRs, and evidence that some payday 

lenders are capturing Social Security direct‐deposit payments directly from beneficiaries, it is 

easy to understand why states such as Arkansas, New York and South Carolina have passed 

stringent legislation regulating payday lending activities including the institution of strict usury 

laws limiting the amount of interest payday lenders can charge customers. In Nebraska, both 

Senator McGill (LB431) and Senator Nantkes (LB293) have introduced bills that institute stricter 

regulations on the payday loan industry. Before advancing such change, the costs and 

consequences of such legislation should be considered. 

Potential Consequences of Proposed Regulation 

First, if Nebraska were to successfully eliminate payday lending activities, where would the at‐ 

risk communities who frequent these facilities go to acquire much‐needed cash resources? 

Research conducted last year by academicians from the University of Missouri and George 

Washington University suggests middle and low‐income households –those with few choices, 

may be negatively impacted by the complete elimination of the industry. At a time when food‐ 

bank provisions are stretched, without viable alternatives in place such as low‐interest short‐ 

term consumer loans provided by lending institutions, families could go hungry. Second, are 

we prepared to fight the battle? In states where the citizen coalitions have taken on the 

payday lenders, the industry has fought back. In Ohio and Arizona last year, payday lender 

organizations spent almost $30 million to defeat ballot initiatives limiting the industry. Further, 

Rent‐A‐Center indicated it would eliminate $500,000 in charitable funding to a local food bank 

unless the Ohio Coalition for Responsible Lending pulled its support of the legislation. Through 

community actions and voter awareness, the initiatives passed in both states. 

Effective elimination of predatory lending activities in Nebraska should be preceded by a 

comprehensive understanding of the industry including ownership and investment interests. 

Further, safety nets should be established for those households who may be immediately and 

negatively impacted by the application of the proposed legislation. One impressive example of 

an alternative lending program is the Payday Alternative Loan (Salva Vida/Lifesaver Loan) 

Program established by the Mission SF Federal Credit Union in San Francisco. Committed to 

serving its members who are primarily Latino families earning incomes of less than $20,000, 

this credit union extends loans up to $500 at a rate of 18%. Mr. Salvador Duran, Manager and 

CEO of Mission SF explains, “We provide emergency financial resources to our members – but 

we are not just handing out checks. We use this as an opportunity to provide financial literacy 

education and counseling.” Through the committed efforts of Mr. Duran, and other local 

leaders, families are being served and San Francisco is no longer issuing licenses to payday 

lenders who want to set up shop in the city. 

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Lothringer 

Conclusion 

Over the last two decades, the expanding payday loan industry has enjoyed significant profits 

through the process of providing customers short‐term high‐interest rate loans. This lucrative 

industry is dominated by large publicly traded companies lead by highly experienced, educated 

and credentialed individuals whose resumes include high‐profile corporate and government 

leadership positions. Major institutional investors include Barclays Global Investors UK 

Holdings Ltd., The Vanguard Group, Inc., the Bank of New York Mellon Corporation, JP Morgan 

Chase & Company, and the Bank of America Corporation. The real owners, many unassuming 

individual investors, who ‐through their employers 401k and 403b retirement funds, are holding 

various mutual funds with ownership interests in the payday loan industry. Due to public 

concern and pressure, many states have moved to regulate the industry limiting the interest 

and other terms specific to lending practices. Given the social and economic consequences of 

payday loans, there is an obvious need for increased regulation; however, before instituting 

such change, states should carefully consider the costs and consequences of such legislation. 

RESOURCES: 

Payday loan legislation in Nebraska: 

LB293 (Adopt the Short‐Term Lenders Act and eliminate the Delayed Deposit Services 

Licensing Act): 

http://www.nebraskalegislature.gov/FloorDocs/Current/PDF/Intro/LB293.pdf 

LB431 (Change Delayed Deposit Services Licensing Act provisions): 

http://www.nebraskalegislature.gov/FloorDocs/Current/PDF/Intro/LB431.pdf 

Payday loans in Nebraska: http://www.ndbf.ne.gov/dds/index.shtml 

Payday loan cost calculator: http://www.paydayloaninfo.org/calc.cfm 

Payday Alternative Loan Effort (Salva Vida/Lifesaver Loan): 

http://www.mission.coop/ASP/aboutus.asp#j 

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Payday Lenders: The industry, leaders, owners, and regulation

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