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

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

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