ARTICLES

These Guys are Parasites

Pay Day Lenders Make the Mafia Look Good

BY BARTHOLOMEW JAMES

Chicago gangster Samuel "Wings" Carlisi held the esteemed position of "boss of all bosses," a title once held by the legendary Al Capone, according to federal court records. Carlisi was the top man in the Chicago Outfit crime syndicate, a group that dominated organized crime in the Windy City in the late 1980s and early 1990s. The federal government caught up with the Outfit in 1992, taking down Carlisi and nine other members for their roles in the gang's illegal gambling and loan sharking operations. Appellate court Judge Terrance Evans described the syndicate's unique debt-collection methods in a ruling that upheld the convictions.

"[T]he crew prided itself on its effective debt-collection practices and held its bookies personally responsible for their customers' past-due accounts," wrote Judge Evans. One delinquent borrower, Anthony Pape, was told by the Mob to pay up or else, and that "not even God was going to help him." Reciting from the original trial court testimony, Judge Evans noted that "another of Carlisi's heavies threatened to beat the completely bald Pape until his head turned so black and blue people would think he had hair."

While the Chicago Outfit may have been a bit heavy-handed in its debt-collection practices, the interest rate the crew charged for a loan was a bargain. A bargain, that is, compared to the fees charged by the numerous payday loan outfits in Northern California and throughout the state.

Carlisi and company extended short-term credit, or "juice loans," for fees that pencil out to an annual interest rate of 260 percent. The Outfit may be disappointed to learn that they were working for chump change. Had they waited a few years, and then come out West, they could have become payday lenders and made some real money. Although the potential gratification of physically collecting a loan isn't allowed in California, it's perfectly legal here for a state licensed payday lender to charge up to 5,474 percent annual interest in this exploding niche lending business. Older residents of the Golden State may recall a time when the concept of usury protected citizens from unscrupulous lenders, and the issue was considered so important that restrictions on abusive interest rates were enshrined in the state constitution. But the legislature has erased much of that historical protection and legalized lending at rates that Mafia loan sharks can only dream of.

Usury is defined as the act or practice of lending money for interest above the legal or socially acceptable rate. The term seems archaic and mostly irrelevant in the deregulated, free-market world of payday loans. And it is even harder to fathom that for most of its history, the word referred to the practice of charging any interest in excess of the principal amount of a loan, simply for the use (usus) of the money loaned.

Throughout the ages, usury has been denounced for exploiting and oppressing the poor and lower classes, causing the inequitable distribution of wealth, and corrupting the natural world and social relations. Usury has been equated with economic instability, as exaggerating the economic cycles of recession and recovery, as a cause of inflation, and as a precursor to periodic national and international financial crashes.

In California, usury is prohibited by the state constitution and other laws. Essentially, state law sets the maximum allowable rate of interest at ten percent per year for a loan used for personal, family, or household purposes. But like any law interfering where there is money to be made, loopholes — or "exemptions" in legislative jargon — are rampant. Banks, pawnbrokers, real estate brokers, mortgage companies, and a long list of other moneylenders are exempt from usury law, but their interest rates are still controlled by the state financial code and other restrictions. The loophole sanctioning payday lenders was created by the legislature in 1997, and the loans were given a specific exemption from financial code rate restrictions. Since that time, more than 2,300 payday loan outlets have opened.

According to industry figures, millions of payday loans are made each month, and one company making a significant chunk of those loans is the Oakland-based California Check Cashing Stores, Inc. The company has 58 stores throughout Northern California, generally located in low-income areas. In 2001, I obtained an internal employee memo dated February 23, 1999 that explained the sales pitch for a typical loan.

"When a customer calls or asks how much a PRA (payroll advance) costs, we MUST tell them the rate AND the annual percentage rate. Since this really depends on the number of days the PRA is outstanding, there is no single answer. Therefore we must tell them an example. Whenever anyone asks about the rates, the response must be: THE RATE FOR A PRA IS 15% OF THE AMOUNT ADVANCED, THE CORRESPONDING ANNUAL PERCENTAGE RATE FOR A TYPICAL 14 DAY LOAN IS 391%."

Not surprisingly, the "example" employees were required to give potential customers reflects the lowest possible annual percentage rate available for a 14-day loan, which only applies if the loan is not paid back for the maximum allowable term of two weeks. Since the loan due date is determined by the customer's payday, many loans are repaid in substantially less than two weeks. Another employee memo reveals that the actual range of interest will vary from a minimum of 391 percent to a maximum of 5,474 percent, the rate for a one-day loan.

I surveyed three stores to find out what the current employee script was. Each time I asked how much a payday loan cost, I was told the fee was 15 percent of the amount advanced. When I asked what that the annual percentage rate would be if I wanted to borrow $200 for the $30 fee, I got a blank stare or a shoulder shrug. I pressed the issue with one employee, suggesting that they must have a chart of some kind that explained the annual percentage rate. After putting me on hold, "Myrna" was able to find the information, telling me that the APR for a 14-day loan was 391 percent and 782 percent for a seven-day loan, but beyond that she had no idea. "Nobody ever asks for annual percent like this," she explained. I asked if I could see the payday loan contract I would have to sign in order to get a loan, and was told, three times, I would have to apply for the loan before I could see the contract.

The California Deferred Deposit Transaction Law went into effect on January 1, 2003 and essentially gave the state's blessing to the exorbitant fees charged by payday lenders, with a few token restrictions. The law's stated purpose was to provide "greater regulatory oversight of the [payday loan] industry, guaranteeing that consumers make informed decisions regarding [payday loans]...." To that end, the bill requires lenders to post "in a conspicuous location in the unobstructed view of the public within the licensee's location" a notice of fees and annual percentage rates. In a section that could have been written by the industry, the law requires lenders to use an example that reflects the lowest possible annual percentage rate a borrower would incur for 14- and 30-day loans (a 30-day loan is now offered to borrowers who are paid monthly, including those receiving social security checks). The actual, usually higher, annual percentage rate on a loan need only be disclosed in the actual loan contract. California Check Cashing Stores has a large poster in the lobby of each store, conforming to the state law disclosure notice.

Consumer advocates and other critics of the industry want to rein in the exorbitant fees of payday lenders and believe that the industry takes advantage of low-income, military, and senior citizen customers. Studies have shown that store locations are disproportionately concentrated in low-income areas and around military bases throughout the state. A study by a Cal State Northridge geography professor found that the neighborhood adjacent to Camp Pendleton in Southern California had 22 payday loan outfits, which greatly exceeded the statewide average for other ZIP codes in the state. In January, the San Diego district attorney's office, the American Association of Retired Persons, and other groups co-sponsored a Consumer Protection Day for seniors to warn them about payday loans and other predatory lending practices.

In 2001, Robert J. Waste, a professor who chairs the department of public policy and administration at Sacramento State University, gave me his blunt assessment of the industry and called for legislative intervention. "The best thing that I can say about payday loan firms is that these guys are parasites. The worst thing that I can say about them isn't printable in a community newspaper. In an industry famous for making money off other people's sorrows, these firms are bottom of the barrel. The legislature should be investigating shutting down these so-called 'businesses.'"

Sister Marti McCarthy is a member of the Sisters of Social Service and executive director of Jericho, a Sacramento-based legislative advocacy group. Jericho engages legislators and the governor to develop legislation that ensures economic justice for those living in poverty, among other things. Sister McCarthy said that they haven't been active in the payday lending issue, yet. "It is, however, something that several of us advocates have talked about putting on our radar because of the implications, particularly as it affects low-income women," she said.

Mary Wiberg, executive director of California Women's Commission concurs with Sister McCarthy that the effects of payday lending on women should be looked at. "The issues of payday loans and high rate credit cards are issues that you don't hear women's organizations talking about very much. And yet it is those things that, on a daily basis, have a huge impact on the lives of poor people. Women are the ones most disparately impacted," she explained.

The Community Financial Services Association of America is the primary trade group for the payday loan industry. Association executive director John McIntyre was away at a conference and did not return calls by press time. The association maintains that payday lenders provide a valuable service for people who need quick cash for emergencies and points out that the fees charged are a more attractive alternative to bouncing checks or asking for high-interest credit card advances, according to its website at www.cfsa.net. There is a "robust consumer demand for these short term loan denomination loans" and "substantive consumer protections ensure responsible and informed use of the product." Community Financial Services spokeswoman Natasha Fooman also works for Advance America, one of the largest payday lenders in the country. Fooman parrots the claim that the high APR associated with payday loans is reasonable when compared to the bounced check fees charged by banks that some payday loan customers are able to avoid when they take out a loan. But, ironically, the 2004 Advance America annual report tells shareholders that, in addition to profits from loans, the company made $2.4 million more in returned check fees, meaning some customers paid both: several hundred percent interest on a payday loan, and up to $30 more for bouncing a check.

Jonathan Eager, the president of California Check Cashing stores, referred questions about the payday loan business to Community Financial Services Association of America. He declined to say whether he was still making legislator campaign contributions, as he was in 2000, according to Secretary of State records. "I would let the public records speak for themselves," he said.

I explained to Eager that this article would include the history of usury and the evolution of Judeo-Christian usury doctrines. I asked him if he was religious. "I would say we are crossing a line here. No comment," he said. "And I'll think we'll end the conversation."

OF INTEREST

Historians trace the practice of usury back approximately 3,500 years, and for the vast majority of that time, it has been repeatedly condemned, scorned, and prohibited for moral, ethical, religious, and economic reasons. The ancient Western philosophers — including Plato, Aristotle, both Catos, Cicero, Seneca, and Plutarch — all condemned usury. Aristotle argued that "a piece of money cannot beget another," because money was barren, or sterile, and therefore breeding money from money was unnatural. Jewish and Christian usury doctrines were based on the Old and New Testaments. In the Old Testament, Exodus 22:25 states that "if you lend money to any of my people with you who is poor, you shall not be to him as a creditor, and you shall not exact interest from him;" and a similar admonition is found in Leviticus 25:35-37. Christian doctrines incorporate the same Old Testament passages and add Christ's command from Luke 6:27: "but love your enemies, and do good, and lend, expecting nothing in return." Later, Saint Thomas expanded on Aristotle's views and reinforced the idea that since money functions as a medium of exchange, to use money for the sole purpose of compiling more was an unnatural use of currency.

In 1515 the Catholic Church formally objected to usury because it constituted unearned income. "This is the proper interpretation of usury when gain is sought to be acquired from the use of a thing, not in itself fruitful (such as a flock or a field) without labor, expense or risk on the part of the lender," decreed the Church. Over time — to accommodate the expansion of capitalism, commercialization, international trade, and other economic factors — a pro-usury counter-movement began to take hold. In 1745, Pope Benedict XIV in his encyclical Vix Pervenit, reiterated the traditional condemnation of usury (a charge for the simple use of loaned money), though he said that a lender may collect an amount over and above the money loaned for "extrinsic" reasons (such as for a penalty for non-timely payment on the loan). But because it became increasingly unclear, because of the growing complexity of the economic system, which interest charges were usurious and which were not, the Western definition of usury gradually shifted from one referring to any loan with an interest charge to one referring to a loan with an exorbitant interest rate.

In 1918, the Church issued canon 1543 that allowed charging interest on loans at a rate within the confines of civil law, provided the rate was moderate. Canon 1543, however, was dropped from canon statutes in the late 1980's. In essence, the Church decentralized the issue, delegating the interpretation and application of usury to the local level, according to Father Charles McDermott, vicar episcopal for theological affairs and censor librorum at the Sacramento diocese.

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