Easy Money in Hard Times
By Jacqueline Marino
AUGUST 18, 1997: It started when Catherine walked into a cash-advance business, handed over a worthless, post-dated personal check, and left with $200 cash. Although she was still saddled with hospital bills, funeral costs, and other expenses from her husband's death three years earlier, the 43-year-old hairdresser felt she could afford this one short-term, high-interest loan.
Her teenage son, a talented gospel singer, wanted to perform with a troupe and needed a choir robe. She had no luck trying to borrow from relatives, but a niece directed her to the cash-advance business that loaned her the money with no credit check and no hassle.
Catherine was charged $38 for the first $200 loan, but shelled out $38 more two weeks later to extend the due date. Eventually, she had to borrow from another cash-advance business to pay subsequent renewal fees on the first loan. And then she borrowed from two other businesses after that. Because of one $200 loan, she now owes Cash, Inc., Cash First, and two EZ Cash stores a total of $880.
"I just got in over my head," Catherine says. "They don't hound you or hassle you to pay them back. You have other bills. Food bills, light bills. Something always comes up when it comes time to pay them back. It's too easy to get into debt."
Cash-advance businesses consider most of their customers serious credit risks, so they charge high interest rates and threaten harsh penalties. Eventually Catherine could not keep up with the quickly mounting cash-advance fees. Those costs, in addition to her other bills, prompted the single mother of four to file bankruptcy several weeks ago. Even though her name is public record, Catherine, only agreed to talk about her situation on the condition that her real name not be printed in this article. Her voice cracking with emotion, Catherine said in a telephone interview last week that cash-advance has put her in "financial ruin."
Cash-advance businesses often sink people with bad credit like Catherine even deeper into debt. It's easy to find names on bankruptcy filings, but reaching former cash-advance customers can be difficult. Tired of being hounded by persistent bill collectors, they often have no telephones or answering machines and cannot be reached at work.
Cash-advance businesses have been operating in Tennessee, unregulated, for years. A new law, effective this October, allows cash-advance businesses to charge interest rates of 15 percent or $30 , whatever is less. The loans are usually for a two week period and cannot exceed 31 days. Some businesses charge as much as $25 on a two-week $100 loan -- an annual percentage rate of 600 percent.
Consumer advocates say the new law, which enjoyed considerable support from the cash-advance industry, won't offer much additional consumer protection. By allowing cash-advance businesses to charge an annual percentage rate of more than 300 percent, the law will keep them from being regulated by the more stringent state usury law. It also will legitimize the industry, making cash-advance businesses as acceptable in Tennessee as other "fringe" banks, including check-cashing outlets and pawnshops. (The two largest check-cashers in Memphis, National Check Cashing Company and ACE Cash Express, already offer cash-advance or will begin offering the service after the law goes into effect.)
It did not go unnoticed that the cash-advance industry had donated more than $125,000 to state politicians, including Gov. Don Sundquist.
"It's the worst bill ever passed in the state of Tennessee," says Steve Cohen, a leading opponent of the legislation in the state senate. "It's legalized loan-sharking. It allows certain people to take advantage of other people's desperate circumstances."
Controversial cash-advance businesses are the newest entrant to Tennessee's thriving fringe banking industry. Called fringe banks because such businesses cash checks, make loans, and offer other services traditionally provided by banks, check-cashing outlets and pawnshops have proliferated in Shelby County over the last few years. As bankruptcy capital of the country, it's no wonder.
"I don't like the statement they make, especially when I see them flourishing in my neighborhood," says Jerome Rubin, Memphis City Council chairman, who lives in Whitehaven. "I wouldn't think the people in my neighborhood would have credit cards and rely on traditional lending services. I wouldn't think they'd be patrons of pawnshops."
Usually considered a negative economic indicator, fringe banks thrive in low-income areas where people generally do not use traditional banks. Some low- to moderate-income fringe banking customers have been left behind by traditional lenders. Others have left willingly. All are lured to fringe banks by the promise of quick cash come easy.
But there's no such thing as fast cash without consequences. And in Tennessee, where regulations are weak or nonexistent, the consequences are high interest rates and lofty fees. And low-income customers have little choice but to pay up.
"IF YOU LIVE IN A FRINGE BANKING market, you're charged high rates to have your checks cashed and exorbitant rates to borrow money," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. "There's a responsibility on the part of the industry for pushing such high costs to the point that they've become predatory and unconscionable."
Fringe banks thrive because there's money to be made off poor people. So says Michael Hudson in the introduction to his book, Merchants of Misery. He proves it by following the money from the pocketbooks of fringe bank customers to the deep pockets of major Wall Street firms. Ford, Citibank, NationsBank, and Bank America are just a few of the formidible enterprises that own or bankroll large pawnbrokers, finance companies, and other businesses that profit from poverty. By Hudson's estimations, all businesses that "bottom-feed on the fringe economy" from finance companies to check cashing outlets make up a $200-$300 billion-a-year market.
NationsBank, for example, along with other banks, has provided growth capital to Cash America, an international pawnshop chain that had 21 stores in Tennessee last year, 16 of which were in Memphis. American Express has supplied financial backing to ACE Cash Express, which provides check-cashing and other services throughout the country and at eight Memphis locations.
The supportive relationship between some mainstream banks and their fringe counterparts is somewhat puzzling, maybe even ironic. Fringe banks have prospered by serving people who have left banks because of high fees or feel otherwise alienated by traditional lenders.
"We are filling a niche," says Krista Baird, ACE America's manager of investor relations and corporate communications. "Until the banks address this problem, you will see us move into areas where banks should be. We're becoming more of a financial services provider than a check-casher."
Tim Amos, vice president and general counsel for the Tennessee Bankers Association, disagrees that traditional banks are to blame for the swelling ranks of pawnshops and check-cashing outlets. He argues that banks make a concerted effort to attract low-income customers.
"We have a hard time reaching these customers," he says. "We do have community reinvestment. We do have a marketing plan. We have to provide services to those customers. If a customer chooses to go to a check-casher because that's more comfortable for them, that's their choice."
While the number of bank branches in Shelby County increased slightly in 1996, recent bank closings have been hard to miss. Union Planters closed 11 bank branches in Shelby County since merging with Leader Federal last year. NationsBank, which recently merged with Boatmen's Bank, also expects to close some branches. Some areas of North and South Memphis have no banks at all.
Because of its large low-income population, bank closings, and other reasons, Shelby County has proven to be fertile ground for fringe banks. According to American Business Information, Shelby County has 76 pawnbrokers, up from 57 in 1995. Only 61 are licensed. It has 39 check-cashing outlets, up from 15 three years ago.
"Check-cashing outlets are the only thing that's left," says Rita Harris, executive director of the Mid-South Peace and Justice Center. "As more and more banks close, more and more check-cashing places open up.They're where the people are, right there in the communities."
New state regulations will establish interest-rate ceilings for check-cashers, as well as cash-advance businesses. Check-cashers will be able to charge 5 percent of the face value of a payroll check or $5, whatever is greater. The ceiling is 3 percent or $2 for welfare checks and 10 percent or $5 for personal checks or money orders.
"The basic bank charge for a checking account is $12 a month. It doesn't cost much more to cash checks with us and pay for money orders. And you don't have to worry about bounced check fees," says Louis Jacobson, general manager of National Check Cashing Company. "If you cash a $300 paycheck biweekly, you'll pay $10.80 a month."
At 5 p.m. outside an ACE check-cashing store on Poplar, a steady steam of customers file through the glass doors. With a discount women's clothing store on one side and a K&B drugstore on the other, ACE advertises 19-cent money orders, money grams, and electronic tax filings.
A young woman in scrubs heads to the store, check in hand. When she emerges from the glass doors, she hurries back to her car. She doesn't have a bank, she mumbles, and shrugs her shoulders when asked why.
She says she comes to ACE because "It's convenient," then climbs into her beat-up, grey car and sputters off.
James Perry, owner of a small promotional sign company, gave up his bank account because of the bank's inconvenient hours, among other reasons.
"Every time I tried to get to my bank I had to drive across town," he says. "This costs you a little, but it's convenient."
While economists often lump check-cashers and pawnshops together as fringe banks, their roles, as well as their histories, differ greatly. Commercial check-cashers, which were established in the 1930s, are evolving into one-stop shops where customers can cash checks, pay bills, and make short-term payday loans. Pawnshops offer cash loans in return for some item of value, much as they did in ancient times. If the customer does not come back to claim the item, the pawnbroker sells it.
Swarthmore economist John Caskey, author of Fringe Banking: Check-Cashing Outlets, Pawnshops and the Poor, has found biblical references to pawnbrokering in the Old Testament. They thrived in Europe from the fifteenth to the seventeenth centuries as not-for-profit operations run by the Catholic Church, municipal governments, and other groups. However, the story that Isabella of Castile pawned her jewels in order to finance Columbus' journey to the new world -- a favorite among pawnbrokers -- is not historically accurate, according to Caskey's research. Advocates for the poor in nineteenth century America were successful in convincing cities and states to regulate the industry. It began to decline in the 1930s because of the depression and did not rebound until the mid-1970s.
In the last decade, corporate chains, including Cash America, have transformed pawnshops from shadowy mom-and-pop shops to welcoming neighborhood businesses. While they are only allowed to charge 2 percent interest per month, pawnshops can tack on numerous fees, which often raise the interest rate to about 15 to 20 percent per month, as much as 240 percent a year.
Cash America spokesperson Mary Jackson says consumer advocates don't take into account the high costs pawnbrokers assume for being in the business. Contrary to the seedy stereotype, pawnshops provide services to many people who wouldn't be able to get short-term loans elsewhere.
At the EZ Pawn near the busy intersection of Winchester and Mendenhall in East Memphis, calming R&B music plays on an almost new stereo selling for $250. The pawnshop, brightly lit and brimming with a patriotic, red, white, and blue decor, has a friendly, department store-like atmosphere.
Two fur coats hang on the wall behind the counter next to an array of musical instruments, including violins, French horns, keyboards, cymbals, and a enough guitars for a dozen angst-ridden rock bands. There's vacuum cleaners in the corner, power tools on the shelf, firearms in one glass case, jewelry in another. Manager Brian Martin, a tall, approachable man with dark hair and a salesman's smile, says he takes just about anything of value, except gold teeth.
"I've seen people pop them out right in front of me," Martin says. "I don't take them. I figure they definitely need them more than I do."
Three Hispanic men in work clothes walk in the store. Martin greets them immediately with disarming attentiveness.
"What's going on, guys?" he asks. "How's it going?"
A cheerful, smiling woman in a flowing green and yellow skirt follows an employee carrying her television set into the store. Martin knows her. Her name is Vernice. She brings her television here whenever she needs an extra $65. This time she needs it to pay the light bill.
"This is my favorite pawnshop," she says. "As long as I get it out in a month the fees aren't too bad."
Martin prefers reliable customers like Vernice who will reclaim their merchandise to gamblers and other customers who typically leave it behind.
"A gambler came in here and wanted to know what he would have to pawn so he could get $1,000," Martin says. "I told him only jewelry would get him that kind of cash. So he bought a ring on his credit card for $3,000 and brought it in here. He never reclaimed it.
"We get a lot of gamblers," Martin continues. "That's a major deal. As far as getting people to come through the door, the casinos have helped the pawnshops. But it doesn't really help us because most don't come back for their stuff."
IN HIS OFFICE AT THE CONSUMER Credit Counselling Service on Poplar, Paul Blackstone pours over the file of a potential client. She came to CCC for its debt-management program, hoping it would save her from having to declare bankruptcy. Discouraged, Blackstone flips through the pages. It doesn't look good.
The woman has outstanding loans at six different cash-advance businesses. Unlike other creditors who negotiate payment plans for CCC's clients, cash-advance businesses won't work with the agency. Blackstone, the program director, says the interest rates are so high and the due dates so frequent, most clients would never be able to pay more than the interest.
"They have become locked into debt with these places," he says. "The people we're seeing already have a debt problem and it [cash-advance] has aggravated it and made it worse."
CCC, a division of Family Services of the Mid-South, doesn't track the number of potential clients who are turned away because of unmanageable debts to cash-advance companies. But the number has increased over the last three years.
Some people do abuse the service, says Melinda Thompson, a minority and the owner of seven EZ Cash stores in Tennessee and Mississippi. But most of her cash-advance customers pay back the store in a reasonable amount of time. Teachers, bank employees, police officers, and other professionals regularly use the service.
"At one point and time, when I was a single parent, I used the service," she says. "It got me through a critical time."
A few publicized consumer lawsuits have been filed against cash-advance businesses in East Tennessee for failing to disclose the annual percentage rate and charging usurious rates of interest. But cash-advance businesses have not instigated the same level of public outrage locally. Memphis Area Legal Services, for example, has not received any complaints from cash-advance consumers considering legal action.
"You're dealing with a consumer group that's generally not very sophisticated," says Steve Taterka, a consumer protection attorney who used to work in the consumer protection division of the Attorney General's Office. "They don't know what their rights are, and they are intimidated by these companies."
Consumer advocates want stricter regulations on fringe banks, similar to the ones other states have adopted. But how realistic are such aspirations for Tennessee?
"I would love to see more strict regulations, but legislators have shown their colors on the cash-advance bill," Cohen says. "The industry is a force willing to hire lobbyists and make political contributions. It's one thing to be a pro-business state and another to be anti-consumer. We're the latter."
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