“You’re never go­ing to see a bumper sticker that says, ‘I’m in debt, and I use pay­day loans’ ”

New rules could make it hard out there for a 780 per­cent len­der Crit­ics “don’t ap­pre­ci­ate the de­mand for the prod­uct”

Bloomberg Businessweek (Asia) - - CONTENTS - −Zeke Faux The bot­tom line The CFPB wants lenders to show they don’t lock their cus­tomers in “debt traps.” Many pay­day lenders could fail the agency’s test.

Get­ting cash-strapped peo­ple into very ex­pen­sive debt has been a good busi­ness for Matt Mar­torello. His com­pany, Bel­li­cose Cap­i­tal, helps an Amer­i­can In­dian tribe in Michi­gan run web­sites that of­fer small loans to the pub­lic at an­nu­al­ized in­ter­est rates as high as 780 per­cent. Bel­li­cose has col­lected tens of mil­lions of dol­lars, with the tribe keep­ing about 2 per­cent of the rev­enue, ac­cord­ing to doc­u­ments pro­vided by a per­son in­volved in the deal. Now Mar­torello is sell­ing Bel­li­cose to the tribe for just $1.3 mil­lion up­front, plus as much as $300 mil­lion in fu­ture pay­ments, de­pend­ing on how the busi­ness does. Bel­li­cose projects the tribe will even­tu­ally earn $58 mil­lion a year, the doc­u­ments show. Mar­torello isn’t the only per­son in the high-cost-loan in­dus­try who seems to be ea­ger to get out th­ese days. Many are mak­ing dras­tic changes to their busi­nesses, such as switch­ing prod­ucts or mov­ing over­seas. One pos­si­ble rea­son: The Con­sumer Fi­nan­cial Pro­tec­tion Bureau is poised to re­lease new reg­u­la­tions this year, af­ter more than four years of stud­ies and speeches. The agency, which hasn’t fi­nal­ized the de­tails, says the rules will stop bor­row­ers from tak­ing out short-term loans they can’t af­ford and rack­ing up fees week af­ter week to buy more time. Lenders say the CFPB will kill off pay­day ad­vances and sim­i­lar loans, hurt­ing bor­row­ers with no other op­tions.

“The CFPB made it ex­traor­di­nar­ily clear that the path they’re go­ing down is go­ing to elim­i­nate the vast ma­jor­ity of pay­day lend­ing,” says Ed Groshans, an an­a­lyst at Height Se­cu­ri­ties.

Pay­day loans are short-term ad­vances, for which the bor­rower must write a check post­dated for the next pay­day. The reg­u­la­tions will also cover sim­i­larly costly loans that al­low pay­ment over a longer pe­riod of time but still re­quire bor­row­ers to pro­vide ac­cess to their bank ac­counts. Bel­li­cose, which pro­vides con­sult­ing ser­vices and is not a len­der, spe­cial­izes in th­ese types of in­stall­ment loans.

So far, such lend­ing has largely been reg­u­lated at the state level, and the rules have proved easy to get around. Many on­line com­pa­nies made ar­range­ments like the one be­tween the Lac Vieux Desert Band of Lake Su­pe­rior Chippewa In­di­ans and Bel­li­cose. Dubbed “rent-a-tribe” by crit­ics, the deals al­low com­pa­nies to get around state laws that cap in­ter­est rates by claim­ing the tribes aren’t sub­ject to those rules. Avoid­ing fed­eral reg­u­la­tions, like those the CFPB will pro­pose, is tougher. The Fed­eral Trade Com­mis­sion al­ready has won cases in­volv­ing tribal pay­day lenders.

Bel­li­cose’s Mar­torello says sale talks be­gan years ago and weren’t in­flu­enced by the com­ing rules. James Wil­liams, chair­man of the Lac Vieux Desert tribe, says the web­sites have a bright fu­ture and will help fund med­i­cal, ed­u­ca­tional, and so­cial ser­vices. “This is, with­out ques­tion, the most im­por­tant eco­nomic de­vel­op­ment in the more than 179-year-long his­tory of our tribe,” Wil­liams says.

Some store­front-based lenders aren’t even wait­ing to see the fi­nal ver­sion of the fed­eral rules be­fore mak­ing ma­jor changes. The reg­u­la­tions won’t cover pawn­shops, so cus­tomers at EZCorp’s 522 U.S. stores now need to put up valu­ables such as jew­elry or elec­tron­ics to get emer­gency ad­vances. The com­pany stopped of­fer­ing its EZ­Money un­se­cured loans in July, cit­ing an “in­creas­ingly chal­leng­ing leg­isla­tive and reg­u­la­tory en­vi­ron­ment,” even though U.S. and Cana­dian loans gen­er­ated $165 mil­lion in fees in 2014. Cash Amer­ica In­ter­na­tional, which has 825 stores, is mak­ing a sim­i­lar shift.

Oth­ers are look­ing over­seas. First

Cash Fi­nan­cial Ser­vices, which closed 22 stores in Texas last year, bought 211 pawn­shops in Mex­ico, Gu­atemala, and El Salvador in Jan­uary. On­line len­der Enova In­ter­na­tional is open­ing divi­sions in Brazil and China.

Con­sumer ad­vo­cates and even some religious lead­ers have railed against pay­day lenders as long as they’ve been around. Their ar­gu­ment is that the lenders prey on des­per­ate peo­ple. The busi­ness “re­lies on bor­row­ers who are un­able to re­pay the loan,” says Paul Leonard of the Cen­ter for Re­spon­si­ble Lend­ing. What’s sup­posed to be a twoweek, $300 loan for a $45 fee ends up cost­ing hun­dreds and hun­dreds of dol­lars. The in­dus­try says its terms are clear and it’s help­ing cus­tomers who need money for emer­gen­cies.

Crit­ics “don’t ap­pre­ci­ate the de­mand for the prod­uct,” says Den­nis Shaul, chief ex­ec­u­tive of­fi­cer of the Com­mu­nity Fi­nan­cial Ser­vices As­so­ci­a­tion of Amer­ica, a lob­by­ing group. “You’re never go­ing to see a bumper sticker that says, ‘I’m in debt, and I use pay­day loans.’ ”

Pay­day lenders seemed to dodge a death sen­tence when the Dodd-Frank Act, which cre­ated the CFPB, specif­i­cally barred the agency from putting caps on in­ter­est rates, over the ob­jec­tions of Sen­a­tors Bernie San­ders (D-Vt.), Shel­don White­house (D-R.I.), and oth­ers. The first ac­tions by Richard Cor­dray, its di­rec­tor, were tar­geted at credit card and mort­gage lenders.

Then the agency started study­ing the pay­day mar­ket. A 2013 re­port found that the me­dian bor­rower took out 10 loans over the course of a year and spent $458 on fees. The next year, Cor­dray said he was con­cerned that too many were fall­ing into “debt traps,” cit­ing find­ings that some bor­row­ers get­ting So­cial Se­cu­rity ben­e­fits were in­debted year-round.

In March, the agency re­leased a draft pro­posal for the pay­day in­dus­try. The main re­quire­ment is that lenders make sure po­ten­tial bor­row­ers will have enough left over af­ter other ex­penses to pay back their loans. It sounds like some­thing any­one would ideally want to do, but pay­day lenders say many of their bor­row­ers wouldn’t qual­ify.

Econ­o­mists hired by the in­dus­try lob­by­ing group found that just 16 per­cent of stores would be prof­itable un­der the pro­posal. Shaul says the rules are a back­door way to cap rates, since lenders that charge less than 36 per­cent are ex­empt from many of them. “If that fi­nal rule is still as ob­jec­tion­able, we would have no choice but to look at our le­gal op­tions,” he says.

Brian Lynn, pres­i­dent of a 26-store chain called Lend­ing­Bear, puts it more starkly: “We would ab­so­lutely, pos­i­tively have to close our doors.”

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