WASHINGTON-Recent initiatives by the trade association here that represents more than half the nation's payday lenders have failed to dissuade consumer advocates that check presentment operations are truly in the consumer's best interests. In late January, the Community Financial Services Association of America (CFSA) issued its "Best Practices for the Payday Advance Industry," which include full disclosure and compliance with all state laws and regulations, truthful advertising, limiting `rollover' transactions to four, the consumers' right of rescission within a 24-hour period and appropriate collection practices (CU Times, Feb. 2). But Jean Ann Fox, the Consumer Federation of America's director of consumer protection was underwhelmed by CFSA's efforts. And in a separate finding, the attorney general of the state of Indiana, Jeffrey A. Modisett, has issued a legal opinion stating that finance charges levied by payday lenders may be in violation of the Hoosier state's loansharking statutes. CFSA President Billy Webster, in an interview with Credit Union Times, said he was equally disturbed by the testimony given by a naval officer during a forum conducted by Senator Joseph Lieberman (D-Conn.) on how a payday lending operation turned a loan into a mountain of debt from which he couldn't extricate himself (CU Times, Jan. 5). The tale of Navy Petty Officer Second Class Stewart Wilson (stationed at the Naval Air Station , Jacksonville, Fla.) moved Webster to say that his experience was an embarrassment to an industry that for the most part fulfills a valid consumer need in a forthright way. Webster is also president of Advance America, which has two outlets in Pensacola (also the site of a Naval base) and stated that his company tries not to locate too near military bases. "The military is really a very small percentage of our business," he said. "And our business is definitely not directed at military personnel." He acknowledged that some payday advance companies may indeed be doing that, and like in any industry, there are a few bad players. The point of the reforms is to try and separate the good players from the bad ones. "If there's a problem with a high number of payday lenders just outside military bases, then maybe the military should tell soldiers (or sailors) they should not or can't use them. What happened to him was an example of the improper and excessive use of the payday option. His testimony would have had an impact on anybody," said Webster. What Webster termed the "horror stories" of such excesses, together with the mounting negative publicity they garner, as well as action in several states to rein in the payday loan was not the impetus for CFSA's "Best Practices," although the timing seemed related. "We've been working on these reforms for some time now. This is a relatively new industry, and it takes time for these kinds of proposals to take form. These improvements don't happen overnight." But the reforms don't go far enough, said CFA's Fox. "If these are their best practices, well, that's not saying much," she commented. Fox said that most of the reforms are already required by most state laws anyway, so they present no real improvement. And while she lauded CFSA's attempt to `clean house,' so to speak, the biggest problem about the payday loan is not addressed at all-the cost of the loan itself. Even calling for a fee cap of 20%, which may seem like a concession is no improvement, she said. "Twenty percent is just too high. And disclosure is already required by law. As for them saying that no criminal action should be threatened; well, that's not applicable either. Court rulings on that have already asserted that these are not NSF checks, so threatening criminal action for writing bad checks is inappropriate to begin with." Fox added that a case against an Illinois payday lender that had made such threats was just settled, proving that it indeed does happen. "There is no advance on state law in these reforms," she said. And because the reforms are voluntary, they essentially have no teeth, either. One purpose of the reforms, said Webster, is to serve as guidelines for proposed state law, and that has been evident in at least one state. Colorado's general assembly has such a bill pending, and it has CFSA's backing. "It is our hope that these best practices will migrate into state law," said Webster, who added that members who post them prominently and abide by them will gain the confidence of customers. It was his hope that those who do not abide by them will similarly lose business. "It's too easy to say they are just window dressing. That may be the legitimate view of Jean Ann, whom I admire, by the way. But I don't agree. We're really trying to do the right thing here." Mark Tarpey, division supervisor, consumer credit division for the Indiana Department of Financial Institutions, also testified at Liberman's forum. Tarpey said that the Indiana DFI compiled a statistical report on the industry in the Hoosier State in order to give a more complete picture of their practices. They examined 47 lenders from July through October of 1999, tracking the last 25 customers going back one year. Tarpey testified that DFI had concerns, particularly about rollovers. But another "potential unconscionable practice" was cited as well. Called `touch-and-go' loans, they are only a method of rolling over a loan while conveniently calling it something else. Some lenders who say they don't do rollovers require customers to pay off an existing loan; then they immediately loan the same money back, calling it a new transaction, or "new loan." On January 19, attorney general Modisett issued a finding that stipulated that "payday lenders cannot avoid Indiana's loansharking statute by referring to their charge as a "service fee" rather than interest...therefore, absent a statutory provision that exempts payday lenders (as pawnbrokers are exempted by the state's interest and usury laws) their business practices are subject to Indiana's interest and usury laws." The opinion was sought because payday lenders had claimed that the charges they assess are legal under the state's consumer credit code, and are not therefore in violation of usury law. In Indiana, a lender can charge not more than $33 as a finance charge. The loansharking statute (part of the criminal code) makes it a crime to charge an interest rate greater than twice that authorized in the consumer code. Modisett found the consumer code and loansharking statute not to be inconsistent, and able to be "interpreted harmoniously." Payday lenders can charge more than one $33 service fee, "so long as the resulting APR does not exceed the interest limit established in the loansharking code." Anything over that is subject to refund, said Modisett. Therefore, any loans that exceed 72% APR are considered loansharking. Consequently, on January 20, Charles W, Phillips, director of the Indiana DFI issued a notice to all the state's payday lenders to review their lending practices. Loansharking is subject to "severe ramifications including prosecution, injunctions, fines and refunds." "Future examinations of payday lenders will be conducted," stated Phillips, adding that "void or voidable loan agreements, unconscionable practices, criminal charges and refunds will be issues to be addressed by all parties." -
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