Many of the payday loan stores that were ordered to cease operations this summer have reemerged simply as check-cashing shops or auto-title lenders, while others, perhaps hundreds, have closed their doors and moved on.
At least two payday loan companies, Advance America and Check ‘n Go, closed all of their Arizona stores in July and August. Executives from both companies said the expiration of the law that allowed payday lenders to offer high-interest loans in Arizona left very few options – and none of them were considered lucrative enough.
Together, the two companies closed 81 stores rather than follow other payday lenders into the collateralized-loan business.
“It’s not a business we’re in anywhere; we don’t really know it,” said John Rabenold, Check ‘n Go’s vice president of government affairs. “We didn’t feel like it was worthwhile, especially since every other licensee is going there.”
The payday lending industry expired in Arizona July 1 after a frantic two years in which voters and the Legislature rejected several attempts to keep it alive.
In all, 594 payday lending licenses were revoked, according to the Arizona Department of Financial Institutions.
The department later reported that the number of licenses for auto-title lenders has spiked by more than 300 percent since July.
Voters shot down a 2008 ballot measure by a margin of 60 percent to 40 percent that would have created new regulations on payday lenders and eliminated the sunset date.
During this year’s legislative session, three bills that would have allowed the industry to survive all died in committee or before going to a floor vote despite a full-press attack on the Legislature by industry lobbyists and consultants.
Jamie Fulmer, a spokesman for Advance America, said his company waited until the bitter end to begin closing stores.
“We had held out hope for some time that there would be some sort of solution that would present itself,” Fulmer said.
But those who clung to hope did so in vain. Advance America, one of the largest payday lending companies in the nation, laid off about 90 employees and abandoned 47 store fronts, taking advantage of a provision in the leases the company signed that allowed it to leave if the payday lending law expired.
Fulmer said Advance America decided against staying and offering alternative loan services because none of the business models that were considered would have allowed the company to pay basic overhead costs, let alone turn a profit.
Typical payday loans were for amounts between $50 and $500; the full amount and a fee of $15 per $100 borrowed were to be repaid within two weeks. Each payday loan was secured by a post-dated check for the amount plus interest, and the borrower had the option to extend the loan by paying additional fees.
The fee structure implied an annual percentage rate of 390 percent.
Critics charged that the loans were expensive and trapped consumers into a cycle of debt, especially those who continued to extend their loans.
Arizona caps its annual percentage rate at 36 percent for loans, but in 2001 provided an exception for payday lenders.
Rabenold, the Check ‘n Go executive, said a two-week loan at 36 percent APR would yield only a few dollars for a payday lender.
Bob Charlton, assistant superintendent of the state Department of Financial Institutions, said many of the payday lenders migrated to Sales Finance Company licenses, which allows them to do auto-title loans.
Before the sunset there were rarely more than 100 such licenses in use at any given time, but now there are 460, Charlton said.
The short-term loans use a borrower’s car as collateral for a loan equal to a certain percentage of the car’s value. State law caps the monthly finance rate lenders can charge on the loans. Loans up to $500 are capped at 17 percent, a rate that gradually decreases as the loan amounts increase. Loans of $5,000 or more are capped at 10 percent.
Speedy Cash was one of those businesses that moved into the auto title-loan business from payday lending.
Thomas Steele, general counsel for Speedy Cash, said the company doesn’t anticipate growing beyond the 12 stores it already has in Arizona. He said the company also doesn’t plan on replacing employees who leave the Arizona stores.
Steele said some Speedy Cash’s customers migrated to title loans, but others decided against it either because they didn’t own a car or didn’t want to pledge collateral for a loan.
“There’s not as much volume, so we’ll anticipate diminished revenues,” Steele said. “Obviously it’s a long-term challenge for the industry when your single-largest product goes away to be able to cope with the loss of revenue and to find a lawful way to lend and service this particular market.”
The market consists mostly of people with credit problems or limited credit, and banks don’t offer products similar to payday loans.
Rabenold said the consumers’ alternative now is to use off-shore, Internet-based payday loan companies, which aren’t regulated.
Charlton, the Department of Financial Institutions deputy, said authorities would have a more difficult time enforcing state laws against offshore companies.
First, the company must have a physical location in order to serve it with a cease-and-desist order and force it to be licensed under state law.
If that were the case, Charlton said the Department of Financial Institutions probably would team up with Attorney General Terry Goddard, who in June launched “Operation Sunset,” which consists of a public information campaign and an enforcement team of prosecutors, investigators and paralegals with expertise in laws pertaining to financial institutions and consumer fraud.
Goddard sent a letter to former payday lenders to warn them against trying to sell the short-term loans under different names or under different structures.
“We’ve received several calls of people reporting payday loan companies still operating like payday loan companies,” said Molly Edwards, a spokeswoman for the Arizona Attorney General’s Office.
Edwards refused to say how many complaints the Attorney General’s Office has received or whether any businesses are under investigation. But she said there have been no indictments.