TV COMMERCIAL: What do you do when your cash is low and you need groceries?
MAN ON COMMERCIAL: Check into cash.
WOMAN ON COMMERCIAL: What's check into cash?
JEFFREY KAYE: Quick cash with no hassle-- that's the enticement offered by a booming industry.
COMMERCIAL SPOKESMAN: We'll give you the money you need today and hold your personal check until your next payday.
JEFFREY KAYE: The payday lending or check advance industry has experienced phenomenal growth in recent years. California has more payday lenders than McDonald's and Burger Kings combined. Nationwide, some 12,000 payday lenders in 30 states and the District of Columbia earned about $2 billion last year. Industry profits are predicted to more than triple by next year.
JEFFREY KAYE: Here's how the business works: A customer writes a check to the lender for the loan amount plus a fee; typically about $15 on a $100 loan. The lender agrees to wait until the client's next payday before cashing the check. The borrower gets cash immediately. Thomas Nix owns Nix Check Cashing with 57 locations in Southern California.
THOMAS NIX, Nix Check Cashing: When you find yourself in need of emergency cash and you don't have a primary alternative to turn to, the payday advance is the very best. It's simple, quick, convenient, dignifying, and we believe very responsible.
JEFFREY KAYE: Most of California's payday lenders are in low- to middle-income communities. In more middle class areas, many resemble well appointed banks. But in poor neighborhoods, where the Nix chain operates exclusively, cashiers work behind bullet-resistant windows.
Nix offers all the necessities of a cash-based economy, like bus tokens, money orders, and food stamps, in addition to payday loans. Nix says he's filling a vacuum created by the departure of banks from the inner city.
THOMAS NIX: The banks about 20 years ago, when they went through deregulation, they began to move out of lower income areas and lower middle income areas where it's difficult to earn a profit. And that created a much stronger need for an alternative financial delivery service, and that's really spurred the growth of check cashing companies.
JEFFREY KAYE: Consumer groups and regulators nationwide are focusing attention on lending in poor neighborhoods. Often credit is scarce and conventional loans hard to get at reasonable rates. Payday loans are also not cheap. The industry is protected from usury laws, which prohibit exorbitant interest rates because the transactions are officially considered deferred deposits, not loans. Critics of the industry, such as lawyer Robyn Smith, don't bother with euphemisms.
ROBYN SMITH, Public Counsel: Payday lenders are loan sharks because they prey on the vulnerability of people that are living paycheck to paycheck, and they charge really high interest rates... extraordinarily high interest rates that really aren't called for in this situation.
JEFFREY KAYE: The rates are higher than credit card fees and pawnshops, but cheaper than the costs of writing bad checks. The big problem, say consumer activists, is that because the industry is so loosely regulated, customers often get multiple loans leading to a cycle of debt.
Part-time bus driver Kenneth Huckaby borrowed $250 for car payments and to pay back previous loans. The $37.50 fee he paid was cheaper than the late fee on his car payments.
KENNETH HUCKABY: See, I borrowed some money before, and I had to pay that back first. There wasn't enough to do both.
JEFFREY KAYE: So how many loans have you taken out now?
KENNETH HUCKABY: About four or five.
JEFFREY KAYE: Four or five.
KENNETH HUCKABY: Uh-huh.
JEFFREY KAYE: Over what period of time?
KENNETH HUCKABY: About seven, eight months.
JEFFREY KAYE: And you still owe money?
KENNETH HUCKABY: Yeah.
JEFFREY KAYE: Do you find yourself getting further behind or are you catching up?
KENNETH HUCKABY: Well, I'm catching up, but it's... it's just like hurrying up and catching behind, you know, like I have... I owe more than I make basically.
JEFFREY KAYE: A more extreme example is Kathy, who asked us not to use her last name. A single mother of two, in 1998, she borrowed $100 from a payday lender and started on a course she came to regret.
KATHY: It was a very bad choice. You know, I wish I had never done it because, you know, it got to where, you know, I couldn't...it was like a nightmare. I couldn't afford to pay them back, you know?
JEFFREY KAYE: The fee was $17.50 for the 14-day loan.
JEFFREY KAYE: So, after 14 days, what happened? You didn't have the money.
KATHY: No, I... I... When I didn't have the money, then I went to another payday loan and got the money...
JEFFREY KAYE: To cover the first one.
KATHY: Yeah, yeah. It was like rob Peter to pay Paul.
JEFFREY KAYE: One loan turned into nine as she went from lender to lender taking out new loans and renewing the ones she had. She ended up owing more in fees than she borrowed.
KATHY: It was getting to the point where I could no longer pay my utilities because all of my money was going for these payday loans.
JEFFREY KAYE: Public interest lawyer Smith ended up assisting Kathy.
ROBYN SMITH: She's an extreme example, but the... a lot of different studies have been done in a lot of other states that show that the average payday lender, payday customer, takes out around 10 to 13 different loans in one year.
JEFFREY KAYE: J. Samuel Choate is executive vice president of Check Into Cash, one of the national chains that dominate the industry. Choate, who is also vice president of a trade association of payday lenders, says it's unfair to insinuate consumers don't know what they're doing.
SAMUEL CHOATE, Check Into Cash: To simply suggest that someone who comes in once a month and uses a payday advance is making a bad decision is not accurate because it may be that they find themselves in a cash flow situation caused by some other circumstance. A car breaks down; they've got to pay to get that fixed today. In Southern California, you can't do without your car. You have to get it fixed. Well, that makes you short on the rent $200 -- is it a better deal to borrow $200 from me or to pay the landlord his fee? Our customers make those decisions.
JEFFREY KAYE: Lucas Quinliven is a repeat customer who says payday advances have helped him over a hump.
LUCAS QUINLIVEN: You've got to pay every time you use it, but, you know, it's not too much, so you just try not to make a habit of it.
JEFFREY KAYE: Yeah.
JEFFREY KAYE: With two low-paying jobs, Quinliven typifies the industry's customer base: People with steady incomes who can't always make ends meet and who don't qualify for bank loans. Ironically, the industry's growth has spurred banks to create partnerships with payday lenders. Union Bank of California, the state's third largest, recently acquired a 40 percent share of Nix.
So Union Bank, which has comparatively few branches in low-income neighborhoods, now has ATM machines and allows customers to open accounts at Nix locations. But it doesn't provide full- service banking there. Thom Branch is a Union Bank senior vice president.
THOM BRANCH, Union Bank of California: We provide the full array of products, but as an example, we can't take over-the-counter deposits because it's not a bank branch.
JEFFREY KAYE: Or provide loans, or do the other things that banks do.
THOM BRANCH: Well, we do have the ability to provide for loans because what they can do is they can actually call on the telephone by using three digits. They can call on the telephone and they can actually apply for a loan by phone.
JEFFREY KAYE: At Concerned Citizens of South Central Los Angeles, executive director Juanita Tate says what low-income residents need is full- service banks in their neighborhood; banks that offer reasonably priced loans and overdraft protection.
JUANITA TATE, Concerned Citizens of South LA: It's better to have some type of service than no service, but what we do know is that this type of lending is very detrimental to our constituents and they can't build a credit history. And without a credit history, you can't get credit. So it might be a convenience for the moment, but it has nothing to do with building credit.
CREDIT COUNSELOR (on phone): Yeah. Are you currently behind on your debt, sir, on your credit card?
JEFFREY KAYE: Credit counselors are trying to help individuals become aware of the pitfalls of payday loans. They recommend other options, including loans from relatives or credit unions, or learning how to save.
SPOKESPERSON: People take a payday loan, and then they get caught in this debt treadmill.
JEFFREY KAYE: The debate over payday lending has moved into the legislative arena. Consumer groups are pressing for more regulations...
SPOKESMAN: Senate Bill 1501 by Senator...
JEFFREY KAYE:...While the payday loan industry, which opposes stiff rules, has increased campaign contributions. Last year in California, efforts to regulate the industry failed. There will be a renewed attempt this year.