Warren Bolton

Bolton: Keeping an eye on payday lenders

SOUTH CAROLINA should be leery of a major payday lender's decision to convert some of its stores to small loan consumer businesses.

If it was any other business, I'd be less skeptical. But you can't trust payday lenders. I've observed these legalized loan sharks long enough to know that you've got to carefully examine every move they make. You can't take their word at face value.

As I've always said, payday lenders have no intention of being regulated; at the tiniest hint of regulation, they begin searching for loopholes. And all too often, they find them.

Maybe Check into Cash's decision to convert some of its stores to small consumer loan businesses by year's end is a benign act. History says be on alert.

A clear sign that something is afoot will be if - or should I say when? - other payday lenders follow Check Into Cash's lead.

Why the change? Could it because the state's new law is supposed to go into effect by February? You know, the one that requires a database to track loans in an effort to end the industry's practice of heaping multiple loans on people who can't even afford the first one? Frankly, the law, which limits each borrower to one loan at a time but increases the maximum amount of a loan from $300 to $550, doesn't go far enough to stop people from getting trapped in a cycle of debt.

But I'd dare to guess that not many payday lenders want to have to log their captive customers into a database that would limit them to one loan at a time.

That might be motivation enough for lenders to pursue alternatives, such as small loan companies, that will allow them to continue extracting tens of millions of dollars a year from poor South Carolina workers with little government scrutiny. In South Carolina, some lenders can charge any interest rate they want as long as they are licensed, notify the state and post the rate.

Our state, for no good reason, has no usury law. Lawmakers did away with the cap on interest rates just a few years before they created the animal known as "deferred presentment," now much better known as payday lending, in 1998.

If you think the nearly 400 percent rate payday lenders charge now is outrageous, just consider what could happen under the new model Check Into Cash is pursuing.

Check Into Cash says it has turned in payday loan business licenses for 12 stores and will apply for "supervised" lending licenses, which would allow the lender to make longer-term consumer loans, based on different underwriting criteria, and for unlimited amounts of money. All of the title loan companies in South Carolina are licensed as supervised lenders; they can charge any amount of interest they wish on loans above $600.

By converting payday stores, lenders can not only escape the database but also increase interest rates.

Check into Cash's maneuver is reminiscent of what's happened in other states that have tried to regulate this industry, where payday lenders' modus operandi has been to change their business model to escape new regulations.

In Ohio, consumer advocates are upset that payday lenders have been getting around a 2008 state law passed to regulate them by doing business under two older laws - the Ohio Mortgage Loan Act and the Small Loan Act - instead of the Short Term Loan Act. The Housing Research & Advocacy Center, based in Cleveland, issued a March report titled "The New Face of Payday Lending in Ohio" that found that only 19 locations in Ohio had been licensed under the new payday lending law. "In 2007, the top 10 payday lenders in Ohio operated a total of 906 stores. In the past year, none of these stores obtained a license to lend under the Short-Term Loan Act (established to regulate payday lenders). Instead, these companies obtained a total of 978 licenses to loan under the Small Loan Act and the Mortgage Loan Act and an additional 114 licenses under the Pawnbroker Act," the report said.

Ohio's new payday lending rules cap the annual interest rate at 28 percent. Previously, payday lenders could charge the annualized rate of 391 percent, the same as is allowed in South Carolina.

Switching licenses allowed payday lenders to increase loan amounts and ratchet up fees. The housing agency's report said the lenders are charging as much as 680 percent on 14-day loans.

The Ohio experience isn't unique. When new rules went into effect in Virginia in January that would limit borrowers to one loan and cap the annual interest rate at 36 percent plus a fee, payday lenders again changed their business model. A number began offering larger loans, including title loans. The Virginian-Pilot reported that some lenders surrendered their payday-lending licenses to concentrate on open-end lines of credit.

South Carolina could be next.

State leaders must be proactive in finding out what's headed our way and then taking steps to stop it before it takes root.

This won't be for the faint-hearted lawmaker, and we have many; it could entail taking on not only payday lenders but title lenders - and even reestablishing a usury law.

Something must be done now.

Doing nothing could allow another horrid, predatory lending product to be hatched in the Palmetto State.

And, as we've found with payday lending, trying to rein it in after the fact is next to impossible.