Payday loan chains eyeing Md.; General Assembly considering exemption from interest limits; 'A good market'; Rates up to 468% will be allowed if law is changed

THE BALTIMORE SUN

National payday lending chains are eager to move into Maryland as the General Assembly considers exempting such businesses from a law that limits the interest rates allowed on consumer loans.

If legislators approve the change, it will open the door for the chains to set up shop in Maryland and start making high-interest, short-term loans to consumers who are borrowing against their next paycheck.

"They wouldn't be working this hard to get legislation if they didn't feel there was a good market in Maryland and didn't want to get into it," said Maxine Adler, an Annapolis lobbyist hired by a national association of payday lenders.

Maryland has a home-grown version of payday lending -- through locally owned check-cashing outlets that operate as small, stand-alone stores or in retail outlets such as liquor stores and pawnshops. A public interest group has filed a complaint against these businesses saying they violate state consumer loan laws.

The big payday lending chains have steered clear of Maryland because state law limits the interest that can be charged on consumer loans to an annual rate of no more than 33 percent. Lending money at rates higher than the state's limit is a misdemeanor, punishable by a $500 fine and six months in prison.

The General Assembly is considering an exemption for payday lending that would let those businesses charge fees that amount to an annual interest rate of as much as 468 percent on loans.

The change is a key part of what proponents bill as reform legislation to, for the first time, license and regulate check cashers and payday lenders in Maryland. Such businesses now operate without regulatory oversight.

The prospect of payday lenders flooding into Maryland worries public interest groups, which say those businesses prey on the working poor and often place them on a treadmill of never-ending debt.

"I think they see Maryland as a cash cow," said Deborah Povich, public policy director for the Maryland Center for Community Development. "They are waiting to walk in and make money on people least able to afford the fees they charge."

Payday lenders say there is a consumer demand for payday loans, that outlets have sprung up to offer the service in Maryland and that it makes sense for the state to license and control the practice.

Executives with several national chains that specialize in payday lending -- some of which are highly profitable, publicly traded companies -- said they see Maryland as a potentially lucrative market for their business.

"Based on the robust demand that we've seen for this product in other states, there's no reason to think that would not be the case in Maryland," said Eric C. Norrington, vice president of ACE Cash Express, based near Dallas.

Jerry L. Robinson, a Little Rock, Ark.-based investment analyst who tracks the industry, agreed that Maryland would be fertile territory for national chains.

"The demographics are fairly good in Maryland, with densely populated areas, a fairly large disposable income and high employment," he said. "The median income is in the high-$30,000 range. You're talking about the heart of the middle class here."

Malin T. Jennings, spokeswoman for the Community Financial Services Association of America, an industry trade group, said that if legislation is approved in Maryland to allow payday lending, the chains are likely to set up shop in suburban shopping centers.

"Most people assume they'll be in the inner city with bars on windows that are 2 inches thick, but they tend to be in suburban malls and look very much like bank lobbies, with carpeting and the interior decorated," she said.

Since payday lending started taking off in 1994, 19 states and the District of Columbia have passed "safe harbor" legislation allowing the practice. Payday lenders also operate in nine other states that set no limit on the fees or interest charged on loans.

In an investment analysis of the national industry, Robinson predicted that the number of stand-alone stores that do only payday lending will more than quadruple by 2002 -- from about 6,000 to 25,000 -- and that industry revenues could increase from $2 billion to $6.75 billion.

"Every state is a desirable market," said William M. Webster IV, president of Advance America, based in Spartanburg, S.C., the nation's biggest payday lending chain with 1,300 outlets nationwide.

Webster heads the Community Financial Services Association of America, an industry trade group that he said hopes to "get good, appropriate legislation passed in all 50 states" allowing payday lending.

Scott Cooper, an organizer with Baltimoreans United in Leadership Development, a group that has been pressing regulators to crack down on the state's home-grown payday lenders, is worried by what he sees as the industry's predatory practices.

"We believe that a loan shark in banker's clothes is still a loan shark," Cooper said. "The only service they'll provide is to make Wall Street investors a lot richer. This is about increasing stockholder profits."

Industry officials dismiss such complaints. They contend that they provide a needed service to consumers who are making informed choices, in their own best interests.

Sam Choate, vice president and general counsel with Check Into Cash, based in Cleveland, Tenn., whose company has 473 outlets in 15 states, said people who occasionally run short of cash between paychecks need a convenient way to borrow small sums.

The loans are usually $100 to $200 for two weeks, at a cost of $15 to $18 per $100 borrowed, he said. Alternatives, such as hocking personal items at a pawnshop or begging a loan from relatives, can be demeaning, he said.

"The real story here is that consumer advocates don't trust consumers, so what they want to do is take this choice away from consumers," Choate said. "I think that's paternalism. We're making money because we have a product consumers want. People don't want you telling them what to do with their money."

Choate and other payday lenders said it isn't fair to quantify the fees charged in terms of annual percentage rates because payday loans are intended to be for short terms. The fees are justified based on the risks for what amounts to a signature loan and the costs of establishing a store and processing the transactions, they say.

Regardless of what the General Assembly does on the issue, payday lending chains could be moving into Maryland because of a recent trend of payday lenders affiliating with federally chartered banks.

The chains act as a service agent for the banks, which can "export" interest rates allowed in the states where they are based to loans made in other states. A payday lender affiliated with an out-of-state bank, therefore, would not be subject to Maryland's 33 percent ceiling on interest rate charges.

Norrington, whose ACE Cash Express has 950 stores in 29 states, said his company recently teamed up with Goleta National Bank near Santa Barbara, Calif., and hopes by midyear to be offering payday lending throughout its network of stores.

Among the states, he said, are Maryland, where ACE Cash Express has 40 outlets that cash checks, sell money orders and provide other financial services, but do not make payday loans.

"For us, it's just another line on the menu board, just another service for our customers," Norrington said. "If it enables us to broaden our services to customers, we'd like to do it."

In Annapolis

Today's highlights:

House of Delegates meets, 11 a.m., House chamber.

Senate meets, 11 a.m., Senate chamber.

Senate Finance Committee hearing on SB 202, to require that "prevailing wages" be paid on school construction projects, 1 p.m., Senate office building, Presidential Wing.

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