Just how does a payday lender get double fees off a $200 payday loan to a borrower who is paid monthly?
The answer is in an October 2012 training document prepared by Madison’s All American Check Cashing and is part of a practice that has the company in hot water with state regulators.
Central to the practice is keeping the amounts of each loan at the state’s allowable first-tier level of $250 or below and setting a 14-day repayment on a borrower whose source of source income arrives monthly. On first-tier loans, fees of up to $20 per $100 are allowed, as is a 14-day required repayment period.
These lower denomination loans are the only type lending All American says it does. State law allows lenders to issue a combination of the first-tier loans up to the state’s loan cap of $500, a limit that includes both the loan amount and fees.
Lenders who make the $400 loans can collect up to $87.80 in fees ($21.95 on each $100). The catch is that lenders who lend more than $250 in one loan must give the borrower 30 days to repay, thus having the company’s money removed from cash flow for a prolonged period.
The practice detailed in the training document shows workers how to gain nearly the same in fees, $80 in this instance, while lending only $200 at one time. It further advises limiting the loan duration to 14 days but spreading the fee repayment over 30 days.
The practice is cited in a June cease and desist order the Mississippi Department of Banking and Consumer Finance issued to All American Check Cashing. The order specifically demands a stop to all lending under what All American calls its “Monthly Lending Program.”
Under this policy, which bank examiners say the company outlined on its intranet, employees are illegally directed to accept only the fee on a post-dated deposit check and “further instructs them on how to illegally roll a check during the middle of each month,” the cease and desist order states.
The order notes All American designed the program especially for borrowers who get monthly paychecks, pensions or government benefit checks.
Payday lenders require borrowers to be employed or show proof of receiving regular income. They also must have a bank account and leave a “delayed,” or post-dated, personal bank check as security.
The cease and desist order came after state examiners showed up at 15 of All American’s 41 Mississippi stores in response to complaints that reportedly came from former employees of the 15-year-old payday lending company owned by Michael Gray of Madison. All American initially refused access to its transaction records, though it later relented.
The Banking Department said its investigation of All American’s lending practices should take several weeks. As with an examination of any state-licensed lender, specific findings will not be disclosed but any violations discovered and penalties will be posted on the department’s website, the department says.
The 2012 Mississippi Check Cashers Act authorizes the banking commissioner to revoke or suspend a license of any payday lender who “has aided, abetted or conspired with an individual or person to circumvent or violate” the Check Cashers Act. As an alternative, the commissioner can set new conditions for a license renewal or place the license holder on probation.
Banking Commissioner Jerry Wilson says the department has a handshake agreement with All American that neither it nor the company will speak publicly about the investigation while it is underway.
Here is the scenario the All American training document sets forth:
A customer comes in on the 3rd of the month and pays off his advance from the previous month. The lender immediately start selling him on getting part of his money back today, whether it is $100 or $200. When he returns on the 15th, he will use his remaining credit line to get another advance and use that to pay off his advance from earlier in the month. If he were to get $200 at the first of the month, he must bring in $40 to put with his new $200 advance in order to be able to pay it off.
Ultimately, however, success for the store comes from the customer leaving with the $40 he brought in and an entirely new loan and fees to cover the one from the 3rd of the month.
The whole thing hinges on the store persuading the customer at the start of the month to take out a $200 advance, accompanied by $40 in fees and at mid-month getting him to take out a new loan to cover the old one and its fees. With this, his fees become $80 on a loan that never exceeded $200.
It works this way, according to the training document: At mid month, the customer is able to bring in only $40 because he does not get paid until the first of the next month. The store has the customer pay off the outstanding loan by taking out another loan of $200 and tells him to keep the $40 he brought to cover fees on the previous loan. “Customer writes another check for $240 to receive cash from buyback on check from” the 3rd of the month, the document says.
In its training scenario, All American says it wins even if the customer fails to come in to either pay or get a new loan to cover the old one. “That’s fine,” the training document says. Process the check the customer left at the 3rd of the month. If his account can’t cover the check, assess him a $30 non-sufficient funds fee.
“Money will be collected when the customer comes in on the 1st or 3rd of the month.”
On arrival at the loan store at the start of the month, the customer will owe a substantial sum that in addition to principal and fees includes an extra $30 late fee on each $100 of unpaid debt.
“The $20 becomes $50 and the $40 fee becomes $70 — almost as much on a $480 fee check for a $200 advance,” the training document notes.
Mississippi law prohibits charging a late fee or collection fee on “on any deferred deposit transaction as a result of a returned check or the default by the customer in timely payment to the licensee.” The payday lender can, however, charge a processing fee for a returned check. The lender is also allowed to pursue a legal judgment against the customer for the amount of the check.
In the previous scenario, the illegal rollover occurs when the customer is assessed the new fees without having paid off the original loan, said Paheadra Robinson, an attorney and the Mississippi Justice Center’s director of consumer protection.
Mississippi’s statute is specific on the rollover issue: “No check cashed under the provisions of this section shall be repaid by the proceeds of another check cashed by the same licensee or any affiliate of the licensee. A licensee shall not renew or otherwise extend any delayed deposit check.”