RINGO H.W. CHIU/LABJ CHECKING OUT? · payday loan at a time from the same lender and loans can’t be rolled over. California’s maximum loan amount is among the lowest nationwide,

Los Angeles Business Journal • December 14, 2015Special Report • Banking & Finance Quarterly

Already squeezed bycompliance rules andonline rivals, paydaylenders fear next year’sfederal regulationscould sink industry.

F the already shrinking payday lending industry finally implodes, William Lucking willbe prepared.

The Gardena-based owner of four Orange Rocket Cash payday lending stores hascontinued to hone his skills as a software developer on the side. Over the past year, thathobby has gained some urgency.

While lenders of these short-term, high-cost loans say they’re providing quick, muchneeded cash to customers with bills to pay, consumer advocates contend this credit isdesigned to trap borrowers in a downward spiral of intractable debt.

And now these businesses, particularly local lenders, are facing a fight for survival asincreased competition from online players, greater compliance demands and enhancedscrutiny from the federal government threaten to shut them down.

“Business has been slowing down and profits are not what they used to be,” said Hal Greenberg,who operates a number of EZ Check Advance, Payday Express and A Advance Payroll stores in LosAngeles County.

While the volume of loans statewide ticked up slightly from 2007 to $3.4 billion last year, the numberof licensed payday lending locations has fallen 16 percent to about 2,000 outlets, according to theCalifornia Department of Business Oversight. While similar data comparisons are not available at thecounty level, local lenders say the number of brick-and-mortar shops has stagnated if not shrunk.

But what Lucking and others fear most is that the Consumer Financial Protection Bureau, an over-sight group established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of2010, will wipe them out with a set of proposed rules to be released early next year for payday and autotitle loans and other similar short-term credit products.

By MARNI USHEROFFStaff Reporter

Please see page 16

ALSO INTHIS SECTION:

Lender takesless whileoffering more.Page 20

Quarterly Banking DataPages 22-23

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Feeling Pinch:William Lucking at hisOrange Rocket Cashshop in Long Beach.

P r i n t e d a n d d i s t r i b u t e d b y P r e s s R e a d e r

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P r e s s R e a d e r . c o m + 1 6 0 4 2 7 8 4 6 0 4 • O R I G I N A L C O P Y • O R I G I N A L C O P Y • O R I G I N A L C O P Y • O R I G I N A L C O P Y • O R I G I N A L C O P Y • O R I G I N A L C O P Y •

16 LOS ANGELES BUSINESS JOURNAL DECEMBER 14, 2015

SPECIAL REPORT BANKING & FINANCE QUARTERLY

Regulators say they’re aiming to preventthese businesses from lending consumersunaffordable loans. But business owners suchas Lucking already smell disaster and arehedging their bets.

“People don’t understand why I’m screw-ing with this business,” he said, given hisvaluable coding skills. “It’s just because mypersonal financial fortune was so tied into it.”

Cash Now A payday loan involves a borrower giving

a lender a personal check for the amount ofmoney they want now. In exchange, the lendergives that person that amount of cash minus afee but defers depositing the consumer’s checkuntil the borrower’s next payday.

If the check bounces, the lender can col-lect a one-time $15 returned check fee. Butthat’s pretty much their only recourse onunpaid debt aside from selling these charge-offs to collectors, which isn’t lucrative, or tak-ing the borrower to small claims court.

In California, the loan term can’t be longerthan 31 days and state law only allowslenders to collect a fee of up to 15 percent.The maximum a consumer can receive is$300, which really means a disbursement of$255 when factoring in the lender’s cut.

These guidelines, enacted as part ofCalifornia laws passed in 1996 and 2002, alsomandate that consumers can only take out onepayday loan at a time from the same lenderand loans can’t be rolled over.

California’s maximum loan amount isamong the lowest nationwide, with moststates allowing lenders to borrow up to $500or more.

But borrowers tend to use multiple loansthroughout the year. Californians taking outseven or more payday loans in 2013 account-ed for 45 percent of all payday borrowers,according to the Center for ResponsibleLending’s analysis of regulator data.

Lenders are left to determine what kind ofunderwriting they want to do, if any.

Some require a pay stub or other proof ofincome, a current bank statement, identifica-tion and proof of address.

Lucking also uses an industry-specificcredit report to see if a borrower is using mul-tiple loans from other lenders, and if theyhave a record of not paying back debt.

“There are some lenders who do notunderwrite,” Lucking admitted. “We believe itreduces charge-offs. But it’s so hard to judgethe creditworthiness of people who are gener-ally not creditworthy.”

Local playersThe county’s payday loan industry has a

fair mix of smaller businesses with one to fivestores, medium-size players with about adozen sites and some large national corpora-tions running a significant number of sitesacross the state, said Thomas Leonard, exec-utive director of industry trade groupCalifornia Financial Service ProvidersAssociation in Sacramento.

Though payday lenders are often criti-cized for targeting ultrapoor neighborhoods,there are some notable exceptions, such asGreenberg’s EZ Check Advance store inMarina del Rey and another in a WestHollywood strip mall directly across from theswanky SLS Beverly Hills hotel. They’repart of 18 payday lending branches thatGreenberg said he oversees for a group ofundisclosed investors doing business sincethe late 1990s.

“We have customers that are doctors andlawyers,” Greenberg said. “An aestheticianwho nets $6,000 a month comes in to borrow$300. Why? It’s not my job to ask why … wecater to anyone who needs to borrow money.”

Those stores each generate gross revenueof about $100,000 a month on average, saidGreenberg.

Though his stores only offer payday loans,others offer a suite of financial services suchas auto title loans, wire transfers, check cash-ing and money orders. That helps to diversifyrevenue, hedge against regulatory issues inthe payday industry or set them apart givenhow little wiggle room there is to compete byadjusting the payday product itself.

“We have no advantage. We charge thesame fee, the same amount, the same con-tract,” Greenberg said. “What can we give(consumers) they can’t get elsewhere?Service.”

Greenberg said he encourages his employ-ees to build a bond with customers. Forexample, he tells them to put notes aboutwhat they discuss – such as a child’s soccergame – in the account profile. It makes cus-tomers more likely to pay them back, he said.

“If they’re having a hard time and need anextra pay period, you give it to them,”Lucking said of his stores’ approach. “Youwork payment arrangements. You’re flexiblewith them.”

Uncertain futureThe flip side of those steady limits is that

local lenders’ cut of those loans hasn’t budgedin two decades. Added to that are burdensomenew compliance measures related to paydaylenders’ other services in the wake of Dodd-Frank reforms.

“There are so many compliance issuesthese days that are costly,” said Leonard fromthe lenders’ trade association. “To somedegree, it’s priced out the very smallest of theentities.”

Lucking’s stores, like many others, havehad to deal with anti-money-laundering com-pliance related to money transfers and orders.He’s had to develop an elaborate process todeal with new requirements including data col-lection, reporting and regular review of trans-actions to identify customers trying to conducttransactions just below reporting limits.

Another recent headache is that many pay-day lenders are having trouble keeping orfinding a commercial bank account. A num-

ber of them are saying their banks, seeminglyout of nowhere, have given notice that theiraccounts must be closed. Then it’s virtuallyimpossible to find a replacement.

The payday industry believes it’s beingtargeted by Operation Chokepoint, a three-year-old Department of Justice initiative toprevent banks from working with fraudulentthird-party payment processors that servebusinesses.

The DOJ wrote in a blog post earlier thisyear that it is aware of claims the departmenthas unfairly targeted businesses engaged inlawful activity.

“Others have confused our efforts withseparate, independent actions taken by finan-cial regulators to warn banks about risksinvolved with conducting business for mer-chants in certain industries,” the departmentwrote in its post.

Whatever the cause, the payday lendingindustry is feeling crushed.

Greenberg said his stores had banked withBank of America Corp. since they opened inthe late 1990s, but they were told two yearsago the institution had to close their accounts.They had a hard time finding a replacement,but ultimately landed a new regional bank inSouthern California; Greenberg declined tosay which one.

Lucking said he’d had a business accountwith Wells Fargo & Co. for more than adecade when the bank shut it down in 2013.

“It has been one of the most catastrophicthings that’s occurred in our industry,”Leonard said. “It’s basically choked us out ofour operations. … We can’t process transac-tions, clear checks. The smaller individuals inparticular were really impacted.”

Feeling squeezeAll these pressures have likely had an out-

sized effect on smaller stores or operatorswith just a few locations.

“There were frankly more small entities inthe landscape three to five years ago,” saidLeonard of the consolidation and closureshe’s seen statewide in the payday industry.

Lucking speculated that some of the shut-tered outlets in the county were probablypoorly located single-location mom-and-pop

stores. And those shops tipped over the edgein a more difficult business environment andbecame too costly.

That’s what Michael Kyong Kim saidhappened to him. Kim owns two Santa FeSprings Cash 4 You Plus payday loan shopsthat will soon become one.

He has had a Norwalk Boulevard store inthe Santa Fe Springs Marketplace shoppingcenter for more than a decade. But in the lastfew years, the 1,600-square-foot outletbecame too expensive to run. So Kim openedanother storefront a few miles away in asmaller, cheaper 900-square-foot space onTelegraph Road and plans to close the origi-nal store when the lease expires next year.

“Business has been going down the lastfive years,” he said of the original location.“We lost maybe 30 percent to 40 percent ofrevenue.”

Kim partly blames greater competitionfrom online lenders for his original store’sdemise. In fact, he launched an online lendingservice earlier this year just to keep up.

“There are so, so many lenders online,” Kimsaid. “That’s why I have to do something.”

Lucking, who seemed like a shoe-in foronline lending given his previous career inWeb hosting, also tried it back around 2002.But he found it too risky at the time and quit.

Successful online lenders benefit by notpaying for a physical shop and capturingconsumers who don’t want to leave the com-fort of their home to get a loan. But it can behard to stand out among the glut of Internet-only lenders.

Some rogue online operators also increasetheir revenue by skirting the law, saidGreenberg. Such lenders, often based offshoreor on sovereign tribal reservations, don’t fol-low state rules that limit loan amounts andinterest rates, and prevent rolling over loans.

“It’s hurt brick-and-mortar stores tremen-dously,” he said.

Ticking clockBut what Greenberg and others fear most

is the set of proposed changes recommendedby the Consumer Financial Protection

Please see page 18

Continued from page 15

Facing Hurdles: E-Z Check Advance store in West Hollywood across the street from the SLS Beverly Hills hotel.RINGO H.W. CHIU/LABJ






Bureau, which should be circulated next year.Potential changes to payday products have theindustry very concerned.

The bureau met earlier this year withsmall-business representatives and worked ona report based on the input received, whichwill be published when the proposals arereleased. At that time, the oversight group

will also take written public comments.Leonard said the payday lending industry

has been lobbying Congress about its concerns.One possible change that’s been floated by

the bureau in advance of its official proposalswould mandate more stringent verification ofconsumers’ income, major financial obliga-tions and borrowing history to ensure cus-tomers have enough income to repay the loanafter satisfying major debts and living expens-es. In this scenario, consumers would be pre-

vented from taking out a subsequent paydayloan until 60 days after the term of a previousone ended, unless their ability to repay haschanged significantly.

The bureau has predicted that these meas-ures would cause storefront payday loan vol-ume to plummet by 69 percent to 84 percentif enacted.

“If that’s going to be implemented asproposed so far, it’s going to close lots ofstorefronts, unquestionably,” said Lucking.

“I’ll be going out of business if this is whathappens.”

His backup plan partly involves using hiscoding skills to develop or hone new softwarefor credit products that could crop up.

But if these lenders are effectively wipedout, Greenberg said that won’t stop demandfor this type of credit.

“Loan sharks will come back,” he predict-ed. “People borrowing the money need thismoney and they will get it somewhere.

Leaner Times: Michael Kyong Kim at his smaller Cash 4 You Plus shop in Santa Fe Springs; he is shuttering the larger one.RINGO H.W. CHIU/LABJ

Continued from page 16

It’s easier thanever to find

The Communityof Business.TM

labusinessjournal.com

Helpful or Hellish?A look at some of the advantages and disadvantages of payday loans.

Pros• Often less expensive than other short-termcredit options, and much less than bouncingchecks or skipping bills• Good for emergencies• Those with bad credit scores or no credithistory can get a loan• Fixed $45 fee, paid up front. No other feesallowed, except for bounced checks• No collateral needed• Heavily regulated by state

Cons• Creates debt trap for consumers who oftentake out multiple loans• Condensed two-week payback period• Repayment due in one lump sum• Lenders can take repayment from customer’sbank account with no consideration of available funds or other expenses • Heavily targeted at low- and moderate-income neighborhoods whose residentslikely have no other options • Payments not reported to credit bureaus,so no credit history built





By MARNI USHEROFF Staff Reporter

NIX Neighborhood Lending looks a lotlike a payday lender, but it’s not.

Nix, a subsidiary of Kinecta FederalCredit Union of Manhattan Beach, marketscredit products similar to those of a traditionalpayday lender, but they’re actually credit unionloans and operate under different terms.

For example, Nix’s 33 branches offer small-dollar, short-term credit structured like payday

loans but with lower fees than most lenders. Nix’s version of a payday loan comes with

a 15 percent annual percentage rate and a $32application fee. In other words, borrowing$255 with Nix’s advance would incur feesslightly more than $33, compared with $45for an actual payday loan regulated by thestate. Consumers can borrow between $200and $400. Payment is due on the borrower’snext payday and fees have to be paid up front.

“As a federal credit union, we’re not limit-ed by California regulations,” said LuisPeralta, president of Kinecta’s alternativefinancial solutions division. “That’s whywe’re able to develop a more consumerfriendly and cheaper offer.”

Last year, the credit union took a step furtherand started offering Payday Payoff Loans at Nixlocations. This product allows borrowers to takeout cash to pay back one or more payday loans,effectively consolidating them. Borrowers thenpay the debt off over a longer period with moreflexible terms. Payment amounts are limited to 5percent of their income.

Payday Payoff Loans range from $500 to$2,500, last up to 24 months and come with a$50 application fee and 18 percent APR.Unlike payday lenders, the credit unionreports Payday Payoff Loan payments tomajor credit bureaus, helping consumers builda credit history.

After buying Nix Check Cashing in 2007,Kinecta realized Nix’s customers were verycomfortable with alternative financial servicessuch as check cashing, prepaid cards and wiretransfers. But a lot of them had bad creditscores or no credit history at all and werestruggling with credit access.

“That lead us to develop our version of apayday loan,” Peralta said.

Seeing consumers misuse payday loanseventually lead Kinecta to develop its consoli-dation product.

Kinecta partnered with LexisNexis todevelop a test to determine if the loan wouldimprove borrowers’ financial health and beprofitable for the credit union.

“The price is a win-win,” Peralta said ofthe end result. “(Borrowers) are saving hun-dreds or thousands of dollars depending onhow much they’re consolidating. At the sametime, we are keeping this product profitableand sustainable.”

Alex Horowitz, an officer in Washington,D.C., with the Pew Charitable Trusts’ small-dollar loans project, said the Payday PayoffLoan is unusual because he doesn’t see a lotof small loans from banks and credit unions.He partly credited Kinecta’s success to limit-ing payments to an affordable amount of bor-rowers’ income.

“What this credit union has done is used astreamlined underwriting standard,” saidHorowitz. “It keeps costs down.”

As of Nov. 30, Nix had lent $10.4 millionthrough 8,100 payoff loans, which in turnretired 35,000 payday loans. Nix launched theproduct in June of last year and has writtenoff about 5 percent of that total. For compari-son’s sake, about 3 percent of credit cardloans have been written off over the past year,according to the Federal Reserve System.

“The community is loving this product,”Peralta said. “They are doing a lot of word ofmouth, which is the cheapest acquisition costwe can have.”

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Lender OK Taking LessFINANCIAL: Credit unionrules allow Nix to providecheaper ‘payday’ loans.


Open for Business: Luis Peralta at Nix Neighborhood Lending shop in Inglewood.RINGO H.W. CHIU/LABJ

‘As a federal credit union,we’re not limited by

California regulations.’LUIS PERALTA,

Kinecta Federal Credit Union




Documents

RINGO H.W. CHIU/LABJ CHECKING OUT? · payday loan at a time from the same lender and loans can’t be rolled over. California’s maximum loan amount is among the lowest nationwide,