On a sunny afternoon, traffic rolls along Charlotte’s busy North Wendover Road. Occasionally, a car eases into a strip mall in a neighborhood of apartments, and the driver files into a storefront under a large, green ACE Cash Express sign. It advertises “checks cashed,” “prepaid debit cards” and similar services often needed by low-income borrowers without accounts at commercial banks.
“Can I get a loan?” one asks. “No sir,” the clerk replies. “North Carolina doesn’t allow us to make loans here.” Then he quickly volunteers, “A lot of our customers go to ACE in Rock Hill or Fort Mill. They’re the two closest to Charlotte.”
Under a similar green sign in a strip mall 45 minutes away in Fort Mill, S.C., another ACE Cash employee is equally helpful. “Do you make loans?” he’s asked. “Yeah, we do. We’ll need a personal check with your name printed on it, and your income and your ID.” The customer pauses. “Does it matter that I’m from Charlotte?” he asks. The clerk doesn’t hesitate. “No sir. Most of our customers are from North Carolina.”
About 900 South Carolina payday and auto-title lenders made more than a million such loans in 2015, the latest year tallied by the Durham-based Center for Responsible Lending. The 128,000 borrowers paid an average annual percentage rate of 390% on a $391 loan borrowed for two weeks. The number of loans made to North Carolinians is not tracked, but clearly tens of thousands made the trek across the state line, helping make South Carolina the 12th-biggest payday-lending state. It ranks 24th in population.
It’s been a decade since a North Carolina appeals court made the small, short-term, high-interest loans illegal. The decision, applauded by a swath of financial-services executives and lawmakers of different political stripes, made the state a national model for reining in payday lending. But evidence suggests the door might not really be closed, as mostly lower-income borrowers will risk astronomical interest rates, ruined credit, abusive debt collectors and the loss of vehicles in return for quick cash.
“It’s legalized loan-sharking, and that’s just not what North Carolina is about,” says Josh Stein, elected N.C. attorney general in 2016. A former deputy attorney general, Stein was part of the push to shut down payday and auto-title lenders that culminated in the 2008 court decision. “These kinds of loans put folks on a debt treadmill they can’t get off, and some end up paying thousands of dollars for a $300 loan. North Carolina was the first state to roll back laws that authorized payday lending, and I’m proud of that.”
In his latest action against such businesses, Stein went to court last year to shut down Liquidation LLC, a nationwide quick-loan chain with offices under such names as Auto Loans LLC, Car Loan LLC and Sovereign Lending Solutions LLC. The company’s offices in Chapel Hill, Charlotte, Raleigh and elsewhere made more than 700 auto-title loans to North Carolinians, at up to 571% annual interest. Defaulters lost cars.
Before 1997, criminal and consumer-finance law forbade the loans. However, as an experiment, the General Assembly that year allowed cash-checking companies to make the loans that numerous studies show are disproportionately obtained by minority borrowers, typically with limited incomes and no bank relationships or other access to credit. Within two years, the number of payday-lending outlets in the state had soared from zero to almost 850. By 2002, more than 1,300 offices were making short-term consumer loans, outpacing the number of bank branches in the state.
One borrower was a former Connecticut state trooper, John Kucan, who’d retired to New Hanover County on permanent disability after being shot in the head by a motorist he stopped for erratic driving. The Marine veteran took out a loan after Connecticut concluded it had overpaid him for his disability and demanded reimbursement. With a steady income from his disability checks, Kucan visited one of 117 North Carolina outlets of Advance America Inc., a lending chain based in Spartanburg, S.C., seeking what’s commonly called a payday loan.
Falling behind in his payments, he returned 15 times to Advance America, which repeatedly rolled over the loan, albeit with extra fees. It was “like being addicted,” he says. In the end, his $850 loan cost him $2,400, at what amounted to 450% annual interest.
Such loans became illegal in 2001 after the law permitting the activity expired. The industry pushed back, changing business models in some cases and mounting a court challenge that lasted until 2008, when the N.C. Court of Appeals ruling put about 300 remaining lending offices out of business.
Today’s stakes are even higher than in the early 2000s. North Carolina’s ban on payday loans and variations such as auto-title loans save Tar Heel consumers close to $500 million a year, according to studies by UNC Chapel Hill researchers and others. But increasing support for deregulation, promoted as a way to provide easier credit for cash-strapped citizens, is prompting renewed efforts to permit high-interest rate lending.
There’s lots of money to be made in small loans, says Michael Lord, president of the 2.3 million-member State Employees’ Credit Union. To deter people from payday loans, the credit union allows members to borrow up to $500 at 13.25% interest in salary-advance loans, with 5% of the amount automatically invested in a savings account. The credit union charges a flat $5 fee for the 30-day loan, which cannot be rolled over. That compares with typical payday loan charges of $15 per $100, plus fees, or $75 a month.
“We’ve got about 100,000 members using these loans, so if you calculate it out, that’s about $90 million a year right there that’s staying in our members’ pockets that would otherwise go to payday lenders,” Lord says.
Under its pricing, the credit union makes a profit, Lord says. “There’s something morally wrong when payday lenders can get by with charging $1,500 to repay a $500 loan,” he says. “They’re taking advantage of those least economically able to handle those excessive charges.”
Such criticism isn’t accurate, according to the small-loan lending industry. “Consumers are not better off when legal, small-loan products are eliminated,” says Ed D’Alessio, executive director of Financial Service Centers of America. His Washington D.C.-based organization represents about 13,000 companies that have about $100 billion annual revenue and 30 million customers. Without such loans, “people bounced more checks and had harder times making ends meet,” he says, citing studies by the Federal Reserve Bank of Richmond. “They pay bills late, leave their cars in repair shops and incur more shut-off charges.”
Many payday lending stores provide around-the-clock access, often in low-income neighborhoods without traditional bank branches, D’Alessio says. If reported in APR terms, fees from bounced-checks exceed the much-criticized payday loans, he says.
While he agrees unscrupulous payday lenders can exploit desperate borrowers, his trade group requires its members to obey laws of the states in which they operate. He and other industry sources rankle at examples of astronomical interest rates because payday loans are intended to be paid off in weeks, not years.
Stein and Gov. Roy Cooper, who as former attorney general led the class-action lawsuit against Advance America and others, detail new efforts to break through North Carolina’s anti-predatory loan laws. One involves lenders based on Native American reservations in states such as California and Wisconsin, claiming immunity to North Carolina laws because of tribal sovereignty.
Cooper and Ray Grace, the state banking commissioner, moved in 2015 to shut down two such companies, CashCall and Western Sky Financial, accusing the lenders of charging up to 342% in interest. Courts ordered $9 million in refunds.
Others attempt to disguise predatory loans as legal pawn transactions or conceal their transactions through online “lead generators” that promise to link Tar Heels to out-of-state lenders. A number of check-cashing companies, such as Irving, Texas-based ACE Cash, concentrate near state lines in areas such as Charlotte, referring customers to their nearby offices in South Carolina and Virginia where payday loans are legal. Other potential payday lenders, known as rent-a-banks, claim they’re agents of mainstream banks.
Meanwhile, in a parallel to payday lending, about 10 private national lenders are offering refinancing loans to military veterans with mortgages guaranteed by the U.S. Department of Veterans Affairs. A bill introduced by U.S. Sen. Thom Tillis of North Carolina and Sen. Elizabeth Warren of Massachusetts would halt “churning,” in which lenders prod VA borrowers to refinance home loans and then profit from fees included in monthly payments spread over many years.
Over the last year or so, the companies involved in VA lending issued about 50,000 North Carolina loans, and about 1,000 of those appear to have been unscrupulous churns, according to a spokesman for Tillis. By early May, the bill had passed the Senate and awaited action in the U.S. House.
Both critics and supporters of short-term installment lending agree that the VA and Native American-reservation issues are a mere skirmish on a larger consumer-lending battlefield shaping up in Congress and federal regulatory agencies. In a closely watched development, the federal Consumer Financial Protection Bureau is considering rescinding a rule that requires payday and similar lenders to determine beforehand if borrowers will be able to repay loans. Democrat lawmakers argue it’s common sense, while many Republicans contend it places unnecessary burdens on lenders. Barack Obama’s administration created the CFPB in 2010 to help prevent another financial meltdown.
President Donald Trump replaced Obama appointee Richard Cordray as CFPB director earlier this year with Mick Mulvaney, the son of a Charlotte home developer who gained a seat in the South Carolina legislature in 2007 and entered the U.S. House in 2011. During a Senate confirmation hearing, Mulvaney called the consumer protection bureau “a sad, sick joke” and said that he favors its abolishment.
Consumer lenders pushed to change North Carolina’s laws in 2013, aided by lobbyists including former Republican Party Chairman Tom Fetzer and former House Speaker Harold Brubaker. The bills were met with bipartisan legislative opposition, while military commanders from the Fort Bragg and Camp Lejeune bases also expressed opposition. Service members are urged not to take payday loans, though the government has limited enforcement power.
Another key player in the payday-lending debate is U.S. Rep. Patrick McHenry, a Republican from Lincoln County. He sponsored a bill that would make it easier for federally chartered, mainstream banks to resell their payday loans in a secondary market. It passed the House in February and was awaiting Senate action in early May.
McHenry said his bill, the Protecting Consumer Access to Credit Act, would overturn a 2015 federal-court ruling that nonbanks such as payday lenders can’t charge higher rates than allowed in states where the borrowers live. Stein spokeswoman Laura Brewer says that’s 30% in North Carolina, one of fewer than 20 states that cap interest.
McHenry declined an interview request. Speaking on the House floor in promoting his bill, the congressman argued it would make credit easier for small businesses and lower-income borrowers. “Many Americans don’t have the savings to cover a common, $1,000 emergency like a car repair,” he said.
McHenry’s bill “would allow a lender to charge whatever rate they want on a loan, then immediately assign that loan to a third-party nonbank,” Stein says. “We’re seriously concerned that model would completely undermine North Carolina’s usury laws that exist to protect people from high-interest loans.”
The Center for Responsible Lending contends the so-called “rent-a-bank” model would allow payday lenders to open in North Carolina by arranging opaque partnerships with national banks that provide funding. “That’s a huge threat to our lending landscape,” says Kelly Tornow, policy director for the Center for Responsible Lending.
McHenry’s staff members denounce such claims as “misinformation.” Because North Carolina flatly prevents payday loans, a federal law that applies to states that permit them simply would not matter, two advisers say. The bill was sent to a House committee, where it awaited action in early May.
Tornow cites research showing more than 75% of such lenders’ revenue — potentially more than $400 million a year in North Carolina — comes from cases such as Kucan’s in which strapped debtors re-borrow repeatedly. Similarly, Cordray’s research claims only one borrower in four repays on time, typically two to four weeks.
What’s clear is that small-dollar, installment credit that once was a thriving business in North Carolina is poised to stage a rousing comeback if legal and legislative attacks on the state’s ban succeed.
Many legal check-cashing and similar outlets remain in place. A random check of about a dozen in Charlotte, Raleigh, Asheville and elsewhere shows all conspicuously warn prospective borrowers that payday loans are illegal in North Carolina.
“We only have the ability to protect people within our state borders,” Stein says. “We can’t control what South Carolina, Virginia or Tennessee do. So our hands are up. But on the other hand, at least we know North Carolina consumers aren’t having to pay these extreme interest rates to payday lenders in our state.”
By banning such lenders, North Carolina forces borrowers to seek alternatives over which it has no regulatory control, D’Alessio says.
“Without access to legal credit, the need doesn’t go away,” he says. “They’re just forced into less-palatable actions.” His trade group supports Mulvaney’s skeptical view of payday-loan regulations. Anti-payday lending rules were “rushed out in the last days of the Cordray administration, and it’s political and deeply flawed,” he says. Congress in May declined to overturn the rules.
Meanwhile, the lure of easy credit will remain strong. The clerk at the ACE Cash Express in Rock Hill listens to the Charlotte customer’s loan request. “No problem,” he says. “You can apply right here in the store and get the money now. Have you out in 15 minutes.”
No one may have more influence on the future of payday lending than Charlotte native Mick Mulvaney, who has shown little interest in curbing high-cost, small-dollar lending. Since President Donald Trump appointed him acting director of the Consumer Financial Protection Bureau, Mulvaney has drawn criticism because of his ties to lenders and disinterest in the agenda of his predecessor, Richard Cordray.
Among his controversial actions include disparaging payday-lending rules instituted by Cordray and dropping a CFPB lawsuit alleging Kansas lenders misled customers and charged up to 950% interest.
Mulvaney made news in a late April speech when he told a group of bankers, “If you were a lobbyist who never gave us money, I didn’t talk to you,” during his six years in Congress. “If you were a lobbyist who gave us money, I might talk to you. If you came from back home and sat in my lobby, I would talk to you without exception, regardless of the financial contributions.” In the 2015-16 election cycle, the then-congressman received $31,700 from payday lenders, ranking ninth among federal politicians.
Such bluntness has long been the style of Mulvaney, a graduate of Charlotte Catholic High School, Georgetown University and UNC School of Law. He worked at the James, McElroy & Diehl law firm in Charlotte, then started a real-estate development business in York County, S.C. He later moved to the Palmetto State, earned a seat in the state legislature in 2006 and then unseated longtime U.S. Rep. John Spratt in 2010.
N.C. Attorney General Josh Stein criticizes Mulvaney’s decision to drop a Cordray investigation into Greenville, S.C.-based lender World Acceptance Corp., which has offices in Fort Mill and Rock Hill, S.C., and other state-line locations that legally serve North Carolinian border-crossers. Two days after Mulvaney’s action, former World Acceptance CEO Janet Matricciani sent an email to him suggesting that if he wanted to leave the CFPB post, “I would love to apply for the position of director.” Because of the World Acceptance investigation, “I am in an unparalleled position” to be the leader, she added.
Stein and Kelly Tornow, policy director for the Center for Responsible Lending, a consumer group that lobbied against predatory loans in North Carolina, believe Mulvaney is attempting to preempt the laws of North Carolina and other states.
In Washington, D.C., Sam Gilford, a senior CFPB spokesman, says most provisions of Cordray’s crackdown on such lenders are not scheduled to take effect until August 2019. Mulvaney plans to “engage in a rulemaking process to reconsider the payday rule,” he says. “We don’t have any more information at this time on what that reconsideration would entail.”
While Mulvaney previously favored abolishing the bureau that he now leads, he has made plans to increase its payroll by adding a team of economists to provide cost-benefit analysis, American Banker reported in May. He’s also added political appointees to shadow bureau division leaders.