Three years after it banned the practice of payday lending, Georgia's legislature is considering allowing lenders to offer those services again, albeit with tough new restrictions.
The proposed bill would create a system of two-week cash advances, which would have a flat $15 fee per $100 borrowed, up to a limit of 25% of a customer's monthly income. While payday lenders in other jurisdictions can permit a loan to roll over, extending the payments, Georgia's proposal would prohibit that practice.
It would be a product unique to the state, but would undoubtedly still draw the industry players, like Advance America (NYSE:AEA). The country's largest payday lender closed down its 89 centers in Georgia in 2004 after the ban was enacted.
The strict payday lending ban -- violations carry prison terms as high as 20 years -- still permitted pawnshops to operate and make loans on pawned merchandise. Interest and fees were limited to 25% of the value of the merchandise put up as collateral. Companies like Cash America (NYSE:CSH), which serve as both pawnshops and payday lenders, had continued to operate in the state by making loans available through third-party banks but ensuring that their remuneration from the bank was below the usury limits set by the state. However, when the FDIC passed its own regulations that affected how banks could process payday loans, that operation ceased as well.
As is to be expected, consumer activists have got their dander up over the revival of payday loans in Georgia. Trotting out the typical reports of predatory lending practices and conjuring up images of loan-shark goons, they say that payday lending preys upon the poor and financially illiterate to reap obscene profits from their plight.
Undoubtedly, the best solution for borrowers is to avoid the need for a payday loan in the first place. Pay yourself first. Save for a rainy day. Live within your means. These are all the right things to do, and we advocate them strenuously at The Motley Fool. Yet not everyone does -- or even can -- abide by these Golden Rules, and the fact remains that people have and probably always will have short-term financial needs that can't or won't be met by traditional lending institutions. Go to a bank today and try to borrow $300 until your next paycheck comes. Once the loan manager picks himself up off the floor and stops laughing, he'll politely tell you that FirstNationalConglomorate Bank doesn't make such small loans.
That's where the payday lenders come in. They are filling a need that's not being met, and the unbanked and underbanked in today's society have found them both useful and affordable. Despite allegations of predatory practices and obscene profits, payday lenders are realizing profits in line with those of many more politically correct companies.
Allan Jones, chairman and CEO of privately held Check Into Cash -- a Tennessee-based payday lender -- notes that "it takes a $15 fee or more per $100 advanced in order for these companies to provide their service ... (it's) is as low as a company can go and stay in business." His study found that the industry average profit is 6.6%, with Advance America leading the way at 10.4% and Dollar Financial (NASDAQ:DLLR) at the low end with 0.8%. He points out that pancake purveyor IHOP (NYSE:IHP) earned a profit of 12.6%, while PetSmart (NASDAQ:PETM) earned more than tiny payday lender QC Holdings (NASDAQ:QCCO). No one was going after these companies as "predators."
It seems surprising indeed that Georgia is considering allowing payday lenders to return to the Peach State after such a short time. Perhaps it's the attention being brought to the issue by two state financiers, who are being charged under the Georgia ban with running cash-advance services thinly disguised as something else. While they've lost the initial rounds in their battle to have the law struck down as unconstitutional, it's currently before the state's highest court.
It would be just peachy if Georgia returned a sense of sanity to its state and permitted legal payday lending to return -- since, as Check Into Cash has pointed out, the only companies driven out of state were the ones willing to abide by the laws. The criminals remain. And providing a service that's both wanted and needed by a populace not being served should not make you a criminal.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
