Bank agency backed off after targeting payday lenders

The New Hampshire Banking Department threatened three major payday lenders with cease-and-desist orders late last summer, according to documents obtained by New Hampshire Business Review through a Right to Know request.

Advance America, New England Auto and Pay Day Loans and EZ Cash of New Hampshire all “appeared” to have violated a law preventing them from rolling over loans because they didn’t allow a cooling-off period between loans, according to letters addressed to the companies.

In February, the department “chose to close these cases, for various investigative and enforcement related reasons,” said the department’s staff attorney, James Shepard. Shepard would not elaborate and would not disclose some 300 pages of documents relating to the investigations, saying that confidentiality provisions in the banking statute trumped the Right to Know law, which allows the department to keep the documents secret unless it deems that their release is in the “public interest.”

Despite Banking Commissioner Peter Hildreth’s testimony in March before a legislative committee that his department received no complaints from consumers against any payday lenders, the Banking Department received 10 complaints against lenders, according to the documents obtained by New Hampshire Business Review. The documents did not disclose whom the complaints were against, though they appear to be mainly against title loan companies, which may explain the discrepancy between the testimony and the records (see sidebar on page 20).

Payday lenders essentially require borrowers to sign a post-dated check for a loan, while title lenders have borrowers sign over the title of their car. Both charge high interest rates – more than 500 percent if the loans are rolled over for a year. Both would have been wiped out by a proposed 36 percent interest rate cap, which Hildreth was testifying in favor of in March.

Critics have argued since New Hampshire lifted interest rate caps in 1999 that the state has become a haven for what they see as legal loan sharking. The number of loans provided by payday lenders has tripled to 150,000 in the last three years, and the industry has engaged the services of several high-powered lobbyists.

Hildreth, apparently concerned that the state had become a magnet for both payday borrowers and lenders, echoed some of those concerns about the growth of the industry in his testimony.

But the House Commerce Committee retained the bill until next session, alluding to other parts of Hildreth’s testimony: that, despite the large number of loans, his department had experienced few problems with the industry. Why try to put such a large industry out of business, skeptics argued, since it apparently had received no complaints about it practices?

Rollovers or not?

A review of the files show, however, that the industry’s record in New Hampshire is not spotless.

The Banking Department’s aborted attempt to prevent the practice of rollover loans, for instance, shows that at one point at least some staffers thought that the practice was continuing, even though the Legislature theoretically had outlawed the practice.

Loan rollovers, coupled with high interest rates, are at the heart of critics’ complaints about the industry. Payday loans usually last two weeks, and when looked at over the short term don’t appear to amount to a lot of interest. Someone borrowing $200, for instance, might have to pay $40 interest to obtain that money two weeks early. But if the consumer rolled over that loan for an entire year, the interest payments would skyrocket to $1,000 if just the principal is borrowed each time – and even more if the borrower rolls in the interest in the new loans. This might be beyond the means of someone who is frequently living from paycheck to paycheck to begin with, critics say.

(Rollover loans by title lenders are still allowed, but the lenders are limited to 11 rollovers over the loan’s term.)

While state law forbids a payday lender from “refinancing” a short-term high interest loan – which would instantly convert interest to principal – it does not specifically prohibit a lender from issuing another new loan within minutes of the old loan. And that new loan could include the interest of the old loan.

The short-term lending industry says that they are two different loans. The Banking Department – at least last fall – said that they amount to the same loan.

“It appears that you allow clients to pay off one loan with the proceeds of another loan without any cooling-off period. This is sufficient to violate the statute which states ‘a lender shall not refinance, renew or extend any loan.’” wrote Banking Department staff attorney Andrea J. Shaw in letters to the three lenders.

“It’s a good argument,” said Sarah Mattson, an attorney with New Hampshire Legal Assistance who has long worked for controls on the payday industry. “This new loan is actually a disguised rollover and a circumvention of the law.”

Mattson said the practice is “rampant” in the industry, but she acknowledged that it would be difficult for the Banking Department to do much about it under existing law – at least at this time.

The lenders see it another way. New England Auto and Payday Loans said it does not allow payday loans to be refinanced, could not find an instance where the law has been violated, but will retrain it staff to avoid any “exceptions” in the future.

Barbara Waters, chief operating officer of EZ Cash, wrote in her response to the department, “We definitely do not allow clients to pay off one loan with the proceeds of another,” and noted that state law doesn’t require any cooling-off period.

The department did not release any response from Advance America, the state’s biggest short-term lender. Out of the 207 pages filed on the matter, the department released 11 – the letter, a check for the examination and copies of its Web site with the section involving rollovers highlighted. Advance America’s policy is that if the state allows rollovers, it limits them to four a customer. The policy is silent on a cooling-off period between new loans immediately following the old loan.

Despite the “cooling-off” reference in the letter, that issue never arose in the company’s response, said Advance America spokesperson Jamie Fulmer. According to Fulmer, the company explained that a clerk simply forgot to stamp two loans paid in full before giving out a new one, so it looked like an actual rollover when it wasn’t. The concern over a waiting period never even came up. After the company explained that it was an isolated clerical error, the company never heard from the department, and it considered the whole matter settled. Fulmer said he was not aware that there were 200 pages of documents generated on the matter, and that it was only closed five months after Advance America’s response.

Internet lenders

While the Banking Department did back off pursuing storefront payday lenders, it has been going after Internet companies with essentially the same practices. Instead of signing over a check, borrowers allow the Internet payday lender to electronically debit their bank account. Many Web-based lenders have not bothered to obtain a license, which has prompted the Banking Department to issue more than 25 cease-and-desist orders.

Most of the Internet companies have simply altered their Web sites so New Hampshire residents can’t borrow from them, but two such local lenders – Cashforce USA of Keene and NHcash.com of Bedford – have challenged the state’s jurisdiction over them, saying that they don’t technically qualify as payday lenders.

NHCash.com maintains that electronic authorization is not the same as a check, and therefore they are just a small loan company. After a long legal battle in the state courts, the banking department vacated its cease-and-desist order against the company.

Cashforce USA made similar arguments, but in March agreed that, because of a change in the law in August, to pay a $15,000 fine, repay some refinanced loans and to require a 15-day cooling-off period between loans.