The Big Squeeze

Michael knew something was amiss. He'd lose his teacher's license? A "Division of Hot Checks and Fraud"? He searched the Internet and found Dean Malone, a Dallas lawyer who sues debt collection agencies. Malone took the case.

For one, it's illegal to threaten someone with jail time for not repaying a debt. "But we see that all the time from these collection agencies--especially the payday loan ones," Malone says. Second, it's illegal to pose as a law enforcement agent of the state of Texas. That's what Manning did. He worked for Ditore, Ruibal & Associates, a Florida debt collection agency. There is no Texas "Division of Hot Checks and Fraud."

Malone sued. He wanted to go after ACE, but an arbitration clause in the contract Michael signed with the lender forbade it. Still, Michael recorded every conversation he had with the collection agency and won an undisclosed settlement from it in August 2004--three months after Florida Attorney General Charlie Crist sued Ditore for deceptive business practices. Crist said at the time, "These people were using cruel and forceful tactics to take advantage of citizens who were already down on their luck."

ACE's Eric Norrington says, "Those guys are long gone...We do collections primarily in-house now."

Despite Michael's settlement, he says payday loans are "the biggest scam there is out there."

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But that's unfair. At least, that's what Eric Norrington thinks. Once ACE heard customers complain about Ditore, ACE dropped the collection agency, he says. As for the loans Michael took out over a year and a half, what happened to him happens only to "a tiny percentage of the people who use the product," Norrington says. "In dealing with the media, so often we just get mauled."

Robert L. Clarke made the same point two years ago. Clarke's the former comptroller of the currency of the United States, which, among other things, oversees the FDIC, which regulates national banks. In response to a Dallas Morning News editorial with the headline "Payday Loans--Texas needs to stop predatory practices," Clarke, whose law firm has represented payday lenders, said what's lost on the media is a bank's overdraft fee. A $200 bounced check could mean a $50 fee for insufficient funds. But if that customer instead took out a payday loan to cover the $200 expense, the fee on the loan would be $30, at most. "Why some policymakers--and editorial writers--think short-term loans by banks in the name of overdraft protection are just fine and payday loans are not is a mystery," Clarke wrote. He tells the Observer, "People completely misunderstand what's going on. Payday lending is providing a convenience no other financial outlet offers."

Exactly, says Tom Bessant, chief financial officer for Cash America International, a Fort Worth-based payday lender with 863 U.S. locations. "Credit card companies can charge a $30 or $40 late charge," he says. "There are fees for not having an energy bill paid on time.

"If you look at our service relative to getting your electricity shut off...if you don't have the money, then you can't make the payment," he says. "Why aren't more institutions offering this loan? The consumer groups choose to ignore that fact."

For what it's worth, in the two days the Observer spent outside area payday lending storefronts, not one person we spoke with had problems paying off a loan in two weeks.

Melvin Battle didn't either. He's the administrator for federal funds at the Texas Youth Commission. After his recent divorce, "I probably took out six [payday] loans," he says. The interest rates were $34 for every $100 borrowed, "but I was able to pay them all back in two weeks."

But he did feel manipulated for taking out the loans. "I felt more sorry for the other people who were in there," he says. "I overheard a couple say their whole check would be going back to these people."

For the poor and desperate, payday lending is "legalized loan sharking," Battle says. "Once you get caught up in the cycle, it's hard to break."

Exactly, says Jim McMillan, a Houston lawyer who represents plaintiffs in class action and individual lawsuits against payday lenders. He served as local counsel for a nationwide suit against ACE in 2003. A federal court found that ACE violated states' usury laws. ACE agreed to forgive $50 million in bad debt. "And it's maybe one of the cleanest [lenders] out there," McMillan says of ACE. "I don't have nice things to say about these companies. I've just seen too many people hurt."

What happened to Michael and Kristy happens all the time to his clients. "It's a total nightmare," McMillan says. "I had one young lady. Hispanic. She was a maid. And she got into three of these outfits, and everything she made was going to payday loans.

"None of them should be in this business," he says. "In a good business practice, you try to apply the law rather than find ways around it."

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McMillan's talking about a credit services organization. It's the new business model for payday lenders, allowing a lender to become a broker. As a broker, the payday lender doesn't have to abide by the FDIC guidelines issued in March, the ones that say a bank partnering with a payday lender cannot give more than six loans to one client in a year. The FDIC guidelines took effect July 1.