Just Business- or preying on the weak?

"On a very basic level, financial institutions have left the community. They are no different than grocery stores and gas stations. When they leave the urban core, they leave a gap. People fill it and feel they can prey on that."

Simmons says the area between 12th Street on the north and 47th Street on the south has seen a flight of banking and financial institutions in the past decade. "We are looking at a community left unbanked," he says. "I have had people who tell me they know loan sharks who would like to have the rates the short-term loan industry has. In regulating the industry in 1990, we may have instituted loan-sharking at much higher rate, made it legal, and given the industry the power to have people prosecuted on its behalf."

Simmons thinks that although the short-term loan industry grew between 1990 and 1994, the fastest growth came after the legalization of riverboat gambling. "If you think about it, they really proliferated in 1994 and 1995," he says. "Simultaneously, banks really began moving out and began the mergers. Now the financial institutions say they no longer want to be in brick and mortar because of technology and online banking, but that leaves a whole group of people in vast areas of the city and the state not served."

Since 1994, Simmons says, only one bank has come into the inner city. Other than Douglass Bank, not one bank has opened a satellite center or branch in the urban core. "This is a problem for people on the bottom, period," he says. "I see places in rural areas also. The poor and unbanked are sometimes in a position where this is the only place they can go. A loan of $500 to $1,000 is not enough to make a traditional bank any money."

Geary, with the Division of Finance, thinks that no one factor or group of factors has contributed to the increase of payday and car-title lenders. "I think we are looking at an evolution in the way people do business," he says.

"One of my examiners offered the idea that a title loan is the old pawn-shop arrangement. The pawn shops found it was no longer profitable to make loans of $50 to $100. The payday and title loan people have picked that up. There are many factors involved, but the small-loan business has also evolved. We also have to remember that banks have never been interested in extremely small loans."

And the market is ripe for growth of the short-term lending business. In 1998, state Sen. Jim Mathewson pushed legislation that loosened usury limits on small loans from lenders not covered under the Missouri statute. These included out-of-state, short-term lenders operating in Missouri. The previous usury statute limited the amounts out-of-state businesses could charge to what Missouri lenders (doing business in Missouri) could charge. The statute, however, overstepped what the state was allowed to do and regulated interstate commerce.

Under the 1998 law, the Division of Finance regulates rates charged by Missouri short-term lenders. But the freedom of out-of-state lenders to charge whatever the market would bear set a scenario for Missouri lenders to argue that they should be able to operate with equal freedom -- and be controlled only by the market.

The CFSA maintains that half of Americans sometimes need money to cover expenses and that 10 percent of Americans, about 24 million, "say they are somewhat or very likely to obtain a payday advance."

Relatively little is known about the average short-term loan customer in Missouri. The CFSA bases its information on representative national surveys, an average that may bear little resemblance to the Missouri customer. The Division of Finance regulates the industry in Missouri but has focused on enforcing the law rather than investigating the industry's impact on individual communities and the state as a whole. About the only fact about short-term lending is that 75 percent to 80 percent of customers pay back their loans; lenders must absorb the rest.

The Illinois Department of Financial Institutions studied the industry in that state in 1999. Geary says the Illinois report is a good comparison for Missouri, because the demographics, and average and median incomes, of the two states are similar. In Illinois, 60 percent of short-term loan customers have an income between $20,000 and $70,000. Of those Illinois customers, more than 39 percent were homeowners, 51 percent were unknown, and the rest were known or thought to be renters. Some 64 percent of the Illinois customers were ages 25 to 44, with another 17 percent being from 45 to 54 years old. While 17 percent held bank cards or retailer credit cards, 77 percent had no credit cards.

The short-term loan industry, the report's authors wrote, "offers a solution for people with questionable credit or those that have incurred unexpected expenses. The fees levied by these companies, while exorbitant, can be compared to the increased costs of banking services throughout the country.... The increased banking fees for returned checks, coupled with the added charges placed onto the account by the recipient of the check, make it less expensive for a person to borrow from short-term lenders than to risk having their check returned NSF (not sufficient funds)."

The report, however, also pointed out that "Short-term loans provide a service as long as they are used as intended. It is only when customers use them for extended periods of time or for reasons other than financial hardship that problems can occur." The report states that allowing lenders to roll over the loans even once can turn "a short-term loan into a long-term headache." Stricter state regulation of the industry -- setting payment terms, determining the amount of principal paid with installment payment arrangements, and limiting the profit of rolling loans over -- would help decrease abuse and customers' ability to get themselves in trouble.