Feds are cracking down on payday lenders, but here’s why Advance Financial isn’t worried

Nashville Business Journal – June 6, 2016To Mike Hodges, the “writing was on the wall.”After working to get the Tennessee Legislature to allow flex loans two years ago — an effort that included extensive lobbying by payday-lending organizations— Advance Financial has completely shifted its business model away from traditional payday loans in favor of the aforementioned flex loans as well as longer-term installment loans.It was all a pre-emptive move to avoid the brunt of a crackdown by federal regulators on payday lending, Hodges, the chairman of Nashville-based Advance Financial, told me.The Consumer Financial Protection Bureau last week unveiled its long-awaited rules aimed to rein in payday lending practices across the country.The 1,300-page proposal still faces months of review — as well as possible legal challenges. Yet they stand to considerably alter the nature of the payday-lending industry, which opponents heavily criticize as predatory and supporters contend as a necessary option for consumers in a pinch.A recent study by the Nashville Area Chamber of Commerce found that the consumer finance industry employs about 17,000 Tennesseans, supporting roughly $1.5 billion in labor income.Many in the industry argue the proposed CFPB rules would force them to close, should they take effect.Not so for Advance Financial — which had spent two decades offering single-payment payday loans.“We knew the Feds were about to say single-payment [payday] loans were going to go off the books,” Hodges said. “Advance Financial isn’t going anywhere.”Because of the new state legislation, Advance and others in Tennessee offering the flex loans — which bear similar higher interests common with payday loans, but can feature a much higher principal amount (up to $4,000) — won’t be squeezed to the extent of companies operating in the traditional payday-lending space. If the CFPB’s rules go into effect, Hodges argues it gives Advance’s competitors in the payday industry “a year or two to live,” adding “it’s basically going to abolish” that space.At their heart, the CFPB’s rules would prevent borrowers from taking out more than three consecutive payday loans — an attempt to restrict the lengthy, repeated borrowing patterns that rack up considerable fees and interest for borrowers, a process that is the foundation of the payday-lending industry’s business model. Predominantly small-dollar credits, payday loans typically come due at a borrower’s next paycheck. Based on the CFPB’s website, their annual interest rates total as much as 400 percent, though a report from the Milken Institute found the fees range as high as 574 percent in some states.Critics consider the existing practice — and the exorbitant fees — to be a debt trap, especially for lower income borrowers. CFPB director Richard Cordray said in a statement last week that the industry’s model is “much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey,” adding the watchdog agency’s proposals aim to “prevent lenders from succeeding by setting up borrowers to fail.”Yet Hodges argues there’s a demand for the products Advance offers, and that the loans are a necessity for a wide segment of the population, notably borrowers needing a loan to help bridge monthly expenses that can’t get such a smaller amount from a traditional deposit-taking bank.A look at Advance’s record track record underscores Hodges’ position. Based on our most recent research of Nashville’s 100 largest private companies, Advance was the fourth-fastest-growing private company among that group of the region’s big private firms. Per our research, Advance grew revenue from nearly $27 million to $74 million in 2014, a pace of revenue growth bested by only three other companies on the NBJ 100.“There’s this need and a gap for short-term and small-dollar credit that is fast and convenient,” Hodges said. “Americans are choosing these option over others. There’s this need for most Americans who are in a pinch and this option has become very popular.”Advance, led by Hodges and his wife Tina, Advance’s CEO, has attempted to differentiate itself from other competitors with its 24/7 hours and branch locations that look more like a credit unions. And Mike Hodges says nearly half of the company’s customer base makes more than $36,000 per year.To be sure, Advance Financial — which operates 74 stores across the state and employs roughly 700 people — won’t be completely unaffected by the sweeping rules by federal government’s new consumer watchdog group, which was created by the Dodd Frank Act.The CFPB’s proposed rules call for additional oversight in installment loans, as lenders such as Advance will need to go through a more stringent underwriting standards and requirements.“It will impact our credit products — and for others like us in Tennessee,” Hodges said. “It’s going to raise compliance costs and reduce revenue … but not nearly to the extent of traditional payday lending.”Hodges says the flex loans, from an annual percentage rate, are cheaper than the traditional single-payment payday loans. The flex loans offered by Advance function as an open line of credit and the daily fees only add up during the time a borrowing uses the loan, Hodges added.That said, these are still high-rate products that, when combined with daily fees, dwarf the type of interest credit card borrowers have to pay. While state law caps flex loan interest rates at 24 percent annually, the daily fee cap of 0.7 percent that lenders such as Advance can charge brings its effective annual rate (APR) as high as 280 percent, based on Tennessee’s statute. The Center for Responsible Lending outlined this scenario for NewChannel5 earlier this year: “Under the term allowed in Tennessee, if you took out a $500 flex loan and made the minimum payments, you would have paid over $2,600 in fees and interest after three years and would still owe $167 in principal.”Hodges argues tighter federal regulation won’t eliminate the need for payday-lending products, or their equivalent. He contends the tighter restrictions proposed by the CFPB will put consumer finance companies out of business, thus driving consumers to completely unregulated markets.“Small-dollar lending happens in every state,” Hodges said. “And it’s become popular wherever it’s enabled [by state laws]. You’re going to have small-dollar lending whether it’s regulated or not. But would you rather have Commissioner [Greg] Gonzales regulating the business or Tony Soprano running the business? We’re in favor of a well-regulated market that allows the consumer to make their choices. This prohibition doesn’t address the need. It doesn’t provide [borrowers] an alternative option.”Gonzales, the commissioner of the Tennessee Department of Financial Institutions, cautioned lawmakers in February that the federal rules may push more consumers to underground and unregulated lenders.