YOUR PAYDAY LOAN INDUSTRY RESOURCE

Payday Loan Industry Newsletter, Issue 03-10

This month's Newsletter will discuss exciting recent payday loan developments and the Payday Loan and Check Cashing Convention that recently took place.

The following comments, ideas, and analysis are the direct result of our attendance at the Payday Loan and Check Cashing Convention. We have also integrated the experiences of not only ourselves as operators of payday loan stores, but those of our clients and peers. Special thanks go to Joseph Doyle with Check Cashing USA out of Florida; Jerry Robinson, President, Valued Services; Robert E. Rochford, Esq, Genl Counsel, FISCA; and Laura E. Udis, Administrator, Colorado Uniform Consumer Credit code.

Read our PREVIOUS Newsletters here if you missed them. The focus of our last Newsletter was :
"The Future of the Payday Loan Industry".
The subject of our Previous Newsletter was:
"The National Bank Model".

The Industry is becoming more and more market driven. It’s more difficult to get new customers in some markets. There is more competition every day. We are becoming more dependent on customer retention (A very rough estimate of the cost to secure a new customer is $80), customer loyalty, and repeat business. Some markets are certainly experiencing a level of maturity not previously seen.

We are witnessing more transaction fee “first loan free” and coupon redemption advertising utilization. (NOTE: with the use of the these approaches, WATCH YOUR DISCLOSURE ACCURACY!!)

Collection oriented PDA firms perform best. (“This is a collections business”) Better collections = better volumes = more repeat customers = keep customers longer

Mono-line operations (those of us focused strictly on payday loans) generally experience 1.5 % defaults every 2 weeks. In other words, for every 100 transactions, 1.5 will be uncollectable.PLEASE note that the default rates stated by various operators are all over the map. But TYPICALLY: 100 loans = 1.5 go bad in mono-line operations.
100 loans = 3-5 go bad in ck cashing and PDA combined operations.

As in past years, we are experiencing higher average transaction values. Additionally we see more interest in installment lending.

PDA Demographics
• 34 % own homes
• 56% rent
• relatively educated customers
• 100% have checking accts ( 80% of Americans have checking accts today)
• 60% of PDA consumers are female. This is good for our industry because, generally speaking, females manage their money better. They are better payers and better borrowers.
• 25 yr to 44 yr old is our target market

70% of US residents reside in a state with favorable payday loan legislation. And this percentage increases monthly.

$20k - $50k IS WHERE OUR BUSINESS IS.

As a side note: check cashers avg. sized check cashed will NOT increase for the foreseeable future. Nor will the volume of checks cashed. Thus check casher revenues are NOT expected to increase anytime soon. (You should consider adding additional products to your offerings to increase revenues.)

This article is Copyright 2003 by Trihouse Enterprises, Inc., a company focused on the payday loan or cash advance industry. This article may be posted by interested parties IF done in its' entirety with full and complete credit given to Trihouse Enterptrises, Inc. This MUST INCLUDE a link to http://www.Payday-Loan-Industry.com. and include our complete contact information. Additionally you must email us regarding your intention to use our material and how it is to be used.

Reasons the PDA Product exists: (Nothing new here)
• Consolidation of the small loan lenders
• Demise of the Household Intl, Assoc. 1st Capital, AVCO, and Beneficial Finance type operations.
• Escalation of late fees, NSF fees, etc by traditional banks
• Proliferation of automatic credit card approval programs
• Increased difficulty for large numbers of consumers to open a checking account. It is estimated at least 10,000,000 residents of the USA cannot secure a checking account. Many are blacklisted.
• The consumer needs small dollar, short-term loans to bridge temporary financial difficulties.

Product Distribution has to be:
• Immediate on-site access to $$
• Simple application process
• A private transaction – no involvement of other parties
• Face-to-face issuance and collection is preferred. Internet & call center models are revolutionizing the Payday Loan Industry.

The Internet and loan-by-phone models are compelling. Seemingly lower entry costs, larger market available. Losses are markedly higher with default numbers all over the place.

The next area of litigation is expected to be an attack of these Internet, fax, and “loan-by-phone” models. Where did the transaction take place? Who actually performed the service? Who has jurisdiction? For example, you may have a company with an office in Florida, which is a Delaware Corporation, lending $300 to a resident of California. You need to organize your payday advance organization with asset protection in mind. Which brings us to this month's Payday Loan Newsletter sponsor...

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The typical Payday Loan Product Cycle:
Education followed by Legislation/Litigation followed by Acceptance/Regulation followed by Maturity. Where are we today? In most areas, probably in Acceptance/Regulation. No one, other than Ace by Spitzer in NY, has been sued of late. Spitzer will lose! 37 states and DC currently have enabling legislation. We are certain more states will soon pass favorable legislation. They are being pressured by their bordering states and by the Internet and loan-by-phone models. Canada is another story! (Dollar is involved)

The Big Gorillas Today:
Advance America = 2000 stores
Ace = 862
Check-N-Go = 750
Check-Into-Cash = 705
Dollar = 621
Cash America = 504

Note that there are MANY MANY small operators staying under the radar and MAKING A FORTUNE in the payday loan industry! Some with a single brick-n-mortar.

Defaults?
The VERY successful payday loan operators exaggerate their default rates! They do not want to encourage competitors. The less successful seem to reduce their default rates out of embarrassment. The average seems to be somewhere around 4% of all loans written will default and become uncollectable. Keep in mind that your default rate is a function of your underwriting criteria and the efficiency of your collections department. (More on this next month)

Future growth rates?
The expectation is 15% - 20% in transaction volumes. Currently estimated to be in the $12 - $14 billion dollar range.

Opportunities?
There are still pockets of opportunity throughout the USA. And our clients in Australia, Canada, England, South Korea, Barbados, San Juan, New Zealand, etc. are experiencing outstanding growth. Tremendous potential exists in the North Eastern states like NY, NJ, PA, MI, etc. Texas, GA, NC also virgin. (Although it is estimated as many as 2000 payday loan stores exist in TX even though enabling legislation does not yet exist.) MI is expected to pass enabling legislation THIS YEAR! GA is surrounded on 3 sides by safe-harbor states causing tremendous pressure on the regulators. The 4th side faces an ocean! It is said that the only thing preventing GA from allowing our industry to flourish is that the GA senator who switched political parties has family with major interests in the Industrial Loan Industry. They do not want the competition! PA will soon be a major battleground. Once PA follows suit NY and NJ will soon follow. There is a continual erosion of non-PDA states. There are really only 13 states left! Everyone, including the regulators, recognize Internet and “loan-by-phone” payday loan rates are much higher than in those states having enabling legislation. The consumer benefits from the passage of enabling legislation. It is estimated the consumer pays 70% more on the Internet!

Store growth throughout the US is still expected to be very high for the foreseeable future.

Regulation
Colorado legislation is treated as a model. The PDA Product fills a niche, no denying. The typical small loan companies are gone. The bank model (sometimes called rent-a-charter) is dying. It does have weight in states lacking enabling legislation BUT we think it is only a matter of time before more states pass appropriate legislation.

If a state you are interested in has enabling (safe-harbor) legislation, avoid using the bank model.

There is no doubt that rate exportation is legal but this approach has many problems. In the state scenario, a state examiner appears at your office and essentially looks for rate limitations, rollovers, APR calculations, etc. A Federal examiner shows up and evaluates safety and soundness, legal risks, bank reputation, oversight by the bank of your new openings, your program changes, mutiple renewals without principle reduction, file management, failures to supply oral APR disclosures, underwriting & repayment ability, staff compensation, consumer complaints, reserves (often 1:1), cooling off periods… Well, you get the picture! Lots of hoops to deal with.

The Attorney General for NY, Elliot Spitzer, has attacked the bank model as well. It is generally felt he will lose this battle. Bob Rochford, Genl Counsel for FISCA, feels this may be a tremendous opportunity to validate the bank model. This would then create additional momentum for the remaining states lacking enabling legislation to adapt safe harbor legislation thus making our product available throughout the USA!

Instead of implementing the bank model, consider working to get your legislators to wake up to the inevitable and embrace the payday loan product. In the interim, prepare yourself to enter the business the day your legislature gives you the green light!

A major concern of the state regulators is whether an operator knowingly enters into a payday loan agreement with a consumer lacking the ability to repay the loan. A court can invalidate a loan if it is deemed “unconciousable”. An example would be when the consumer receives a loan due in 14 days but the consumer receives his paycheck in 30 days. How could he have paid back the loan?

Another concern of state regulators is the “continuing cycle of debt” debate. The number of days the consumer remains in debt. In debt to you. 60 days? 90 days? 120 days? It is an issue lacking a difinitive agreement.

State regulators are also focusing on the payday loan alternatives. The ISP model. The phone card. The sale-leaseback. THEY DO NOT LIKE THEM! Disguised loans. Alternatives. They would rather we worked to change the state law. Of course, MSN, Earthlink, and AOL all offer cash rebate programs with dramatic success. Why can’t we utilize these tactics? If you can afford to litigate them, go for it.

Florida has implemented a state data base. In existence approx. 1.5 years. The PDA Industry in Florida hates it. Revenues dropped 25% - 50% when it was implemented depending on who made the statement. The mono-line companies suffered the most of course. The regulators love it because they receive lots of data they can “play” with. The industry hates it because it is expensive ($1.00 per transaction), it is cumbersume, outstanding payday loans are not removed from the system in a timely manner once the consumer pays it off. Of course, the vendor for the data base strokes its merits. They have high hopes other states will embrace it. In fact both OK and VA have recently authorized its use.

More states are looking at this. It is only a matter of time before you will have to address this issue. You need to prepare to fight it.

Valuations?
For operators of 1-25 stores, 3X receivables. Over 25 stores, 4X. Over 100 stores, 5X. Multiple of EBITDA. Lots of variables here…

Regarding the Internet Model?
Have a good lawyer. You are going to be addressed by state regulators eventually. The larger you are, the sooner you will hear from them. There is no case law yet! Keep in mind that USURY is CRIMINAL! It should be noted that Internet PDA offerings generally suffer from extremely poor service. Rarely is it possible for a consumer to call an operator. Lack of addresses and phone numbers are a problem for both consumers and regulators. Of course, for the most part, this lack of contact information is intentional. Internet operators rarely want to be found! Make certain you utilize appropriate asset protection strategies! A C-Corporation managed by an LLC? Offshore? Perhaps it’s time for you to “go straight”? Internet operators are under the impression they are exempt from state laws. This maybe an illusion. For example, the Colorado State Regulator, Laura E. Udis specifically stated at the FISCA Natl. Convention, Oct 28th, 2003 that if a borrower resides in Colorado, and the operator advertises in Colorado (“including the Web”), Colorado State law prevails. HOWEVER, this is being challenged. AND there is no case law! But the fact that the state regulators FEEL that you are under their jurisdiction WILL COST SOME INTERNET/CALL CENTER $$$ to defend. Hopefully, it will not be you.

ISP Approach With Cash Rebates
Again, HAVE A GOOD LEGAL TEAM! You will be attacked. This does not mean the cash rebate approach is not legal. It does mean you should research this model very carefully and keep your eyes on what the "big-boys are doing. And always consult competent legal counsel.

FUTURE?
To create value, PDA operators must focus on customer needs and maximize product offerings. You witness pawnshops and check cashers adding the PDA product because it is so highly profitable. Installment lenders as well. The successful, value oriented PDA operator will add additional product offerings. Consider money transfer, tax refunds, prepaid residential and cell phone service, stored value cards, insurance, installment loans, utility bill payment, auto title loans, etc.

Your customer needs more credit. Hybrid loan structures will develop to offset losses and compensate for the risks. It is extremely difficult for the small operator to finance receivables.

If rollovers are 50% of your business, YOU NEED MORE CUSTOMERS! (Note there are many characterizations used to avoid using the term “rollover”) You know if you are guilty! “You are wearing your customers out “, as Jerry Robinson stated at the Colorado Springs FISCA Convention.

The multi-product financial service center convenience store is the model to emulate! Your value increases and your profits increase. The mono-line PDA company will not perform as well, particularly once the industry reaches maturity.

Changes at the OCC and FDIC are uncertain. Four new banks have recently entered the PDA industry. For those of you in need of an exit strategy (retirement?) this is very good news. Banks are VERY INTERESTED in our industry!

Product expansion into installment loans and insurance appears to be a certainty. The need to get creative has never been more obvious!

As Bob Rochford stated, “The payday loan industry has never been more polarized! They either love us or hate us”. There is no middle ground. The pressure is on the regulators! There are now 40,000 payday loan employees. A $14 billion dollar industry. That means 40,000 employees and owners who vote! $1.4 billion dollars in wages paid! And they have family members, friends, and vendors who have a voice. Additionally, the loan-by-phone and the Internet operators add additional pressure on the regulators. Concurrently the entrepreneur in NY, NJ, PA, NC, TX, etc., is screaming at his regulators for not allowing him to participate in this highly lucrative industry. And of course the states bordering a state without enabling legislation add additional pressure!! A loss of jobs = a loss of revenues. We have achieved a “critical mass” to protect ourselves with tremendous potential for networking on a grass roots level. Our opponents must take notice. IT”S ONLY A MATTER OF TIME!! :)

This information is discussed further in depth in our Payday Loan Startup & Training Manual. You may ORDER it NOW. Next Month a new topic and coverage of more states.

From: Trihouse Enterprises, Inc.
http://WWW.Payday-Loan-Industry.com
Payday Loans

If you have comments, questions, topics you would like covered...PLEASE contact:
The Payday Guys
PaydayGuys@Payday-Loan-Industry.com
http://www.Payday-Loan-Industry.com
1-702-889-9555 PST USA