Critic calls CashMax abusive as 2nd opens in Arkansas

Information about Small dollar loans by state
Information about Small dollar loans by state

Arkansas has some of the toughest limits on low-dollar, high-cost loans in the nation, but a new sort of business is challenging its restrictions, a national watchdog said.

CashMax, which opened a storefront in North Little Rock earlier this year, now has a new location a few hundred feet from former President Bill Clinton's childhood home in Hope. It's been open nearly a month.

At CashMax, which connects consumers with third-party lenders, the fees and annual interest charged could reach 259.79 percent or more, calculated using the federal Truth in Lending Act, according to the CashMax website. Arkansas caps interest rates at 17 percent under Amendment 89 to the Arkansas Constitution.

"Arkansas is a little unique in that you have that constitutional interest rate cap," said Nick Bourke, director of small-dollar loans for the Pew Charitable Trusts. "It's a pretty powerful tool and law -- if the regulators decide to use it." Bourke directs Pew's research on consumer needs and perceptions, market practices, and potential regulation of payday and other small-dollar loan providers, according to the trust's website.

Cheney Pruett, chief executive of CashMax, contends that the business is compliant with Arkansas law because fees do not count as interest. Annual interest on the loans is always less than 17 percent, he said.

Furthermore, he has said it fills a void in small-dollar lending left when payday lenders were expelled from the state.

Hank Klein, a North Little Rock resident and longtime foe of payday lenders, complained in June to North Little Rock officials and Arkansas Attorney General Leslie Rutledge's office about CashMax before the first storefront opened.

"It's a continual cycle of debt," Klein said of small-dollar, high-interest loans. "It isn't like when you buy a car, you buy a house and at the end of five years or 30 years, it's all taken care of. Because the interest rates are so high, these loans are designed to keep people in debt. It's financial slavery to those companies."

Klein is the former head of the group Arkansans Against Abusive Payday Lending, which disbanded after payday lenders left the state in 2008 thanks to a state Supreme Court ruling and action by then-Attorney General Dustin McDaniel.

He said he's still waiting for a response from Rutledge. Both North Little Rock and Hope's city attorneys have also reached out to Rutledge's office for guidance.

She has yet to comment on the legality of the business model, but Pruett said in an interview that he did receive a collection of questions from Rutledge's office and responded within the past two or three weeks.

North Little Rock City Attorney Jason Carter sent a letter dated June 29 cautioning Pruett that "the City of North Little Rock will take swift action against any person or entity who transacts loans in violation of Amendment 89."

Since then, he said he has not received any citizen complaints from CashMax customers nor a report from the attorney general.

"Given the publicity, I don't really know how to interpret the silence," he said in an email. "I thought CashMax might have had some sort of awakening, but a new store indicates otherwise. I suppose I am still in 'wait and see' mode."

Judd Deere, a spokesman for Rutledge, said she had no comment regarding CashMax and he referred to Arkansas Code Annotated 4-88-111, which governs confidential information related to ongoing investigations under the Deceptive Trade Practices Act.

Adaptation

Laws meant to help consumers repair their credit history are being used by former payday loan providers to lend money in new ways, according to Bourke.

In Arkansas, CashMax is set up as a credit services organization. Pruett said he provides third-party loans to consumers and the business itself is not a lender, but a facilitator that charges a fee.

Pruett was head of the Arkansas Financial Services Association, which represented payday lenders, and was chief executive of such a business called Cash Now prior to 2008.

Across the country, Bourke said, the people who ran payday lending businesses are adapting to restrictions by using credit services organization laws. Credit service organizations were designed to "help consumers consolidate their debts, broker a consolidation loan and charge a fee for that," he said.

In 2008, Ohio's Legislature passed a law that capped interest rates at 28 percent. Payday lenders operated "seamlessly" while they transitioned to an installment loan model under the umbrella of a credit services organization, Bourke said. Texas lenders use similar laws to the same effect, he noted.

CashMax is now using a similar model in Arkansas.

Bourke said the lenders are using the credit service organization umbrella to provide installment loans at nominal interest rates, but "charge large brokerage fees, that far exceed what the state law would otherwise allow."

In order to outlaw CashMax's practices, states could limit who could use a credit service organization or put limits on what credit service organizations are allowed to charge as a fee, Bourke said.

But "I would note in Arkansas, it seems to me that the legal question is still open as to whether this practice is constitutional, given your 17 percent constitutional usury cap," he said.

McDaniel, the former attorney general, has said a 2008 Arkansas Supreme Court ruling that concerned the constitutional cap allowed him to expel payday lenders from the state.

The Arkansas Supreme Court said this about fees in the decision: "Because that fee is in reality an amount owed to the lender in return for the use of borrowed money, we must conclude that the fees authorized clearly constitute interest."

Access to cash

People sometimes need money but don't have it.

Pruett, the CashMax owner, said this situation is common. He cited a 2016 Federal Reserve study that found that 46 percent of Americans don't have enough money to cover a $400 emergency expense.

"Situations happen, emergencies happen, and typically people don't have the savings and are not prepared for these unexpected expenses," Pruett said.

CashMax is an option Arkansans can turn to, he said. A few hundred people have used his services since the North Little Rock location opened several months ago.

The business is advertised as a solution for a broken car, cellphone overage, overdrawn bank account or unexpected visit to the emergency room. Loans range from $300 to $1,000.

"There's no competition, yet, other than ... pawnshop loans," Pruett said. "Banks and credit unions don't offer these type of services. Pawnshops require customers to secure the loan with collateral or personal property. That's definitely a distinguishing factor."

An installment loan provided by CashMax might work like this: The customer applies for a loan for $600. He must repay $893.25. It's split into seven bi-weekly payments.

Interest on the loan, which is provided through a third-party company, totals $24.75. But the consumer must also pay a credit services organization fee to CashMax of $268.50. In this example, that includes a fee for a loan guaranty, so the credit services organization will back the loan if the consumer does not pay.

Pruett said the fee to act as a guaranty only applies if a consumer is not otherwise approved for a loan.

In the example above, annual interest equals 259.79 percent, when calculated under the Truth in Lending Act guidelines.

A typical payday loan -- outlawed in Arkansas since 2008 -- works like this: The customer writes a check for $377, for example, and receives $325 in cash. The lender keeps the check for two weeks but does not cash it.

The $52 charge on a $325 loan for 14 days equals 416 percent in annual interest. The customer often does not have enough money to buy back the check in two weeks. So he pays another $52 to keep the check from being cashed.

Hope

Joe Short, the Hope city attorney, said the attorney general's office has traditionally taken on lenders who exceed the interest limits found in the Arkansas Constitution.

"Certainly, [CashMax] is of concern if they're charging usurious interest rates," he said. "We're attempting to coordinate or contact members of the attorney general's office to see what their take is on it."

City Manager Catherine Cook said she remembers payday lenders operating in the city before 2008, but hasn't seen a storefront resembling one in years.

She said she had been following news coverage of the North Little Rock CashMax location.

"We just have to find out if it's something that can legally be operated," she said.

Mayor Dennis Ramsey, a former banker, said he was looking into the business, but didn't yet have enough information to comment.

Pruett said he opened the storefront in Hope because he had an existing lease in Hope for an e-cigarette store that had closed.

He owns the Vapor Stop chain of stores in Arkansas, which has locations in Benton, Fort Smith, Hot Springs, Little Rock, Van Buren and in Texarkana, Texas. He said he's not looking to convert those stores to CashMax locations or expand them.

Hope is also close to Pruett's home in Texarkana.

Pruett is a primary financial backer of the Arkansas Medical Marijuana Amendment. He supported ResponsibleOhio, a failed medical and recreational marijuana legalization plan in that state. The proposed initiated act would have allowed commercial cannabis to be grown at 10 sites owned by ResponsibleOhio investors.

Pruett has said he would be interested in entering the medical marijuana business in the state, but "only if there is a proper regulatory framework in place." The competing Arkansas Medical Cannabis Act contains "regulatory uncertainties," he said. Both proposals are to appear on the Nov. 8 general election ballot.

Outside of Arkansas, CashMax has more than 40 locations in Ohio. There, the business offers auto title loans and cash advances, according to its website.

Klein said CashMax, and businesses like it, harm consumers because of the high interest rates.

"Because of the high interest rates they charge and the way the loan is configured, it's designed to keep you in debt for a long period of time," he said. "You think it's your salvation, but it's really the anchor to drag you down to the bottom of the ocean."

He said he wants Rutledge to take action against the business.

But Pruett said CashMax exists because of a public need.

"Customer feedback has been exceptional," he said.

Further CashMax storefronts are planned in Arkansas, but Pruett said he had no definitive information yet.

Metro on 10/03/2016

Upcoming Events