Interview: Rick Lake

Could you basically explain what payday lending is ... and how it works?

Sure. … We allow a customer to come into one of our stores, write us a personal check that we hold, uncashed, until their next payday. And then it is their option -- they can either bring in the cash to redeem that check or allow us to deposit the item.

[It's a] simple process: The customer comes in, gives us their information. We verify the information and process the transaction, usually within less than 10 minutes, so the customer's enabled to get the cash that they need in a relatively no-hassle, speedy way.

And you give them cash, but you don't give it to them for free.

Right.

You're a profit-making business. How do you make money?

The fee on a payroll advance is basically $15 per $100. In California, the law reads that we can charge 15 percent of the check amount. So on $100, the customer would write the check out for $117.65. We're keeping the $17.65, and the customer gets the $100.

How much money can you give them?

We go up to the face value of the check, [which] cannot exceed $300. So we allow the customer to write the check for $300. In that situation, they would get back $255.

And how long is the loan for?

It's until their next payday. State law allows up to 31 days. So in some cases, where people only get paid once a month, the term can go up to 31 days.

And the interest rate, the APR [annual percentage rate]?

We don't charge interest; we charge a fee. So the fee is based on the amount the customer needs in cash.

But there's an equivalent if you were charging them interest.

... We are required to disclose it as an annual percentage rate.

Right. So what is the annual percentage rate?

Well, the posted rate -- depending on the amount of time that they take the advance out for, so it's going to vary -- but on a two-week advance, it's about 460 percent [annually]. ...

And on a month?

Two hundred thirty percent. ...

Sounds like a lot.

It does. But if you break down the reality of it, as I mentioned, we charge a fee for the transaction. We're not charging interest. And any time you take a product that's intended to be a two-week product and apply an annual percentage rate, it's nonsensical. ... The only way that that annual percentage rate is effective is if they take out 26 consecutive payday loans, which is just not the reality of how the customers use the product.

Aren't most of your customers coming back regularly?

No. The vast majority of our customers use this as an emergency product. And even the report [PDF] produced by the Department of Corporations to the California Legislature in December '07 points out that the majority of the customers use this product responsibly.

I guess the question is, the same report says that 80 percent of the customers are repeat customers. ... So they come back more than once.

Right. They may come back depending on their needs, how many times they come back per year. In comparing the report to the number of times consumers used overdraft, for example, it found that payday lending is less used than overdraft programs.

You're talking about banks and overdraft on checking and debit cards.

Right. …

How would you define your consumer?

It depends on what product they use. And getting industry research around who our customer is, that's a little difficult, because there are not studies out. But the national trade organization [study] shows the payday lending customer primarily makes between $25,000 and $50,000. One in five have a bachelor's degree.

On the check-cashing side, it's a little bit different demographic. It's skewed to 51 percent female. Eighty-two percent have a high school diploma when we did a 2006 survey of our customers. But again, this is data that it's hard to get your hands on.

I'm just trying to get a sense. I mean, if it's a payday lending operation, it's got to be somebody who has a job, right?

Right. On the payday lending side they have to have a source of income and a bank account. So every one of our customers that uses the payday loan product has a bank account. ...

So why is it illegal in 15 states? ...

Various states have passed legislation eliminating the payday loan as a choice, passing APR caps that make it impossible to operate the business. ... So the viable option of a payday loan is no longer available to people that live in those states.

And there has been research done to show what happens when payday loans are eliminated. I don't really need a report to tell me, but if you take away an option, it's going to drive consumers to higher-priced options, be it paying late bills [or] overdrafting their bank account, which can lead to more fees.

The reason customers like a payday loan is because they know it's one fee. They know they can come in, do it, close it out, and there are no additional fees, and they don't have to worry about any surprises. Sometimes if they miscalculate on their bank account, that can lead to additional fees over and above the initial overdraft fee.

Now, overdraft fees -- you're saying that the banks themselves are charging more from an APR point of view than you charge?

The FDIC [Federal Deposit Insurance Corp.] report that came out on overdraft fees showed the median amount on a point-of-sale debit transaction that was charged [for] an overdraft fee was $20. So in essence what they're saying is for $20, customers are being charged, at least in California, an average of about $35. So if you do the math, you know, paying $35 on $20 is much higher than $17.65 on $100. And that's why customers prefer our service.

So why do you guys get all the criticism?

That's a question I don't really know the answer to.

Really?

I would tell you that over my 20-year career it's kind of always been that way, that our industry has always been the subject of unfair criticism, because what we do is we charge for financial services in a retail environment. You can never walk into one of our stores and wonder what you're being charged. All of the fees are right there on the wall in poster format. There's no way you can say, "I didn't know what I was being charged."

On the other side of that, how many times do you get hit with a fee that you didn't expect, whether it be your credit card or your bank account or what have you? From my personal experience, I forgot to pay a $10 credit card bill one time; I got hit with a $35 fee. How does that compare to what we do?

So from your perspective, if the banks were to be fair to their customers, they'd have posters up on their walls disclosing what they do?

I think that that is the direction that financial services needs to head in, so everyone knows exactly what they're paying and why. Disclosure is something that our industry takes very seriously. Our industry has for years had posters in the lobbies whether we were required to by law or not, so our customers always knew what they were being charged. And when they do the transaction they get a receipt, so they know exactly what fee they paid.

And customers are comfortable with that because then there's not an unknown charge somewhere. They're not going to get a surprise at the end of the month that they didn't budget for.

But the studies that have been done both by the California Department of Corporations and others ... show that, somewhat like credit cards, your most profitable clientele are the people who keep coming back.

But that's a small percentage of the business. And one of the hurdles in California is that we can only do a payday loan to $300, so there are times that a consumer needs more than $300 to meet whatever financial emergency it is. You know what the cost of living is in California. So there are times that customers may not be able to ... just pay it off and then get another one just because of the dollar amount.

I'm not exactly sure I understand. The people who come to you are usually people who are ... living paycheck to paycheck more or less, right? So the fact is that often they will revolve or renew that loan at the end of the month, and that's profitable for your company.

It is, but if you look at the statistics that are in the reports, you'll see that that's the minority of customers. It's not the majority of customers.

I think I've seen the same statistics you have, so according to the California Department of Corporations, 80 percent of payday lenders' customers are repeat customers.

OK, but what you have to do is [ask], what does repeat customer mean?

More than one transaction a year ... is what I'm saying. And the average usually is anywhere, depending on the state, but can be six or more a year.

It's six to seven, which is the average. And that pretty much is when people have emergencies, you know? ...

So you've been around basically since 1996 in terms of payday lending.

Right.

And that came out of a check-cashing business?

Right.

Maybe you could explain a little background of the story.

Sure. What was happening is, people were writing personal checks that were then being held, and they were being charged the rate that we were allowed to charge for a personal check, which is the timeless 12 percent. There was a need for the service, thus the Legislature in California took a look at the product, decided that it needed to be regulated, and the Deferred Deposit [Transaction] Law was passed, and that's how [the state] legally defined a payday loan. It's a deferred deposit in California. ...

That's a legal terminology for a payday loan. So we're deferring deposit on a personal check.

I see. And how big is your company?

We have 103 stores stretching throughout Northern California, and about 650 employees.

It's privately owned.

Correct.

How many payday lending outlets are there in California?

There are roughly 2,400 licensees, which is a number that basically stayed stagnant from '06 to '07 to '08.

But I read somewhere that that's more than the number of outlets for Starbucks and McDonald's.

I don't know who came up with that analogy, and I don't know why it applies. I don't know how many ATM machines there are in California, but I would assume that there are more ATM machines than there are payday lenders. So at any ATM machine, if you'd like, you can overdraft your bank account, or in the case of Wells Fargo or U.S. Bank, you can actually get an advance on your direct deposit that functions exactly like a payday loan. And in that case you can go up to $500 for an advance.

But what's the APR?

The APR is quite similar to a payday loan. They charge 10 percent. And understand that their 10 percent rate compared to our 17.65 -- OK, so apples to apples -- they have virtually no collection expense because they own the bank account and require direct deposit. So they're going to do the advance in an ATM machine. There's not a teller involved, so there's virtually no overhead from that perspective. And they're guaranteed to get their money when the next direct deposit hits the account.

And?

No one counts the number of ATM machines when they talk about the number of payday lenders.

I see. So what you're saying is that because you're not a bank and because you don't have accounts ... and savings and any relationship to the people who walk in the door other than that check, that's why your losses are pretty high; ... that's why you have to charge as much as you do?

Right. Because if you look at the loss rates from the department's report, you'll see that on $15 we're losing about $3, about 20 percent on just the losses.

And so to the criticism that the most valuable customers for you are the people who come in and not just revolve six or seven times a year ... but continuously, and you can multiply each time they come in if they take $300 each time by $45 --

Right.

-- that in the end, the amount of money someone pays back in the end may be far beyond the cost of the actual loans themselves.

Lowell, all I can tell you is that it's not the majority of our customers.

But it's the most profitable customers.

It's not the majority of our customers. Now, it's no different than someone who pays a late credit card. Would you say that they generate the most in fees? Those that overdraft their bank account generate the most in service fees. I mean, that is the reality of it.

Well, the reality is that, in a sense, those who least can afford it ... pay the most in the banking industry in general and credit cards in general. And it sounds like that's the same in payday lending.

I would say it's true throughout the finance world.

I guess the question is, is that fair?

Is it fair? I would ask, what is the solution? I mean, how can we fix it? And it's both in our beliefs in what our company does that financial literacy is the key. In every one of our lobbies, there are pamphlets on the facts about payday loans: Do not use it as a long-term credit product. And we do that in all of our advertising.

Furthermore, our company also has a financial literacy program where we go into local high schools and educate graduating seniors on the basics of financial literacy. ...

What the consumer advocates say is that [payday lending] is a debt trap; ... that you wind up at the end of every month, as you know, taking out another loan to pay back last month's loan. Not true?

… Debt trap, to me, just the commonsense definition of that is going to be that you didn't know it was there or there was something unknown about the product. You've been in our stores. You've seen our posters; you've seen our disclosures. Did you at any time feel that there was something you didn't know?

But when I'm putting myself in the shoes of one of the people I met in your stores and talked with, and she said that she came to your store to take out a loan in order to make her credit card payment so she wouldn't get a late fee ... on her credit card, but she said this time was probably the last time, because she realized that the $45 she was paying [on] the $300 to your organization was more than the $35 in the late fee. So it seems like it's people who really feel trapped themselves in their own financial situation, and that's why they show up. That's the criticism: that you are, in a sense, exploiting those people.

OK. It's not the majority of our customers. And some come up with a solution. You know, our industry has always been willing to listen, but all the consumer groups want to do is put us out of business, which [is] going to take away a viable option for the consumer. And what you didn't mention on paying your credit card late is that's going to be a negative impact on your credit.

Right. That's what she was concerned about. ... It was, "How is that going to affect my credit score?"

Right. So if her credit score goes down, what's going to happen? She's going to pay more for credit in all areas. So that is sometimes why people use a payday loan to make sure that their credit card payment is not late, because we don't report their activity to a credit bureau.

So in some ways your business is being driven by the tactics of the credit card industry?

I don't think that's a fair statement. I think it's, again, giving the customer an option. And I think it's important that customers have the options and the right to choose which options they use. It's not the right of consumer groups to tell them what products to use. ...

But, you know, it's the location of your stores. ... Generally speaking, you're [located in] low-income or minority, ethnic communities around the country.

Right.

And specifically in Northern California, right?

Sure. So let's talk about that, as I've heard that statement many, many times. It's also where the most densely populated areas are, OK? I can tell you I've been locating stores for 20 years, and not a single time have I said, "Oh, let's find some poor people." That's not how we locate our stores. Our stores are located in densely populated areas on high-traffic streets because our basic advertising is our signage.

And in more affluent neighborhoods, there's not a six-lane road going through it. So when we locate a store we're looking for densely populated areas. Primarily that's going to be apartment dwellers and busy, busy roads.

And that's it?

That's how we locate a store.

But that doesn't define to a certain extent who your clientele is.

You are correct. All of it's going to go together. But it's not a targeting thing that we've been accused of. I mean, we do look for apartment buildings in dense population. And extrapolating from that is what the consumer groups do.

OK. We have a statistic that says 5 percent of payday lenders, of the borrowers from your industry ... -- this is not specific to your organization -- completed 19 consecutive transactions and paid debt nine and a half months out of the year. Let's say they start with a $255 loan basically and wind up paying during the year $1,110 for that $255 loan.

OK, so I have two questions. What about the other 95 percent that use the product responsibly? And have you compared that to other products? You're saying 5 percent 19 times. How many credit card companies did you look at to see how many times they were on their late fee or over-the-limit fee or bank account? So you making the argument in a vacuum isn't fair.

You seem to be saying that all of you are in a sense ... exploiting your customers, and that's the reason why it's OK.

Your term is "exploiting," OK? But I want to ask you, does the consumer have a choice? This is America, where we have a choice, correct? ... So that consumer has a choice on what products to use and when to use them. ...

Do you see the problem that if you have a customer who comes to you and gives you one of those checks and gets $255 back, that when you go to collect that check at their bank and they are still tight and it bounces, they are also then going to have to pay an overdraft fee at the bank as well? So the spiral is there. They get somebody deeper into debt all the time.

And what's the difference between them writing the check to us or writing the check to Kmart or any other retailer where they'd incur fees well above what we charge? Our return check fee is at $15, where retailers can charge $25 plus the fee charge by the bank.

So that scenario could take place at any retail environment, not just if they wrote a bad check to a payday lender.

So if I understand correctly, what you're saying is at least someone is walking out the door with $255 in cash to do with [it] what they want.

Correct. And before we ever deposit that check, we give the customer a week cushion to come in past the date that it's due where we call them and remind them that the payment's due.

We do everything that we can to try and get the customer to bring in cash versus depositing the check.

Do you charge a fee if they're late?

No. There are no late fees. ...

So the $45 on $300, that's it?

Yeah.

So then explain this to me. [President of the Navy-Marine Corps Relief Society] Adm. [Charles] Steve Abbot (Ret.), before the Congress of the United States about what you just said, said, "Instead of solving what for many may be temporary cash-flow problems, these military families become overwhelmed and financially destroyed when they fall in the payday loan trap."

I can tell you I'm very close to the military issue. My brother served for 21 years, and I've talked to him at length about this issue. Interesting thing happened. The Talent Amendment [John Warner National Defense Authorization Act] that passed in 2007 --

That's the one that caps interest rates to military personnel at 36 percent.

Correct. The initial draft of the Talent Amendment included all bank fees. The final version of the Talent Amendment had that provision removed.

I don't have statistics. I have not talked to every member of the military, but when that law passed, is the statement that all of a sudden the need for short-term cash went away for the military?

They no longer could get a payday loan. What do you think they did? Again, I don't know for certain, but I'm guessing the overdraft fees that the military paid probably went up a little. … No one has made that statement, but a commonsense approach to it is that's what happened.

So now the military doesn't have the option of a payday loan. Furthermore, the issue with the military is that the military personnel need to be paid more, but I could go on for hours about that.

We were attacked for taking advantage of the military, which was not true at all, and now they've taken away that option for the military. I can assure you the need for short-term cash didn't go away.

When we talk to the Pentagon, they say that the kinds of debt traps that their troops were getting into, particularly around payday loans and other consumer loans, was affecting the readiness of the troops and potentially the national security of the United States, and that's why they went to Congress.

What we did, any military personnel -- when we were doing payday loans to the military before '07 -- anyone that was deployed, we ceased all collection efforts, as well [as] did most of our industry. Furthermore, I would like to know from the DoD, [were] any credit cards calling military members? I would think the answer to that is yes.

So again, back to your earlier question, it's OK over here, but don't do it over there.

So you've been discriminated against.

I don't think "discrimination" is the right word. I think [it's] not [being] allowed to put forth the entire story. And to take away options I don't think is ever a fair thing to anyone.

The Pentagon said to us that with credit cards, they put out a competition after this for a military-approved credit card, which went to JPMorgan Chase, ... [and it] has basically three sets of interest rates capped at 18 percent as the highest, and that's it.

And no fees on that? No late fee? No over-the-limit fee?

I'm sure there are fees attached to it, but the fees are controlled.

Oh, OK. My question is, what I would ask the DoD is, please tell us the annual amount of overdraft fees paid by the military. That's what I'd like to know.

We'll ask them. But again, it does sound like you're saying that you've been held to a different standard than everyone else in the financial services industry.

I think that would be accurate.

Is it because you're not a real bank; you're, in a sense, a non-bank bank?

I think retail financial service centers have always been attacked for being open and honest with their fees.

No one ever guesses when you walk into our store, and sometimes that's to our detriment. Maybe if it was behind closed doors and in fine print we wouldn't be attacked the way we are, but that's just not how we operate.

You do make payday loans to people on unemployment, is that correct?

As a source of income, yes.

So you also do loans against unemployment checks.

Correct.

This just occurred to me. If someone's on unemployment, they're usually strapped. ... The check doesn't make, usually, their regular income. ... How are they going to be able to keep up with you -- that is, to get that money back the next month -- if their life is really not only now paycheck to paycheck but unemployment check to unemployment check? They'd have to come back and, in a sense, refinance that loan to be even with you.

And it might also act as a bridge until they become employed so they didn't have to incur other fees. Do you think their bank stops charging them overdraft fees if they become unemployed? Do you think the credit card companies suspend all payments?

I mean, we do give the customer an option, and in that situation customers still need the option.

Could you explain why you think that [a cap of] 36 percent is not enough?

Sure. I just go by the numbers, OK. So on $15 on a two-week advance, 36 percent would equate to $1.38. As we discussed earlier, the losses on that $15, about $3. ...

To me, 36 percent interest -- I don't think I've ever paid 36 percent interest on anything.

Right, but when you talk --

Have you? Have you ever paid 36 percent interest on anything?

Not that I recall.

And you find that --

But wait a minute -- I did. I paid about 400 percent interest when the credit card company hit me with a $35 late fee on $10. So I mean, when we talk about APR, the argument is on an annual percentage basis for a product that would be for an annual basis.

During testimony given to Congress recently, someone from the American Bankers Association said you cannot apply an APR to a product that's under a one-year term.

It doesn't make sense. Imagine if you attach APR to, let's say, a parking ticket. If you were there at the parking meter for two minutes too long and you get a $55 parking ticket, what's the APR on that?

Well, look, we just interviewed somebody who was paying with his debit card for $2.50 parking in a machine, and he went over, and so he had to pay $35 on the $2.50 --

Precisely.

So that's going on all the time.

Right.

But we're talking about your business in particular.

OK. ...

My question is, you've never paid a 36 percent interest rate other than when the credit card company, as you told me, hit you on a late fee.

Or anytime I pay a convenience fee.

Anytime I go to an ATM machine that's not in my bank's area, I pay a fee. I pay that fee to get money right then, right? If I wanted to, I could calculate that as an APR. Everyone harps on our industry and the APR, and we're required to do it under Reg[ulation] Z, and we're also required to do it by state law.

That's [another name for] the Truth in Lending [Act].

Right.

The Reg. Z that's referred to I understand, but 36 percent interest -- it's beyond traditionally what the usury laws were in most states.

When it applied to an annual percentage rate and a product, then that was for an annual term.

But for some of your customers who are the revolvers, who come back the average of six times a year, the interest rate is very high over those six times a year for the same amount of money.

On six times, right -- if they rolled it over six times. But we do not roll over the loans; they have to come in and pay it in full.

But then you start again. As soon as you pay it in full, you can start again, right?

But that could be said about almost any product. Let's say I paid my credit card two days late every month for six months. I mean, if you want to start attaching APRs, you can apply it to almost anything. It's a measure of time and the cost.

But I'm talking about the total cost versus the total amount loaned.

To us it's a fee. When we disclose it to our customers, it's a fee for using that money for two weeks.

But it's the same $300 that became $255. And then they come back and pay you, and they get the same money --

But again, you're saying that that -- you make it sound as if that's the majority of our customers.

A large number of your customers, right, do it at least six or seven times a year.

OK, so if you go that statistic, let's compare apples to apples. Let's look at credit cards, and do you have the statistics for that, how many times people pay a late fee or over-the-limit fee?

Well, we know that fees, especially since 1996, when they haven't been regulated, ... are now the major source of profit for the credit card industry as well as on debit cards.

Has anyone looked at what happens if we take fees out of the banking system? I mean, let's say we eliminate overdraft and NSF [non-sufficient funds] fees --

There was a time when banks didn't charge overdraft fees. ... They did it as a courtesy. They paid --

Right, $2 or $3. Those were payday loans back then, when they initially started. But let's talk about how a bank is going to make money today. They used to make money by taking in deposits and lending out that money, and the spread is how they made money, right? Well, more people are defaulting on loans today, OK. The Internet exploded, and if you want to get a loan, a mortgage, at least through the last three or four years you were able to do it anywhere.

But you have to look at the banking system today and say, "What happens if we remove service fees?" What would happen? Banks would lose tons of money. The banking system could not continue to operate. How are they going to support a full-service branch today? Do you know what the cost of running a full-service bank branch is? It's upwards of a million dollars.

How are they going to support that? But no one's vilifying banks for charging service fees.

I don't know about that.

But, I mean, let's talk about that.

Banks aren't exactly popular at the moment.

Right, I understand that. But financial services, should they be free? According to the consumer groups, they should be. So my message is, go out and open free banks and see how that works.

It won't. ... We spoke to a number of people outside your stores, and a number of them referred to the trap; that they felt that they were in a trap coming back here again. Others said, "This is just an emergency; that's why I'm doing it."

One person said that it took them years to get out of the cycle, borrowing against every paycheck, because they were living paycheck to paycheck. Do you see that plight often in your stores? Do people come to you and say, "I can't keep doing this, but I don't know how to get out of this"?

I can assure you, any customer that calls us -- and my phone number is on every wall in every lobby -- that says those words to me, we would work out a payment plan so that wouldn't happen.

But aren't they the most profitable people for you? Why would you tell them, "We'll work out a payment plan so that you wouldn't have to do this anymore"?

We've been in business since 1987 with one mission: to help our customer. And if a customer called us and said, "This is what I need," that's what we would give them.

I can tell you because I've had the conversations with customers. And I have cut customers off that say, "I can't manage this." And so we do make the decision.

But I also have to ask you, at what point do we as a business start telling customers what to do?

Well, that's a good question. You may have noticed the recent proposed legislation. There is a school of thought that financial institutions -- this is primarily banks and credit card companies -- should offer things like mortgages, like credit cards, at least offer a really responsible product, a "plain vanilla" product, as it's called. Do you agree with that?

I do. I believe that disclosures are extremely important. My only concern is that if the government starts taking rights away from consumers by saying this product can be offered, and that product cannot be, where does it stop? ...

There was legislation at one point in Congress with credit cards to cap the interest rate at 36 percent, ... which failed. ... But there seems to be some momentum ... around the idea of a national interest rate cap around 36 percent. ... Would that put you out of business?

That would put us out of business. And my question is, given the economic times, do we want to restrict consumer credit? And that's already what you're seeing the credit card companies react to with a new set of rules going into effect in January. Consumers that I've talked to are having their credit lines cut, and they're having their APRs increased. And this is what everyone predicted would happen.

When you limit the fees that can be charged, everybody's going to pay more.

But has the decline in credit card lending resulted in an increase in your business?

We've not seen an increase in our business. And if you look to publicly traded companies in the industry, they haven't seen an increase. As a matter of fact, [they have seen] a decrease. I think it's really changed consumer behavior. I think consumers are looking at debt differently, given the collapse of everything around us, [and] that they are less likely to be free with debt the way they used to be.

And I think it's really a change in consumer behavior that's affecting that, as well as the unemployment levels in various states. With California at 11.6, that's impacted us a great deal. ...

We're feeling the brunt just like every other retailer, when customers don't have paychecks to cash. It's going to impact us that way. Our payday loan business is basically flat as a result of the unemployment levels climbing.

Because you can't get a loan unless you've got a check, and you can't get a loan because you have to prove you have a paycheck coming in.

We need a source of income, correct. And, you know, people are falling off payrolls now. The other thing is it impacts our other businesses. I'm sure if you look at Western Union's financial reports, you'll see that business in the Americas is hurting as a result of the economic downturn.

Less money is being repatriated to Mexico ... and elsewhere.

Correct. And people are leaving the U.S., so the customer base is declining. ...

If there was a credit union near your stores ... that offered the same service ... for members but at a lower rate, would you tell them to go there?

We wouldn't tell them to go there. Like any other business, if you went and shopped at Macy's, would they tell you to go over to Wal-Mart because you can get the shirt cheaper? That wouldn't make any sense. But we do support more choices. Let the consumers choose. Maybe they don't want to go to the credit union. Maybe they don't want to be a member. Maybe they don't want to go through their application process.

There's a variety of reasons why a consumer chooses our business versus somebody else's.

Is it because they don't have their own transportation and it's closer to their --

That could be a factor but I don't think that's a primary --

They have to have a bank account, though.

Right. And for some reason they've chosen to use us. And we do have people that have credit union accounts that use payday loans. So they're members of credit unions, but they choose our products instead.

Is that because there's a lack of financial education in your customer base?

I wouldn't peg our customer base. I would say I think there's a lack of financial education nationwide. But in some cases, the consumer likes the choice. They like the ease of use, the speed. We can process a transaction much faster than a bank or a credit union, and that appeals to some consumers.

You may go to a convenience store to buy milk, and you can get it for half that price at the grocery store. But sometimes customers pay a little bit more for the convenience.

Because the grocery store may be far away.

That's a factor, too.

... There's a school of thought that the government has an obligation to guide citizens. You may have 200 kinds of credit cards or more, ... but you should at least guide people towards what's the most responsible product.

I have no problem nudging someone, if you will, from a government perspective. I just don't think eliminating choices on any level is fair to the consumer. ...

I think unregulated lending should definitely be eliminated. And I believe that regulated products are the right way to go. But I don't think eliminating products is the right way to go. I don't think passing arbitrary APR caps without looking at the cost of operating the business -- I mean, that's what's amazing when I hear these arguments about an APR cap.

What I don't hear behind it is, OK, what's the cost of providing that credit? No one seems to know that information. Don't you think that's important information before we use arbitrary APR caps to see what the product actually costs to deliver?

We did a scrub on your company and went through the court records and the California Department of Corporations and so on looking for complaints, and frankly, we didn't find any, or didn't find many. But some of your colleagues around the country have pretty dicey reputations for the way they operate. Is that what you're suffering from, the way they operate?

I think that's true. Anytime someone in our industry does something wrong, it's magnified towards the entire industry, which I just don't think is fair. If you look at the number of complaints -- and, you know, I think I mentioned earlier what the Department of Corporation shows -- it's minuscule compared to the number of transactions that are done.

For your operation or most of the operations?

I would say most of the operations. ... I can't speak to those operators that are, you know, rogue operators. But that's in every industry. There are always going to be people, no matter what industry it is, that operate outside the rules. But I don't think that that should be painted as our standard, if you will. ...

You don't collect against your customers?

We collect for about 90 days, but we do not pursue them in small claims court, and we don't affect their credit. We don't put wage garnishments on them.

You don't put wage garnishments?

No, we do not. ... I can't speak for the industry or individual companies, but our company does not.

What stops people from going to another payday lender? You can only do it one at a time, right?

Right. All of our stores are connected by a database. But to answer your question, there's nothing to stop a consumer from going to two [different] payday lenders. ...

But they can get themselves in real trouble doing that?

Yes, they could, just like they could with a credit card or a bank account or anything like that. ...

There's legislation that's been proposed to create a Consumer Financial Protection Agency [CFPA] ... to set down rules and laws. And I know the banking industry is lobbying that if it does happen, it should cover what they call non-bank banks like payday lending. ... Is that OK with you?

It's OK as long as they don't eliminate choices. If it's about disclosure and education -- which I think it would be a great thing if they would embrace our industry and the customers that we serve and teach financial education somehow through our outlets -- I think that can be a good thing. But again, I'm concerned that anytime there's a government body to protect us from ourselves what the ramifications are from that.

What the government is supposed to do is protect us --

Protect us from ourselves.

-- from damaging ourselves or damaging others.

Is that the role of government? I thought that was the role of each and every one of us as an individual. ...

Have you ever taken out a payday loan?

I have not.

OK. Has anyone in your family done it?

Not that I know of, but I do want to talk about, at one point, my employer bounced my paycheck. ... [Then] I bounced my check to my credit card company. I incurred a bank fee and a bounced-check charge at the credit card company. So I have paid in essence for a payday loan. It was just called something else. ...

I've never had a payday loan. I've been lucky, I guess. ... To many people in this country, it's someone who's desperate who goes and gets a payday loan.

... Let's say you lost your job, and then you ... took a less-paying job for the time being, and your electric bill came due, and you had two choices: You could either get a payday loan or have your electricity cut off. Whether you like the service or not, because you've never used it, wouldn't you like to have the choice of using it, or would you like someone to take that away from you?

Well, I have a third alternative. What about a payday loan that didn't charge me that level of interest or fee, that I could get at my credit union or my bank or some other institution that I've done business with, ... and that would tide me over?

So let's talk about that. Let's say you go to a bank, but for some reason, at one point in your life, you wrote a bad check and you're in check systems, or you went through a nasty divorce and your credit was ruined. Let's say the bank wouldn't open an account or you couldn't get a loan from your bank. Wouldn't you still like the option?

Well, in that extreme sense, probably, because it might save me from going to the real loan shark down the street, OK?

Fair enough.

But I'm asking you in turn on a personal level, because ... in some way your business is a personal loan business. ... You're taking chances on individuals coming in the door. You don't have a FICO [credit] score; they don't have to fill out a form. You're betting, to a certain extent, ... on these people. And that's one reason they're in there. They don't have to explain themselves; they just get the money.

You don't just come in, we hand you the money, and you walk out the door, OK? If I made it sound that easy, I apologize. ...

We evaluate your pay scale. Our company, we use a scoring system based on how much you make. We don't just hand everyone $255. So we do look at your income level, and we do look at how you handle your bank account. So if we see that you're constantly overdrawing your account or you're bouncing checks all over town, you're probably not going to qualify.

So you do run a credit check?

We don't run a credit check. We look at your banking history, and that's why we ask for a bank statement. But you are correct. We're taking a check, and there's no other collateral. If you don't pay that check, we're out the money.

OK. Let me just read you one thing ... because this is the same criticism over and over again. This is Jim Blaine, who runs the North Carolina State Employees' [Credit] Union, ... apparently after payday lending was eliminated in North Carolina, they set up their own system. ... And he said: "We looked at their system, and there's no question about it. They charge $15 per $100 borrowed. So if you borrowed $500 two weeks before payday, you pay $75 and you get $425. We thought we could do it cheaper. So we looked at our cost of funds, and we charge 1 percent per month, or 12 percent APR. ... So on a $500 loan from a payday lender, our member was paying $75. We think we have demonstrated, despite what it said, that payday lending is a trap for the borrower from which it's very, very hard to escape." He's saying from their point of view, one of the things we did to help correct the problem is we introduced a mandatory savings component to the payday loan, ... and the payment basically comes to a 12 percent APR, the fee involved. ...

Can you beat that?

No, we can't. Let's talk about just a few components: the cost of funds. We pay for the money that we fund the advances with. We're not a bank, so we don't get the money at what the Fed rate is. ...

As far as a mandatory savings plan, ... -- and I'm just talking from a consumer perspective -- do I want to be told I must put money into savings? Maybe I won't use your product if there's another product where I don't have to. Now, is it the right decision? I wouldn't do it.

But it doesn't mean it's the wrong decision for that consumer to make a choice. They may not want the savings component. They may not want to belong to a credit union. They may not want to be looked down on at times when they have to apply for a loan. I've worked in a credit union. I know exactly what we put a consumer through to get a loan. It doesn't happen in 10 minutes. It's a lengthy process.

Oh, they do this. They have a window similar to yours. People go up to it. They're members of the credit union, or they have to be a member. ... And it's done right there.

Again, I think it's fantastic. I wish that we would have had more competition from credit unions and banks in our industry. If they can do the service for a lower rate, then let them do the service. And Wells Fargo and U.S. Bank do the service at a 10 percent rate, so the customers do have a choice. But understand that that 10 percent rate compares to our 17.65 [percent]. If you draw out the APR in the Wells Fargo or the U.S. Bank product, it comes out to 120 percent. There are virtually no costs with their product. They own the bank accounts. They don't even have a teller doing the transaction.

You've been in our stores. You know what it takes to go through a process. We have the teller overhead; we have the store overhead, plus the contracts that have to be printed, plus all the compliance that's involved in running this organization.

Basically you're saying the real predatory lenders are the people who are pointing the finger at you.

I'm not going to point fingers or use that term. To me, "predatory" means not knowing. And I would say that anyone that lends money without telling the consumer exactly what they're paying, that to me is my definition of "predatory."