The 'Poverty Inc.' economy

* $40 billion: Total value of payday loans each year, which generated $7 billion in fees last year

* $4 billion: Annual revenues generated by pawn brokers

* $3 billion: Annual revenues for check-cashing businesses

* $5 billion: Western Union money-wiring revenues

* $100 billion: Revenues generated by subprime mortgage lenders in 2005 before the housing slump

Source: Gary Rivlin, Broke USA

In more than 2,000 pages of legislation, payday lending is not mentioned in either the House or the Senate bills on financial reform.

But companies that provide short-term, cash-advance loans such as the Cleveland, Tenn.-based Check Into Cash still feel threatened by the revised financial system regulation working its way through Congress.

"Payday lending has been a very profitable business, but the problem is with the stroke of a pen Barack Obama can wipe out the whole industry," said Gary Rivlin, a financial writer who just released a book on payday lenders and related industries titled "Broke USA."

Payday lenders dodged the bullet when Congress rejected proposals to cap interest rates or to adopt a federal law on the number of payday loans an individual may take out each year.

But legislation being hammered out this month by congressional conferees includes provisions for a new federal consumer protection agency that could write regulations to control or possibly curb payday lending altogether. The House version would create an independent consumer protection agency to oversee almost all types of credit. The Senate version would put the bureau of consumer protection under the Federal Reserve Bank.

"This could be a brand new federal agency with almost unlimited autonomous power," said Jabo Covert, a vice president of government relations for Check Into Cash. "At a time when the American people want to see the federal government spend less, do less and be a little more responsible, they are talking about creating a massive new federal bureaucracy."

Critics of payday lenders insist that such lenders shouldn't be exempt from the consumer protections required of banks or other conventional lenders.

"In this final stretch, we hope lawmakers will resist efforts to water down the bills' strong provisions," said Kathleen Day of the Center for Responsible Lending, a North Carolina consumer group that denounces payday loans as "legalized loan sharking."

Birth of an industry

A payday loan, also called a paycheck advance, is typically a two- to three-week loan of $100 to $400 borrowed against a person's next paycheck. The borrower pays a fee -- no more than $30 for each payday loan in Tennessee -- to cover the expense of the loan.

The annual percentage rate for a two-week payday loan of $100 with a $15 fee amounts to 390 percent. But payday lenders insist what they charge is a loan fee, not a interest rate, and payday loans are usually cheaper than penalties charged for bouncing a check because of insufficient funds or late payments on many bills or overextended credit cards.

Allan Jones, the Cleveland, Tenn., founder of Check Into Cash whom Mr. Rivlin calls "the father of the payday lending industry," insists the annual percentage rate calculation doesn't make sense for loans of only two weeks.

"You don't sell salmon for $14,000 a ton; you sell it for $7 a pound," Mr. Jones said.

The payday lending industry got much of its early growth in Cleveland, Tenn., from industry pioneers Mr. Jones and Toby McKenzie, who started the company that became Advance America Cash Advance. Mr. Jones' Check Into Cash is now the largest privately owned payday lender with more than 1,100 locations, while Advance America is the biggest payday lender with revenues last year of nearly $650 million from its 2,587 outlets.

In its early years, payday lenders such as Mr. Jones realized profit margins of 20 percent or more, Mr. Rivlin said, encouraging payday lending outlets to proliferate in storefronts around the country. As banks and credit unions shied away from small loans, payday lenders made getting quick cash advances more convenient.

"A banker wants 100 clients worth a million dollars, but the payday lender wants a million clients worth $100," Mr. Rivlin said.

From their start around 1990, the number of payday outlets grew by 2006 to top 24,000 storefronts, or more outlets than McDonald's and Burger King have restaurants, Mr. Rivlin said.

At least 10 million Americans take out a payday loan every year and collectively the industry lends nearly $40 billion in short-term loans, Mr. Rivlin said.

Maturing industry

The recession may have put more people in need of short-term loans, but payday lenders also have been hurt by the economic downturn. To get a payday loan, you have to have a job or other regular source of income and you have to have a checking account.

As competition among payday lenders proliferated and states began to limit their activities, the number of payday storefronts has dropped by more than 2,000 across the country in the past three years, including the closing of more than 100 Check Into Cash outlets. The Center for Responsible Lending said 15 states have adopted legislation to restrict or outlaw payday lending through usury limits or other fee restrictions.

The payday industry's trade group, the Community Financial Services Association in Washington D.C., contends that payday lenders already are regulated strictly in the 34 states where they operate.

"Unlike those who are responsible for the collapse of our financial system, payday lenders provide a fully disclosed, transparent and highly regulated product to working families with the highest customer satisfaction rate of any comparable product," said D. Lynn DeVault, chairman of the Community Financial Services Association.

In Tennessee, payday lenders are restricted to lending no more than $200 at a time and the maximum fee on any loan is $30.

In neighboring Georgia, the Legislature outlawed most types of payday lending in 2004.

Mr. Jones, insists his industry is regulated tightly at the state level and was unfairly dragged into the congressional response to the financial crisis on Wall Street in 2008.

He complained earlier this year that the House version of financial reform "could take control of nearly every form of credit from auto dealership loans to funeral home payment practices."

President Obama's previous work with and support from community organizations critical of subprime loans and payday lending could mean the White House might appoint a consumer protection director who wants to restrict payday lending severely, he said.

"It doesn't make sense to try to include us in legislation developed in response to this crisis when we didn't have anything to do with it," Mr. Jones said.

But Mr. Rivlin said the easy availability of credit at all levels, including payday lenders, helped create a debt-burdened, over-leveraged economy vulnerable to the recent downturn.

"A bigger picture view of what happened to us in 2008 must recognize our excessive appetite and use of easy credit and that caught up with us," he said.

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