When state regulators caught payday lender Cash Express twice breaking consumer-protection law in 2010 at its Central City store, they could have slapped the company with fines up to $25,000 per violation or shut down the store by suspending or revoking its license.
But the state was lenient. It let Cash Express pay the smallest possible fine: $1,000 for each violation. In exchange, Cash Express chief executive officer Garry McNabb — a major campaign donor to Kentucky Democrats and Republicans — agreed in writing to “devote the time and resources necessary to ensure continual and full compliance” with the law in the future.
Leniency didn’t fix the problem. Cash Express has since broken the law in nearly 100 additional cases involving 113 customers at 72 of its stores across Kentucky, including that store in Central City once again.
Still, state regulators never dropped the hammer. Cash Express kept its store licenses. It paid an average fine of $1,368 per violation. As part of the settlements, Cash Express executives continued to pledge their “continual and full compliance” with the law. Sometimes they made that pledge two or three times in a single day as they signed multiple settlement deals.
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A Herald-Leader analysis of state enforcement records found this is a common pattern for Kentucky’s largest payday loan chains. They break the same laws time and again. But as they settle hundreds of violations with state regulators, they keep their store licenses and pay fines toward the bottom of the available range.
“I don’t want to appear as a regulator who’s going to come in and bash you over the head or have you afraid of me,” Vice said in a recent interview at his agency’s office. “Instead, I’d much rather have a situation where … if a problem occurs, we can sit down and work this out and come to an agreement on what’s the best path forward.”
Others say they’re frustrated by so many repeat violations of laws that were passed to protect low-income Kentuckians from predatory business practices.
The legislature gave the DFI the authority to ratchet up its fines for payday loan violations, up to $5,000 for each offense per day, and to revoke licenses for violating the law or other fraudulent or dishonest activities, said state Rep. Darryl Owens, D-Louisville. But that power is worthless if the state does not use it, Owens said.
If you’re only issuing a $1,000 fine, that’s not going to change these companies’ behavior. A $1,000 fine is a slap on the wrist for them. It’s just the cost of doing business. Come on, they’re making millions of dollars on these loans to some of our poorest people.
State Rep. Darryl Owens, D-Louisville
“I’m disappointed to see so little being done, to say the least,” Owens said. “If you’re only issuing a $1,000 fine, that’s not going to change these companies’ behavior. A $1,000 fine is a slap on the wrist for them. It’s just the cost of doing business. Come on, they’re making millions of dollars on these loans to some of our poorest people.”
According to state records, Cash Express stores sometimes type the wrong Social Security number or other inaccurate personal information about their customers into a statewide payday loan database, or they wrongly report unpaid loans as “closed” in the database, all of which lets customers borrow more money than state law permits. The current limit is no more than two loans or $500 at any given time.
Preventing excessive debt is why the General Assembly ordered the payday loan database to be created in 2010. Given their high interest rates, payday loans can be tough to pay back. Cash Express alone is listed as a creditor in 129 bankruptcy filings in Kentucky. But the database can only prevent borrowers from taking out too many payday loans if the stores correctly report who has loans outstanding. When the stores fail, so does the database.
Sometimes Cash Express stores illegally let customers roll over unpaid loans, fattening their original debt with additional fees that can exceed a 400 percent annual interest rate, according to state records. Once, in Elizabethtown, state examiners found that Cash Express was conducting business at the local hospital, far from its approved storefront location.
‘No political backbone’
The Herald-Leader analyzed enforcement actions settled since 2010 by the state’s five largest payday loan chains: Cash Express, Advance America (doing business as Cash Advance), Check Into Cash, Southern Specialty Finance (Check ‘N Go) and CMM of Kentucky (Cash Tyme). It found that the Department of Financial Institutions seldom, if ever, imposes heavy penalties.
For example: The Check ‘N Go store at 3060 Richmond Road in Lexington has settled consumer-protection violations with the DFI every year since 2013, involving a total of 13 borrowers. Its most recent case was closed June 28.
$1,380 The average fine paid by Kentucky’s five largest payday lending chains to resolve state violations involving 291 borrowers
Much like Cash Express, the Check ‘N Go store entered wrong information into the state’s payday loan database that allowed excessive debt to be issued to customers. To resolve those cases and keep the store’s license, Check ‘N Go paid an average fine of $1,538 per violation. Its executives also kept signing the usual pledges for “continual and full compliance” with the law.
Overall, to resolve cases involving 291 borrowers, the five largest chains paid an average of $1,380 in fines, for a total of $401,594. They never lost a store license. These chains represent 60 percent of the state’s 517 payday loan stores.
Critics of the industry — which collects roughly $120 million in fees every year in Kentucky on more than $700 million in loans — say state regulators need to start cracking down to protect low-income borrowers.
“Historically, and certainly during Gov. (Steve) Beshear’s two terms in Frankfort, there was no political backbone to take on the payday lenders. I’ll be very curious to see if Gov. (Matt) Bevin takes it more seriously as a moral issue,” said Terry Brooks, executive director of the nonprofit Kentucky Youth Advocates.
Creating the loan database is the only regulatory change that payday lenders have agreed to in recent years, Brooks said.
It looks to me like the payday lenders have figured out exactly how much they can get away with under the state regulators in Frankfort, and it’s a lot.
Terry Brooks, executive director of the nonprofit Kentucky Youth Advocates
“Folks said, ‘We’ll set up a database and we’ll see what’s going on,’ and that’s the last thing we did,” Brooks said. “You know, kids figure out during the first weeks of school how much they can get away with under each of their teachers. It looks to me like the payday lenders have figured out exactly how much they can get away with under the state regulators in Frankfort, and it’s a lot.”
Vice said his agency’s fines are meant to be taken seriously. In fact, Vice said, the DFI recently raised its standard fine for an offense from $1,000 to $2,000 because “we were seeing some repeat violations, companies doing the same thing from exam to exam. And that’s why we made the decision internally that we do need to escalate the fines.”
But the DFI is reluctant to shut down a payday loan store, Vice said. State regulators have suspended or revoked just a few licenses out of 435 cases since 2010. None of those actions were taken against the five largest chains. Most recently, in April, it ended a lengthy investigation by revoking the license of a Louisville store owned by DBHL Investments. The state cited that store for inaccurately reporting Social Security numbers 353 times over three years.
“A revocation of a license is something that we would take extremely seriously for a couple of reasons,” Vice said. “Number one, it puts a company out of business. And that company is providing financial services to the community, and it’s also employing people. So we take the revocation extremely seriously.”
‘Fat-fingered keystroke errors’
Of the state’s five largest payday loan chains, only Advance America, headquartered in Spartanburg, S.C., returned calls seeking comment about Kentucky’s enforcement actions against them. Advance America claims about 2,400 locations around the United States, 66 of them in Kentucky. Four years ago, it was purchased by Mexican finance and retail giant Grupo Elektra for $655 million.
Since 2012, Advance America has settled consumer-protection violations with the DFI involving 65 customers, paying an average fine of $1,353 per offense. Ten of its Kentucky stores have racked up multiple violations, including its Cash Advance store at 352 Southland Drive in Lexington, which last year settled two cases involving three customers. The state said the store inaccurately reported borrowers’ loans as closed, allowing them to take out too much debt.
Jamie Fulmer, Advance America’s senior vice president of public affairs, credited Kentucky for having “a proper balance in its regulatory environment.”
Fulmer blamed “fat-fingered keystroke errors” for his chain’s database entry violations. The lapses are never intentional, he said.
We try to always obey the rules and regulations in every state where we operate.
Jamie Fulmer, Advance America’s senior vice president of public affairs
“We strive for full compliance,” Fulmer said. “We try to always obey the rules and regulations in every state where we operate. But you have to put some context around this, and that’s that we provide tens of thousands of loans a year. And if you’re talking about, like, 50 violations over five years, that’s not so bad.”
The industry’s “context” defense assumes that the state is catching every violation at more than 500 payday loan stores every year, which is unlikely, said Anne Marie Regan, senior staff attorney at the Kentucky Equal Justice Center in Louisville.
“If we’re seeing hundreds of violations detected for just the five biggest store chains, then who knows how many more problems are actually out there?” Regan asked. “This could just be the tip of the iceberg. We’ve long worried that the DFI isn’t as serious with these stores as it needs to be.”
Vice said some database entry violations by payday lenders appear to be mistakes, while others seem to be deliberate. During their annual visits to each store, DFI examiners “pull a sample” of loans from the past year and compare customers’ checks and store paperwork against the information recorded in the state’s database, to determine if the stores correctly reported the circumstances behind those loans.
“We take a sample,” Vice said. “We would not have the ability to look at every single loan file.”
Political muscle in Frankfort
Like many regulated industries, payday lenders have a lot of political clout at the state Capitol.
For instance, McNabb, the wealthy Cookeville, Tenn., businessman who runs Cash Express, has given more than $216,000 in Kentucky campaign donations in recent years, including $140,000 evenly divided between the state’s Democratic and Republican parties. He has hosted fundraising events for Beshear and other Kentucky politicians. Beshear, in turn, invited McNabb to the Governor’s Mansion for socializing while his administration was responsible for enforcing the law on McNabb’s stores.
Cash Express, Advance America and other chains also employ a team of lobbyists to represent their interests in Frankfort. During the 2016 General Assembly, while a Senate bill to cap payday loan interest rates at 36 percent languished, the industry reported spending nearly $88,000 on its legislative lobbyists.
“I usually can’t even get a committee hearing on my payday loan bills. The one year I did get a committee hearing, my bill was voted down,” said Owens, the state representative from Louisville. “Those companies, they are generous campaign donors, they really give out a lot of money. And sometimes I think they have a lobbyist for every legislator. It seems to make a great deal of difference for them.”
Communication with the governor’s office … has always been ‘You’re the regulator, you do what’s appropriate and you do the right thing.’ And that’s the direction I’ve always received.
Charles Vice, commissioner of the Kentucky Department of Financial Institutions
Ella Robinson said she ran into that same wall of resistance during the late 1990s when she led the Department of Financial Institutions under Gov. Paul Patton. Payday loan stores were a new idea then, erupting all over the Southeastern United States, including Kentucky. Under Robinson, the DFI pushed lawmakers for limits on loan size and a ban on roll-overs. The industry pushed back, she said.
“They (the payday loan stores) later bent the rules a lot. I know how hard it was to get any laws passed and make them stick,” Robinson said. “We went back to the legislature for help, but it was difficult to get anything more passed. The payday lenders, they were big, big money people.”
However, Vice said the DFI on his watch feels no political pressure regarding payday lenders.
“As a matter of fact, that’s one of the things I’ve appreciated in the Beshear administration and so far in the Bevin administration,” Vice said.
“I’ve got no communication whatsoever relative to this individual, this company, ‘This person was a donor or helped me, and therefore, we need to treat him this way,’” Vice said. “Communication with the governor’s office … has always been ‘You’re the regulator, you do what’s appropriate and you do the right thing.’ And that’s the direction I’ve always received.”
Kentucky’s five biggest payday lending chains
1. Cash Express. Founded: 1995. Headquarters: Cookeville, Tenn. Stores in Kentucky: 172.
2. Advance America (Cash Advance). Founded: 1997. Headquarters: Spartanburg, S.C. Stores in Kentucky: 66.
3. Check Into Cash. Founded: 1993. Headquarters: Cleveland, Tenn. Stores in Kentucky: 32.
4. Southern Specialty Finance (Check ‘N Go). Founded: 1994. Headquarters: Madison, Ala. Stores in Kentucky: 22.
5. CMM of Kentucky (Cash Tyme). Founded: 1998. Headquarters: New Albany, Ind. Stores in Kentucky: 16.
Source: 2015 data, Kentucky Department of Financial Institutions