You’ve read articles or maybe even this blog pointing out how unwise it can be to make Payday Lenders part of your personal financial landscape. The long and short of it is that if you look at these loans under traditional banking terms, they’re costing users 300% interest in many cases. That’s assuming you pay off the loan as planned; “rolling it over” or extending the loan will cost you more, and despite the efforts of organizations like the BBB and law enforcement agencies to make consumers aware of these high costs, folks continue to use them. They may have their reasons. Some may use the “cash stores” as a product of last resort, but they appear to be going strong in this economy.
I’ve never made a secret of the fact that I watch my fair share of TV. Maybe more than that. But my BBB hat is firmly on my noggin when I’m enjoying some couch time in front of the big screen, and I often make note of ads representing businesses that could prove problematic down the road. About a week ago, I caught an ad featuring a pleasant Native American young lady representing Western Sky Financial. She was offering to put $2,500 in my bank account by tomorrow morning. During the ad, she said two things that especially caught my attention. First, she said, “Yes, it’s expensive,” and then she noted that whatever those expensive rates might be are still better than payday loan shops.
I’d go so far as to say that an advertiser for an unsecured loan admitting that his services are expensive is a refreshing turn. One of the usual answers I’ve received when quizzing payday loan vendors is that they are serving a market ignored by conventional banks and that they deal with a segment of our population who couldn’t get a short-term loan from anyone else. They also quote huge default rates on those loans, which means the customers who do pay are going to pick up the cost of the losses. They’re in the game to make money -- no doubt about it -- and even with some limits placed on exactly what can be charged for those two-week loans, I haven’t seen a single payday loan shop close its doors in the ten years or so I’ve been watching them.
Let’s say a $500 loan costs $700 to pay back at your local loan store. That earns the advertiser $100 per week of the loan, plus his money back, right? That’s a pretty stiff handling fee, but consumers with the rent due, the car on the fritz, and no money in the bank have limited choices. If there’s a better alternative, I want to know about it.
I decided to check out Western Sky’s website and see for myself just how reasonable the rates are, compared to your average 300% APR payday loan store. As of August 9, 2011, here are the rates for an Oklahoman’s loan from Western Sky Financial, taken from the website….
A $5,000 loan, loan fee ($75) at an APR of 116.73% for 84 payments of $486.58 each.
$2,600 plus the loan fee at an APR of 139.22% for 47 payments of just under $300 each.
A $1,500 loan with a whopping $500 loan fee at an even more whopping 194.70% interest for 24 payments of about $167 each.
Remember: “Yes, it’s expensive.” She told you so in the ad.
Also of note, the website carries the disclaimer: Here are Western Sky’s current rates. Please be aware that not all applicants will qualify for every loan product or the lowest interest rate for a particular loan product. Some applicants may not qualify for any of the products. Western Sky reserves the right to change the rates and loan products…without notice.
Does that mean that the same loans might be made at even higher rates to “less qualified” candidates? I don’t want to know what the cutoff is where a candidate is not eligible to deal with the service.
Do you have your calculator handy? Based on those numbers from the website, a $1,500 loan at the stated rate will cost you over $4,000 over two years. The “almost four year” loan of $2,600 will cost you $14,100. The big deal of the day? 84 X $486.58 is $40,872 and change.
Do the math and you’ll probably agree: “Yes, it’s expensive.”
The ads are absolutely correct in saying that they aren’t as expensive as a payday loan shop if you’re looking at the 300% APR. It’s true that 140 is less than 300, but the design of the average payday loan is that you write your check for the amount you borrowed plus the fees and the cost of the loan. You hand your personal check over the counter, they give you a check (sometimes cash) for the loan amount. In two weeks, the payday loaner cashes your check. Hopefully, there’s money in the account that day. The whole idea is that the loan store covered you for (ideally) the maximum of two weeks until you deposited a paycheck. Western Sky’s program, as stated, takes that 140% for years. It adds up to a lot more financial damage. Think back to the first transaction in the payday loan shop. They have you write the check for what should be the total amount of the loan. It’s there, on the face of the check, and you wrote it. You know exactly what this should cost. In the case of Western Sky, unless someone takes the time to do the math for themselves – and let’s assume for the moment that they won’t, because the site appeals to folks who are desperate and without the means to successfully generate a conventional bank loan – they won’t necessarily think about what they’re getting into until it’s too late. “It’s expensive”? Yeah, well, I guess they warned us.
The company is located in South Dakota, and the BBB office that carries the report responsibility for the firm grades it “D,” as of this writing. The reasons for that grade, according to the current review, is that the BBB doesn’t have sufficient background information on the company, the complaints on file, the nature of the business, and government action against the business. (The Colorado AG sued the company for its practices in that state.)
Watching the ad for the first time from the comfort of my living room, I was wondering what the connection to Native America and the business might be. On repeated viewings, I saw that the loan company is associated with the Cheyenne River Sioux Nation. Digging into the company website a little deeper, you’ll find this disclaimer posted:
Okay, I guess the name of the business and spokespeople used by the company (a YouTube hunt and references in other online venues show that similar ads use a male Native American to pitch the loan with the same “Yes, it’s expensive” line) has a basis in fact, but could it mean any more than that?
Is that saying what I think it’s saying? The usual assortment of laws that protect consumers under loan conditions don’t apply here? Really? Apparently, at least the Attorney General of Colorado disagrees – remember, that AG sued the business for violations of that state’s usury laws. It’s also interesting to me that one disclaimer tells us that the business is owned by a single Native American, but disputes on policy will be handled by the tribal court. How many people who are in the position to apply for this loan understand the ramifications of this statement? Even if they do – when facing the loss of a car or being forced to move out of their homes – they’re probably too stressed out over their financial problems to see that they could be getting in way over their heads.
Still…a $35K profit on a $5,000 loan…?
“Yes, it’s expensive.” Damn expensive.
By far, this article has gathered more comments than any other blog I've posted, and a stunning number of comments suggest that, since the loan is provided by some tribal entity, that it's okay to "skip out" without paying the loan. I haven't posted these comments because they are not only wrong-minded, they're reckless. The loan agreement is a contract between you and a lender -- a legally-binding contract. Some amatuer attorneys have taken the position that since the loan has been written to be enforced by the Tribal Court, that there is no legal right to pursue the matter in the rest of America.
Do you think that this business would leave itself open to so obvious a loophole? It's absolutely ridiculous to think that a multi-million dollar operation got that successful by leaving itself open to debtors walking away from their legal obligations. Don't think for a minute that the lender and its agents will not pursue the debt. The first question is not going to be "Are you a member of the Tribe?" or even "Is a U S citizen bound to this loan agreement?" It's going to be "Is this or is this not your signature on the contract?" If it is, plain and simple, you're bound to its terms.
If you're feeling exceptionally brave and insist that my read of the situation is wrong, I challenge you to take out the loan and refuse to pay it back. I'm no attorney, but I expect that Western Sky's legal department will find a way to assure you that it's in your best interest to begin making payments.
Thank you for the many comments I've received on this posting, but I will not add any suggestion that Western Sky Financial does not have a legal right to pursue the debts owed to the firm just because those who sign the agreement have volunteered to take any dispute to the Tribal Court. The rules are on the box, and if you sign the agreement, you're bound to them. Period.
The Colorado Attorney General's Office has recently taken action against Western Sky Financial Services. It also appears that Western Sky has changed its name to Payday Financial Services. Here is a treatment of the Colorado AG's suit:
DENVER - Colorado Attorney General John Suthers announced today that his office has filed a lawsuit against Western Sky Financial, a South Dakota-based online lender, and its principal, Martin A. Webb, for making unlicensed, high-interest loans to Colorado consumers.
According to the lawsuit, filed in Denver District Court, the company made more than 200 loans to Colorado consumers since at least March 2010, during which time it was not licensed with the state. The loans to ranged in value from $400 to $2,600 and had terms ranging from seven months to 36 months. The loans' annual percentage rates ranged from 140 percent to 300 percent. Under Colorado's Uniform Consumer Credit Code, lenders making subprime loans must be licensed with the Office of the Attorney General. Because Western Sky Financial made loans with interest rates higher than 12 percent, it must be licensed.
The Georgia Attorney General has also weighed in on Western Sky Financial Services.
At the urging of Georgia Attorney General Sam Olens’ office, Payday Financial, LLC, Green Billow, LLC and Western Sky Financial, LLC, payday lenders which claim to be Native American owned and operated, have agreed to cease making loans in Georgia. The Attorney General’s office alleges that the companies made illegal payday loans in Georgia through websites they operate. Georgia law specifically prohibits the making of payday loans, including the making of payday loans to Georgia residents through the internet (O.C.G.A. § l6-17-1, et seq).
According to the Federal Trade Commission, Martin A. Webb operates Payday Financial, LLC, and several related businesses in Timber Lake, South Dakota. The entities offer short-term, high-fee, unsecured payday loans of $300 to $2,525 to consumers throughout the country, advertising on television and through websites.
The businesses purport to be “wholly Cheyenne River Sioux Tribal Member owned…operating within the Cheyenne River Indian Reservation.” Although, attorneys for Mr. Webb claim that the companies are exempt from Georgia law due to tribal (sovereign) immunity, the Attorney General’s office has made clear that when a company conducts business in Georgia, Georgia law applies.
“When it comes to payday lending in Georgia, there is no gray area. It is unquestionably illegal in any form,” said Attorney General Sam Olens. “We will not stand for unscrupulous, out-of-state lenders taking advantage of Georgia consumers by skirting our laws.”
“The Attorney General’s timely and decisive action resulted in this entity ceasing to do business in our state,” said Governor’s Office of Consumer Protection Administrator John Sours. “We are pleased that Georgia consumers will benefit and look forward to ridding our state of all such illicit operators.”