Ernst & Young National Study Confirms Pricing of Payday Loans is Fair and Reasonable

Ernst & Young National Study Confirms Pricing of Payday Loans is Fair and
Reasonable
Based on the study findings, it is clear that attempts to impose artificial
rate caps will result in the elimination of a product used responsibly by
millions of Americans to address small dollar, short-term credit needs

HACKENSACK, N.J., Oct. 13 /PRNewswire/ -- In order to address unsubstantiated
claims regarding the cost of small, short-term loans, also known as payday
advances or loans, Financial Service Centers of America, Inc. (FiSCA) engaged
the firm of Ernst & Young LLP to perform an economic survey analysis of the
cost to provide consumers with this form of credit through stores that offer
many other financial products as well (also known as multi-line operators).
The data obtained through this nationwide survey of FiSCA members clearly
illustrates that payday loans are priced fairly and reasonably for consumers
seeking small dollar, short-term loans to address unexpected financial
shortfalls.

Further, based on the study's findings, it is reasonable to conclude that
imposition of arbitrary fee caps will cripple an industry that operates
responsibly under a variety of federal and state regulations to provide this
form of credit to millions of cost-conscious Americans.

Among the findings of the Ernst & Young study:

-- The average revenue for multi-line payday advance lenders for every
$100
loaned is $15.26. At the same time, the store-weighted average cost to
lenders equaled $13.89 for every $100 loaned.

-- On a pre-tax and pre-interest basis, multi-line payday advance lenders
earn an average profit of $1.37 per $100 of loan principal issued -
that
represents a modest margin of 9.1%, before taxes.

-- There are no collateral requirements for a payday loan, so lenders in
this industry face a much greater risk than lenders offering loans
requiring some form of collateral. According to the Ernst & Young
report, the store-weighted average bad debt costs equaled $3.74 per
$100
loaned, or 26.9% of the total cost of each loan issued.

"Based on the Ernst & Young survey findings, it is reasonable to assume that
reducing the fees charged by multi-line payday advance lenders, such as
through rate caps, would have a significantly adverse financial impact on the
industry," said Joseph Coleman, Chairman of FiSCA. "If multi-line providers
are currently only earning $1.37 in pre-tax profit for every $100 loaned, then
it stands to reason that significantly reducing the fees that can be charged
for offering such products, such as proposed in various pieces of legislation
pending in Congress and in some state legislatures, will have a significant
impact on the multi-line payday loan industry, which includes an estimated
10,000 locations nationwide."

The typical payday loan is for a duration of approximately two-weeks. The
average cost of $15.26 in fees per $100 borrowed on such a loan equates to an
annual percentage rate (APR) of 397%, a cost disclosure that is required by
the federal Truth in Lending Act and Regulation Z, but which is an inefficient
and inappropriate tool when applied to payday advances or any other small
dollar, short-term credit product. Proposals in Congress and in various state
capitals call for reducing the rate to an APR of 36%. If enacted into law,
such a fee cap would render payday advances unprofitable, forcing all lenders
to cease offering the product and creating a void in the marketplace.

Another aspect of payday loans often overlooked is the high fixed costs
associated with offering the product. The following chart breaks down these
costs and illustrates them in relation to the revenue and pre-tax profit
generated from the typical payday loan.

Revenue, cost and pre-tax profit for the average payday advance of the E&Y
survey

Payday advance revenue, cost and profit (pre-tax basis)
-------------------------------------------------------
Store-Weighted Average
Per $100 Loan
-------------
Revenue $15.26
------- ------
- Operating Cost $9.41
- Cost of Loan Capital $0.07
- Cost of Supplementary Capital $0.67
- Bad Debt Cost $3.74
--------------- ------
Loan Cost $13.89
--------- ------
Profit (pre-tax) $1.37
--------------- ------

The survey of FiSCA members offering PDA loans was conducted during the summer
of 2009. In total, information from 2,687 stores, approximately 27% of the
multi-line locations in the United States, was included in the survey. The
survey can be found by visiting www.fisca.org.

About FiSCA
FiSCA, founded in 1987, is the national trade association for more than 7,000
individual financial service centers across the United States. FiSCA members
provide a wide variety of financial services and products to their
communities, including check cashing, money orders, money transfers, and
electronic bill payment services, automatic teller machine access, government
benefit and payroll payments, small dollar short-term loans, electronic tax
preparation, prepaid debit cards, deposit acceptance services, public
transportation fare and token sales, motor vehicle license plate and title
distribution, postage stamp sales and numerous other services. For more
information, please visit www.fisca.org.

SOURCE Financial Service Centers of America

Financial Service Centers of America, Stephen Altobelli, MWW Group,
+1-201-964-2369, saltobelli@mww.com