If the already shrinking payday lending industry finally implodes, William Lucking will be prepared.

The Gardena-based owner of four Orange Rocket Cash payday lending stores has continued to hone his skills as a software developer on the side. Over the past year, that hobby has gained some urgency.

While lenders of these short-term, high-cost loans say they’re providing quick, much needed cash to customers with bills to pay, consumer advocates contend this credit is designed to trap borrowers in a downward spiral of intractable debt.

And now these businesses, particularly local lenders, are facing a fight for survival as increased competition from online players, greater compliance demands and enhanced scrutiny from the federal government threaten to shut them down.

“Business has been slowing down and profits are not what they used to be,” said Hal Greenberg, who operates a number of EZ Check Advance, Payday Express and A Advance Payroll stores in Los Angeles County.

While the volume of loans statewide ticked up slightly from 2007 to $3.4 billion last year, the number of licensed payday lending locations has fallen 16 percent to about 2,000 outlets, according to the California Department of Business Oversight. While similar data comparisons are not available at the county level, local lenders say the number of brick-and-mortar shops has stagnated if not shrunk.

But what Lucking and others fear most is that the Consumer Financial Protection Bureau, an oversight group established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, will wipe them out with a set of proposed rules to be released early next year for payday and auto title loans and other similar short-term credit products.

Regulators say they’re aiming to prevent these businesses from lending consumers unaffordable loans. But business owners such as Lucking already smell disaster and are hedging their bets.

“People don’t understand why I’m screwing with this business,” he said, given his valuable coding skills. “It’s just because my personal financial fortune was so tied into it.”

Cash Now

A payday loan involves a borrower giving a lender a personal check for the amount of money they want now. In exchange, the lender gives that person that amount of cash minus a fee but defers depositing the consumer’s check until the borrower’s next payday.

If the check bounces, the lender can collect a one-time $15 returned check fee. But that’s pretty much their only recourse on unpaid debt aside from selling these charge-offs to collectors, which isn’t lucrative, or taking the borrower to small claims court.

In California, the loan term can’t be longer than 31 days and state law only allows lenders to collect a fee of up to 15 percent. The maximum a consumer can receive is $300, which really means a disbursement of $255 when factoring in the lender’s cut.

These guidelines, enacted as part of California laws passed in 1996 and 2002, also mandate that consumers can only take out one payday loan at a time from the same lender and loans can’t be rolled over.

California’s maximum loan amount is among the lowest nationwide, with most states allowing lenders to borrow up to $500 or more.

But borrowers tend to use multiple loans throughout the year. Californians taking out seven or more payday loans in 2013 accounted for 45 percent of all payday borrowers, according to the Center for Responsible Lending’s analysis of regulator data.

Lenders are left to determine what kind of underwriting they want to do, if any.

Some require a pay stub or other proof of income, a current bank statement, identification and proof of address.

Lucking also uses an industry-specific credit report to see if a borrower is using multiple loans from other lenders, and if they have a record of not paying back debt.

“There are some lenders who do not underwrite,” Lucking admitted. “We believe it reduces charge-offs. But it’s so hard to judge the creditworthiness of people who are generally not creditworthy.”

Local players

The county’s payday loan industry has a fair mix of smaller businesses with one to five stores, medium-size players with about a dozen sites and some large national corporations running a significant number of sites across the state, said Thomas Leonard, executive director of industry trade group California Financial Service Providers Association in Sacramento.

Though payday lenders are often criticized for targeting ultrapoor neighborhoods, there are some notable exceptions, such as Greenberg’s EZ Check Advance store in Marina del Rey and another in a West Hollywood strip mall directly across from the swanky SLS Beverly Hills hotel. They’re part of 18 payday lending branches that Greenberg said he oversees for a group of undisclosed investors doing business since the late 1990s.

“We have customers that are doctors and lawyers,” Greenberg said. “An aesthetician who nets $6,000 a month comes in to borrow $300. Why? It’s not my job to ask why … we cater to anyone who needs to borrow money.”

A look at some of the advantages and disadvantages of payday loans.

Pros

• Often less expensive than other short-term credit options, and much less than bouncing checks or skipping bills

• Good for emergencies

• Those with bad credit scores or no credit history can get a loan

• Fixed $45 fee, paid up front. No other fees allowed, except for bounced checks

• No collateral needed

• Heavily regulated by state

Cons

• Creates debt trap for consumers who often take out multiple loans

• Condensed two-week payback period

• Repayment due in one lump sum

• Lenders can take repayment from customer’s bank account with no consideration of available funds or other expenses

• Heavily targeted at low- and moderate-income neighborhoods whose residents likely have no other options

• Payments not reported to credit bureaus, so no credit history built

Those stores each generate gross revenue of about $100,000 a month on average, said Greenberg.

Though his stores only offer payday loans, others offer a suite of financial services such as auto title loans, wire transfers, check cashing and money orders. That helps to diversify revenue, hedge against regulatory issues in the payday industry or set them apart given how little wiggle room there is to compete by adjusting the payday product itself.

“We have no advantage. We charge the same fee, the same amount, the same contract,” Greenberg said. “What can we give (consumers) they can’t get elsewhere? Service.”

Greenberg said he encourages his employees to build a bond with customers. For example, he tells them to put notes about what they discuss – such as a child’s soccer game – in the account profile. It makes customers more likely to pay them back, he said.

“If they’re having a hard time and need an extra pay period, you give it to them,” Lucking said of his stores’ approach. “You work payment arrangements. You’re flexible with them.”

Uncertain future

The flip side of those steady limits is that local lenders’ cut of those loans hasn’t budged in two decades. Added to that are burdensome new compliance measures related to payday lenders’ other services in the wake of Dodd-Frank reforms.

“There are so many compliance issues these days that are costly,” said Leonard from the lenders’ trade association. “To some degree, it’s priced out the very smallest of the entities.”

Lucking’s stores, like many others, have had to deal with anti-money-laundering compliance related to money transfers and orders. He’s had to develop an elaborate process to deal with new requirements including data collection, reporting and regular review of transactions to identify customers trying to conduct transactions just below reporting limits.

Another recent headache is that many payday lenders are having trouble keeping or finding a commercial bank account. A number of them are saying their banks, seemingly out of nowhere, have given notice that their accounts must be closed. Then it’s virtually impossible to find a replacement.

The payday industry believes it’s being targeted by Operation Chokepoint, a three-year-old Department of Justice initiative to prevent banks from working with fraudulent third-party payment processors that serve businesses.

The DOJ wrote in a blog post earlier this year that it is aware of claims the department has unfairly targeted businesses engaged in lawful activity. 

“Others have confused our efforts with separate, independent actions taken by financial regulators to warn banks about risks involved with conducting business for merchants in certain industries,” the department wrote in its post.

Whatever the cause, the payday lending industry is feeling crushed.

Greenberg said his stores had banked with Bank of America Corp. since they opened in the late 1990s, but they were told two years ago the institution had to close their accounts. They had a hard time finding a replacement, but ultimately landed a new regional bank in Southern California; Greenberg declined to say which one.

Lucking said he’d had a business account with Wells Fargo & Co. for more than a decade when the bank shut it down in 2013.

“It has been one of the most catastrophic things that’s occurred in our industry,” Leonard said. “It’s basically choked us out of our operations. … We can’t process transactions, clear checks. The smaller individuals in particular were really impacted.”

Feeling squeeze

All these pressures have likely had an outsized effect on smaller stores or operators with just a few locations.

“There were frankly more small entities in the landscape three to five years ago,” said Leonard of the consolidation and closures he’s seen statewide in the payday industry.

Lucking speculated that some of the shuttered outlets in the county were probably poorly located single-location mom-and-pop stores. And those shops tipped over the edge in a more difficult business environment and became too costly.

That’s what Michael Kyong Kim said happened to him. Kim owns two Santa Fe Springs Cash 4 You Plus payday loan shops that will soon become one.

He has had a Norwalk Boulevard store in the Santa Fe Springs Marketplace shopping center for more than a decade. But in the last few years, the 1,600-square-foot outlet became too expensive to run. So Kim opened another storefront a few miles away in a smaller, cheaper 900-square-foot space on Telegraph Road and plans to close the original store when the lease expires next year.

“Business has been going down the last five years,” he said of the original location. “We lost maybe 30 percent to 40 percent of revenue.”

Kim partly blames greater competition from online lenders for his original store’s demise. In fact, he launched an online lending service earlier this year just to keep up.

“There are so, so many lenders online,” Kim said. “That’s why I have to do something.”

Lucking, who seemed like a shoe-in for online lending given his previous career in Web hosting, also tried it back around 2002. But he found it too risky at the time and quit.

Successful online lenders benefit by not paying for a physical shop and capturing consumers who don’t want to leave the comfort of their home to get a loan. But it can be hard to stand out among the glut of Internet-only lenders.

Some rogue online operators also increase their revenue by skirting the law, said Greenberg. Such lenders, often based offshore or on sovereign tribal reservations, don’t follow state rules that limit loan amounts and interest rates, and prevent rolling over loans.

“It’s hurt brick-and-mortar stores tremendously,” he said.

Ticking clock

But what Greenberg and others fear most is the set of proposed changes recommended by the Consumer Financial Protection Bureau, which should be circulated next year. Potential changes to payday products have the industry very concerned.

The bureau met earlier this year with small-business representatives and worked on a report based on the input received, which will be published when the proposals are released. At that time, the oversight group will also take written public comments.

Leonard said the payday lending industry has been lobbying Congress about its concerns.

One possible change that’s been floated by the bureau in advance of its official proposals would mandate more stringent verification of consumers’ income, major financial obligations and borrowing history to ensure customers have enough income to repay the loan after satisfying major debts and living expenses. In this scenario, consumers would be prevented from taking out a subsequent payday loan until 60 days after the term of a previous one ended, unless their ability to repay has changed significantly.

The bureau has predicted that these measures would cause storefront payday loan volume to plummet by 69 percent to 84 percent if enacted.

“If that’s going to be implemented as proposed so far, it’s going to close lots of storefronts, unquestionably,” said Lucking. “I’ll be going out of business if this is what happens.”

His backup plan partly involves using his coding skills to develop or hone new software for credit products that could crop up.

But if these lenders are effectively wiped out, Greenberg said that won’t stop demand for this type of credit.

“Loan sharks will come back,” he predicted. “People borrowing the money need this money and they will get it somewhere.