With bills piling up, her credit shot, and a choice looming each morning of whether to spend her last dollars on food or on gas to get to work, high school science teacher Dawn Schmitt went online in search of financial hope.
A search engine led her to the website of a company called MyNextPaycheck. And within minutes, $200 was deposited into her bank account – a short-term loan to cushion her until her next payday.
It seemed too good to be true, she told a federal jury last month.
It was. Within months, she was bankrupt.
Schmitt's struggle to pay back that initial $200 loan, with an annual interest rate of more than 350 percent, is just one of the witness accounts federal prosecutors in Philadelphia have presented in their racketeering conspiracy case against Main Line entrepreneur Charles Hallinan, a payday lending pioneer who counted MyNextPaycheck as one of more than 25 loan companies he owned.
Throughout the trial, which entered its third week Tuesday, government lawyers have sought to draw a clear contrast between Hallinan – who lives in a $2.3 million Villanova home with a Bentley in the driveway – and borrowers like Schmitt, whose inability to pay her $200 debt quickly pushed her closer to financial ruin.
"I couldn't seem to get ahead of this loan," Schmitt, 48, of LaMoure, N.D., told jurors Sept. 29. "I ended up in more trouble than before I ever asked for a loan."
Hallinan, 76, and his longtime legal counsel, Wheeler K. Neff, a codefendant in the case, are credited with developing many widely copied business strategies that turned payday lending into a multibillion-dollar industry. But they have denied allegations that they preyed on low-income borrowers and that they broke state and federal laws to do it.
So far, prosecutors repeatedly have sought to use Hallinan's own words against him, playing several conversations secretly recorded by a former business partner turned government cooperator.
In one excerpt played for jurors last week, Hallinan laid out what authorities say was his attitude toward government attempts to regulate his industry.
"In this environment today, you've got to run afoul of the regulators," he said. "You can't [survive] if you don't lend in California or Colorado or New York or Florida," states with some of the tightest restrictions on payday lending.
Hallinan's defense has maintained that those quotes were taken out of context and has rejected government attempts to paint borrowers like Schmitt as victims.
"Isn't it fair to say that in your time of distress you went to these companies because you needed money and you got it in pretty short order?" defense lawyer Edwin Jacobs asked while cross-examining Schmitt last month. "In the comfort and convenience of your own home, you dialed into one of these search engines and found a payday lender. It was that easy."
Like all lenders, payday loan companies make their money from customers who pay slowly, allowing interest to accrue month after month on the sum they owe.
Hallinan's companies, prosecutors say, charged interest rates as high as 800 percent — more than 133 times the cap for unlicensed lenders in Pennsylvania.
"The best borrower from a profit standpoint is someone who borrows, say, $300 and just rolls that $300 over and over," said Christopher Peterson, a University of Utah law professor and government expert witness who testified earlier in the trial. "That person can end up paying four times the original amount that they borrowed and still owe the entire debt."
In Schmitt's case, she said, she fully intended to repay her loan in full as soon as she got her next paycheck. But the money wasn't there, and over time the interest began to add up.
She took out more payday loans to cover the payments for the first one.
"I have been borrowing from one to pay another," she wrote in a 2011 complaint to state authorities in Nebraska, where she was living at the time. "My monthly paycheck is eaten up with the fees that I'm paying."
Schmitt said she tried contacting MyNextPaycheck directly, but the phone number on her loan documents led to a disconnected line. With some online sleuthing, she eventually found a physical address for the company on an American Indian reservation in Northern California.
Prosecutors contend that the difficulty she faced in contacting the company was no mistake.
Hallinan and Neff were among the first to recognize the benefit of forging partnerships with tribal leaders to get around state-imposed interest rate caps.
By taking advantage of internet advertising and the tribal sovereignty granted to federally recognized Native American groups, payday lenders who set up shop on tribal lands can effectively "export" whatever interest rate they want into states across the country.
Prosecutors have described Hallinan's use of the strategy — known in the industry as "rent-a-tribe" — as a sham with tribal leaders having little involvement in the businesses other than to collect monthly payoffs.
Hallinan's lawyers maintain the practice is legal.
But as the trial continues, they may be fighting against their client's own words. In another recorded excerpt prosecutors played for jurors last week, Hallinan laid out his own thoughts on the strategy he devised.
"Let me tell you what my thoughts are on tribes and payday loans," he said while discussing a rival's business. "I believe that [regulators are] going to prove that it's a sham. … I think they're going to prove that they're farces. And, let's face it, they are."