Payday Loans: Predatory Lending and the Big Banks

Sheila Musaji

Posted Oct 30, 2011      •Permalink      • Printer-Friendly Version
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Payday Loans: Predatory Lending and the Big Banks

by Sheila Musaji


Payday loan companies are really disreputable businesses that take advantage of the poor.  Their effective average annual interest rate is often over 400% and sometimes as high as 417%.

What I just found out is that these companies are financed by the big banks, and that a number of the big banks are getting into the Payday loan business directly.  In a discussion with friends about Payday loans and how they had hurt people we know, someone said that this was true, and I found it difficult to believe.  How could “respectable” financial institutions be involved in something that comes close to loan sharking?  I decided to look it up and find out if there was any truth to this claim, or if it was just a rumor.

Sadly, it appears to be only too true.  Yet another reason that the 99% need to consider moving their money to banks and credit unions that are not involved in such immoral practices.

In September of 2010, Nathaniel Popper in the L.A. Times reported that

Major banks led by Wells Fargo & Co., US Bancorp and JPMorgan Chase & Co. provide more than $2.5 billion in credit to large payday lenders, researchers at the Public Accountability Initiative estimate in a report released Tuesday.

The financing provides vital support for an industry criticized for charging effective annual interest rates that can top 400%, the researchers said.

“Not having financing would shut the big players down,” said Kevin Connor, a coauthor of the report and a director of the Public Accountability Initiative, a nonprofit research group that has been critical of big business.

PR Web recently reported that a number of big banks are getting into the Pay Day Loan business directly

While they prefer to give them names other than payday loans, Wells Fargo, Fifth Third, U.S. Bank and Regions now offer these loans with varying rates. Wells Fargo charges 7.5% and the other three charge 10%. “The banks defend their new product by claiming that this is a short term loan, but our experience with our clients shows that these loans are chronic, and borrowers string them together without a break.” said Stark. Since these loans are for short periods, typically 10-15 days, it can get expensive very fast. For example, the Annual Percentage Rate of a 10-day loan at 10% is actually 365%.

The Huffington Post reported that a recent report from the Center for Responsible Lending shows that predatory lending practices are still part of the banking industry.

Here’s how a payday loan works: You, the customer, borrow money from the bank. The bank lends it to you at a high APR, or annual interest rate.

When your next paycheck comes, the bank repays itself out of your direct deposit—taking the loan, plus whatever interest the bank charges. It doesn’t matter if you don’t have enough money in your account; the bank goes ahead and repays itself anyway, even if this triggers overdraft fees. Often customers end up having to take out another loan to get by until the next paycheck—and so the cycle continues.

The CRL report isn’t the first indication that mainstream banks have adopted this practice, which is sometimes called a “direct deposit advance” or a “checking account advance.”

In 2010, Bloomberg reported that banks including Wells Fargo, U.S. Bancorp and Fifth Third Bancorp were offering services called “checking advance products”—which functioned very similarly to payday loans—as a way to recoup billions in lost revenue after new overdraft-fee regulations were passed.

Wells Fargo, Fifth Third and U.S. Bancorp were also among the banks named in a 2009 piece for the Twin Cities Star Tribune. That article, by Chris Serres, noted that in 2003, John Hawke, then head of the Office of the Comptroller of the Currency, spoke strongly against payday loans and warned such lenders to “stay the hell away from national banks.”

According to the Center for Responsible Lending report, the average 10-day payday loan from a bank carries a 365 percent APR. The one-month payday loan has an interest rate of 120 percent—significantly higher than the average interest rate on a credit card, which is only 13.1 percent, the report notes.

Social Security recipients, whose financial situations can be especially precarious, make up nearly a quarter of payday-loan borrowers, according to the report.

In addition to offering payday-style loans directly, banks have also been accused of financing non-banking establishments, like the check-cashing shops, that make payday loans available. In 2010, a report from National People’s Action and the Public Accountability Initiative linked payday loan companies like Advance America, First Cash and EZCORP to financiers including JP Morgan, Wells Fargo and Bank of America.

According to the Center for Public Integrity, payday lending is one of the practices that consumer groups would most like the Consumer Financial Protection Bureau, which launched on Thursday, to address.

The Consumerist reports

Seven big payday loan chains are extensively bankrolled by brand name banks. Bank Of America, Chase, WellsFargo, U.S. Bancorp, and Wachovia all extend tens to hundreds of million dollars in lines of credit to these predatory lenders who charge several hundred percent interest on cash advances, often made to the poor and uneducated.

The chart below was included in the Consumerist article:

 




SEE ALSO

Banks Increasingly Use Payday Loans Despite Crackdown On Predatory Lending: Study http://www.huffingtonpost.com/2011/07/22/payday-loans-banks_n_906765.html

Big Banks Accused Of Promoting Predatory Payday Lending http://problembanklist.com/big-banks-accused-of-promoting-predatory-payday-lending-0194/

Big banks play key role in financing payday lenders, Nathaniel Popper http://articles.latimes.com/2010/sep/15/business/la-fi-payday-banks-20100915

How “payday” lenders pull off crippling rates, Armen Ketayian http://www.cbsnews.com/stories/2011/09/26/eveningnews/main20111913.shtml

How payday loans became big business, Gary Rivlin http://articles.moneycentral.msn.com/Banking/BetterBanking/how-payday-loans-became-big-business.aspx

Payday Lenders Funded By Bank Of America, Chase, WellsFargo, U.S. Bancorp, Wachovia http://consumerist.com/2007/06/payday-lenders-funded-by-bank-of-america-chase-wellsfargo-us-bancorp-wachovia.html

Payday Loans Now Being Offered by Big Banks http://www.prweb.com/releases/2011/10/prweb8908135.htm

Report Blames Big Banks for Payday Loan Growth, Maya Jackson Randall http://blogs.wsj.com/economics/2010/09/14/report-blames-big-banks-for-payday-loan-growth/

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