Bailed-Out Banks Finance 'Legalized Loan Shark' Payday Lenders, Says New Report

Big banks that received TARP bailout money are funding payday lenders -- companies Senator Dick Durbin (D - Ill.) termed "bottom feeders" -- and which charge high interest rates and fees for short-term loans, according to a report released Tuesday.

The banks, which include Wells Fargo, Bank of America and JP Morgan, currently provide roughly $1.5 billion in credit lines to publicly-held payday loan companies and between $2.5 to $3 billion to the larger payday loan industry, says the report, which was issued jointly by community group network National People's Action and non-partisan watchdog Public Accountability Initiative.

The payday lenders, including Advance America, Cash America and ACE Cash Express, which allow customers to borrow against future paychecks, and which, according to the report, charge an average interest rate of 455 percent on top of fees of $15-18 per $100 loaned, often depend on the big banks' financing for their business.

"The very same banks that helped tank the economy and then needed hundreds of billions of dollars in taxpayer-funded bailouts are now aiding the bottom-feeders of the financial industry, as they seek--the payday lenders--to strip even more wealth away from everyday Americans," NPA executive director George Goehl, who also called payday lending "legalized loan sharking," said in a telephone press conference. "If Al Capone was alive today you might even get a better loan from him." (Goehl is also a HuffPost blogger)

The report, called "The Predators' Creditors," which features a picture of three sharks on the cover, says that some banks abstain from business with payday lenders because of what Advance America itself calls "reputational risks." The report also notes, though, that some of these payday lenders have ties to Wall Street. For example, the board of Advance America includes former executives from Bank of America, Morgan Stanley and Credit Suisse.

PAI co-director Kevin Connor, who co-authored the report, said in the press conference that big banks are attracted to the payday loan industry because "Americans were losing their jobs and homes in record numbers but they still had their family treasure to borrow against"

Connor also noted that the big banks themselves pay close to zero interest when they borrow from the Fed, a stark contrast to the high interest rates paid by consumers.

NPA and PAI are calling for an end to these credit lines from banks. Goehl said a protest campaign will launch today in Ohio and continue in Iowa, Kansas, Missouri and Illinois through next week, culminating in a meeting of the organizers in Chicago. "This report is really the beginning, not the end," he said.

Comments

[Belinda Griffin Olive]

08:13 PM on 09/30/2010

When saying that payday loans carry high APR, you really have to look at the big picture. Sure, a 300% APR for a loan might seem like a lot, but just compare that to other emergency financial solutions, such as bounced check or NSF fee (up to 1,250%), a late or reconnection utility fee (up to 1,300%) or a one day late fee on your credit card (as much as 10,00%)!
Especially in times of economic downturn, such as now, I think we should be giving consumers more credit options, not less. Many subprime consumers are finding that they have fewer and fewer choices when in need of immediate credit. While payday loans may not be a long-term solution to their problems, they can help many hardworking people make it through difficult short-term periods or cover emergency expenses that they never saw coming.

[Socialjoe]

11:42 AM on 09/29/2010

I, too work for a payday company. The article specifically targets the payday loan product for short term/no credit loans. Unfortunately, it does not take into account each state having different laws regarding payday loans and the restrictions for use so statistical data will vary from place to place. One statistic that is reliable is over 90% of payday loan customers pay off the loan within 2 weeks and thus incur the very minimal of fees associated with the product.

[JStading]

10:15 PM on 09/15/2010

"455 percent on top of fees of $15-18 per $100 loaned"

Wow, definitely ban this. You see, all poor people are stupid and cannot be trusted to make rational economic choices. We should close this avenue to credit down so that instead of paying $18 per $100, they are compelled to use overdraft protection for the three or four purchases they need to make (racking up a bill of $100-$120 for the $100 loaned).

We also don't need to worry our pretty little minds with the fact that high interest rates across a market suggest that the loans are expensive to service, expensive to monitor, and yield a de minimis return when rates are at "reasonable" levels. How do we know? Because if you could loan profitably at 200% or 100% or even 20%, wouldn't at least 1 payday lender switch to the lower rate to capture the market?

Phew, good thing we didn't let adults make adult choices. Things could have gotten messy.

[RightWingMarine]

06:31 PM on 09/15/2010

if only there were someway to stop these adults from deciding for themselves to take out these loans when the terms of the loan are very clear often in giant letters on signs in the lobby easily viewable by everyone as they walk in. There has to be someway to stop these fully informed and consenting adults from doing what they feel is best for their situation and force them to do what we think is best for them.

[txrunner]

06:03 PM on 09/15/2010

Banks offer lines of credit to companies all the time - the line of credit is based on company net worth.

For the Liberals to demonize these businesses and the banks doing business with them is just wrong.

If you've ever stepped foot into these places - they are full of illegal immigrants cashing checks and sending money back to mexico.

Perhaps the Liberals wouldn't have to criticize the banks for the the companies if they would do their job.

[spinns17]

12:13 PM on 09/15/2010

the mob has been running wall street for the last 30 years

[mrspiffy]

11:57 AM on 09/15/2010

Shocker...
http://yieldpig.blogspot.com/

[lenderchick]

11:57 AM on 09/15/2010

The story incorrectly describes payday loan customers as unemployed and unbanked. To get a payday loan, you have to have a job and a checking account.
Payday loans are typically for two-weeks not an entire year, and comparing them to ANNUAL interest rates is misleading.
At 36 percent APR, the total fee charged on a $100, two-week advance, would be $1.38. Payday advance lenders could not cover the cost of originating the loan, let alone meeting employee payroll and benefits and other fixed business expenses, like rent.
Such a rate cap would virtually eliminate payday lenders, but not the need for short-term credit. (Arizona did this) Instead it forces consumers to choose between more expensive alternatives, such as fees for bounced checks, overdraft protection, late bill payments, reconnection fees for a utility discontinued for lack of payment or even unregulated off-shore Internet lenders.
I work in the industry, and working adults are best served when given a variety of options and trusted to make financial decisions based on what’s best for them and their families.
My company charges $15 for every $100 borrowed for two weeks.

[LivingDebtFree]

01:23 PM on 09/15/2010

Since you are a Payday Loan person, I'll go ahead and rebutt much of this.

Payday loans are in 2 week increments and then if not repaid, they can be renewed. Comparing them to annual interest rates is not misleading. Especially when often times, the actual "interest charged" is miniscule, but the CSO Fee is the robbery. For example, on a $50 loan from one company in Texas, they show the interest paid to lender to be $0.19 and the CSO Fee Paid to Loan Broker (the person you are actually talking to) to be $11.

So, to translate to your story, the cost of the $100 loan is $16.38 every two weeks.

[JStading]

10:19 PM on 09/15/2010

The payday loan company is essentially taking a lien out on the person's next paycheck. The idea that they are routinely carried over for multiple weeks simply isn't true.

You're also ducking the obvious - what's the alternative? Here in AZ, we "protected" our poor right out of their only credit market. Why? Because their horrid credit means no checking accounts or credit cards. Their inability to get payday loans now means that they are compelled to do auto title loans which have the benefit of making nanny staters feel good because the rates are lower while being overall more profitable because a default on a $100 loan earns the bank a free car.

When we shut down title loans, where do these people go? Who knows?

[RightWingMarine]

06:20 PM on 09/15/2010

very well said.

[Jennifer Hill]

10:42 AM on 09/15/2010

Another predatory parasitical business that some of us have been trying to reign in for years.

The banks, which include Wells Fargo, Bank of America and JP Morgan, currently provide roughly $1.5 billion in credit lines to publicly-held payday loan companies and between $2.5 to $3 billion to the larger payday loan industry.

Yes these banks got TARP money so they could continue to bleed even the poorest of us dry.

Thanks to NPA for this report.

[rory talbot]

09:05 AM on 09/15/2010

What's surprising about this? Welcome to America, Inc.

[mountainweb]

08:33 AM on 09/15/2010

Bottom line, the banks could not steal money fast enough so they funding payday lenders to do it for them. Takes a lot of money to buy off a president....

[VolcanoInsurance]

07:14 AM on 09/15/2010

I for one am glad the bailed out banks are into payday lending. It's a hugely profitable business and they owe us money. They can pay it back a lot faster with r.etards paying 600% interest to them.

[Giverny]

10:30 AM on 09/15/2010

Unethical business practices like this if not stopped will only snowball us all into hell.

[capitaldysfunction]

04:22 AM on 09/15/2010

Arizona did it right. They set the max interest rate that these sharks could charge at 36%. Result: The sharks packed up and left the state. Unfortunately, several settled in Nevada. The nearest main cross streets where I live has one of these lenders on three of the four corners. The fourth corner is a fire station.

[RightWingMarine]

06:23 PM on 09/15/2010

I'm sure the people that had no other option for borrowing money except from a payday lender is glad that the govt of AZ decided they didn't need that option either. Maybe Al Capone would have offered a better deal but at least with a payday lender if you were late with a payment they didn't break your thumbs.

[JStading]

10:21 PM on 09/15/2010

Is that what you think happened? Lol! Here, lemme break it down for you from Mesa, Arizona where there are currently at least 15 open payday lenders within a 5 mile radius of where I write this.

All of the payday lenders got out of the "payday loan" business. How did they survive? (1) Check cashing fees went up and (2) everyone got into the auto title business. What's this mean? The payday loan now cost $8/2 weeks less because the rate went from 400% to 36%. Huzzah! But wait, what's the unintended consequence? If you default they take the car. That's a steep price to pay for a $100 loan....

[capitaldysfunction]

10:44 PM on 09/15/2010

Thanks for the update. There are complaints in this area that (some) people pay off the auto title loan but the lender refuses to return the auto title.

It is somewhat like running a local economy with casinos. If tourists from outside the locality leave their money behind, the local economy may benefit. But if locals do most of the gambling, supermarkets and others in the area are hurt by less cash flow. Similarly, local businesses are impacted by Payday Lenders.

[FREEDOM BELL]

02:33 AM on 09/15/2010

Move Your Money to local banks and credit unions. If we all did that, we could drive them out of our country !!

[LivingDebtFree]

07:00 AM on 09/15/2010

They tend to feed off of people that don't have bank accounts. They are Pay Day/ Check Cashing institutions.

[manrock1]

02:09 AM on 09/15/2010

At least back then you knew where you could find Big Al if you were so inclined.