Payday Lending is a Huge Money Maker for Big Banks

111-2New Orleans The Consumer Financial Protection Bureau (CFPB) released a recent report in the United States with the boring title “Online Payday Loan Payments,” but despite that, wake-up, this is important.

The report is ostensibly directed at online payday lenders, and there’s nothing wrong with that; they need a hard look. Many of them have created a business model out of trying to skirt state regulations designed to at least try to reduce predatory practices. The Attorney General in New York got a lot of publicity by going after a gang of them, including some that were adding insult to injury by operating from Indian reservations to claim yet another layer of impunity.

Anyway the top line of the report got a couple of seconds of attention over the fact that based on the CFPB findings the average payday lending victim in addition to paying the vig on the loan and a host of other penalties and fines that lard up the total price of the repayment, also pays an average of about $185 over 18-months in bank charges when the lender hits their account for payment and hits the account dry. They found that the average overdraft fee for these desperate consumers was $34 a hit. The report, examining 2012 data, determined that the overdrafts and NSF (non-sufficient funds) were routinely triggered by the payday lenders and the banks:

“Of the average of $185 in fees, $97 on average are charged on payment requests that are not preceded by a failed payment request, $50 on average are charged because lenders re-present a payment request after a prior request has failed, and $39 on average are charged because a lender submits multiple payment requests on the same day.”

The report also illustrates how this collusion of payday lenders and banks stubbornly victimizes the consumer. CFPB found that normal collections succeed 94% of the time, but of the 6% that fail, when the lenders keep hitting the account multiple days, 70% fail on the second hit, and subsequent hits or re-presentations, as they call them, bounce even higher and harder. Often in fact they found that they only succeed because the bank covers the hit, incurring yet more charges to the consumers. It’s kind of a surprise that they found about one-quarter of consumers with a payday loan had their accounts closed within a one-year period, because for banks this was a cash cow. They likely only pulled out because they couldn’t get any more blood from these stones.

If you wonder why banks have deserted the business of low-level consumer loans, the picture becomes clearer with this study: they make more with less risk by fleecing the customer on the overdrafts and NSFs, thanks to their buddies in the payday loan business and their computer programs. Although the CFPB work studied online payday lenders, most payday lenders require automatic account deductions for their payments as well, so it’s really the same mess, just with a physical address.

Studies in recent years by the FDIC found that banks make over $17 billion from overdrafts and NSF charges. The big three banks made more than $1 billion just between themselves. Besides making money from payday lending on the front end by loaning the money to the payday lenders to re-loan as predatory as they can get away with, banks are exploiting their victims with their partners help on the back end with these charges.

At the least we need to stop the pyramiding of fees and force the fees to represent real costs to the banks. Furthermore, when someone’s account runs dry, why allow them to keep going back to that well, unless it’s to lard on more fees. We also need to make all financial institutions come clean about how much they have their hands in these rip offs of cash-poor low and moderate income families.

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Perhaps Some Progress on Payday Lending Rules in USA

New Orleans   Payday lenders could not operate without the collaboration of the big money center banks.  They are financiers providing the dollars being lent in predatory fashion to desperate lower income families.  They are also the loan collectors by facilitating drafting from borrowers’ accounts to service the loans for the payday lenders, sometimes on multiple occasions as we all saw in the recent JPMorgan Chase scandal.  Finally, it appears with some prodding from Congress, the Office of the Controller of the Currency (OCC) and the Federal Deposit Insurance Commission (FDIC) are moving to clamp down on some of the big banks payday lending business, especially that of notorious bad actor, Wells Fargo, and U.S. Bank, both of whom have been bottom fishing to compete against the most predatory players.

             The new standard being proposed, similar to the recent consumer and low income advocate gains around home mortgages and other work done by the new Consumer Financial Protection Bureau (CFPB), would reportedly stress “affordability,” meaning that a loan could not be made where there was not a reasonable expectation of the borrower’s ability to repay.   As ACORN Canada studies on payday lending have thoroughly shown the first loan often leads to a series of similar loans over a 15 month period as the borrower tries to extract themselves from the loans with repeated additional loans, deepening their financial crisis.  Importantly, the government agencies are going to bar any additional loans for 30-days between loans and would not allow additional loans until the first loan is paid off. 

            Some of these so-called direct-deposit loans or “checking account advances” as U.S. Bank calls its product seem frighteningly like the tax preparer “advances” in anticipation of refunds, but of course payday loans are by definition marketed as loans against the coming payday, even if the borrower is out of work without a payday in sight.  Hiding behind the notion that these loans are an “advance” and for the “convenience of the customer,” banks are also not disclosing the level of the interest rates involved, which are exorbitant, as you would imagine.  “Convenience of the customer” must be a euphemism for describing the desperation faced by the borrower.   Wells Fargo spokespeople, according to the New York Times, also tried to hide behind the facade that they were just lending a hand to customers facing an “emergency situation.”  Well, yeah!   Too little money and too much month!  Come on, boys!

            All of this is pure and simple loan sharking and part and parcel, of the criminal enterprise that big time banking has become these days, so it is refreshing to think that some of the regulators might be waking up and starting to do something about it.  Hopefully they will move from the big fish to the little fish soon and go after the whole payday lending industry, which has been thriving in the great recession.

Audio Blog of Payday Lending

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