September 15, 2010 – Big banks seem to be on the nation’s list of most hated institutions. After being blamed for causing the financial crash of 2008 through reckless lending, banks are now taking heat for prolonging the recession with excessively stringent lending standards. One industry to which banks have aggressively extended credit is now drawing criticism from a community organization group.
The National People’s Action (NPA) and Public Accountability Initiative released a report that details the financing connections between big banks and payday lenders. According to the report, big banks provide an estimated $2.5 to $3.0 billion in credit to the payday loan industry and big bank financing has “led to the rise of a powerful industry lobby which has successfully fought efforts to cap interest rates”. (Payday loans are short term loans that are repaid from the borrower’s next paycheck.)
The National People’s Action report accuses the big banks of promoting the growth of an industry which is predatory and usurious.
There are few industries more widely despised than the payday loan business. Over the past fifteen years, payday lenders have gained notoriety for lending money against future paychecks at annualized rates that average out at 455%. Their predatory practices have made the industry a favorite object of ridicule.
Despite their toxicity, however, payday lenders do not work alone; they operate with quiet assistance from major Wall Street banks like Wells Fargo, Bank of America, JPMorgan, and US Bank.
Just as large Wall Street investment houses lurked behind the most predatory subprime lenders in the run-up to the financial collapse, these big banks have strong ties to the most predatory, usurious payday lenders. According to Christopher Peterson, a professor at the University of Utah who has studied predatory lending, payday lenders charge close to double the interest rates charged by mafia lenders during the 1960s – 455% as opposed to 250%.
The payday loan industry has experienced explosive growth over the past five years and total lending now totals about $30 billion annually. The average loan size is only $300 to $400 and fees can average about $15 per $100 loaned. The number of payday stores has grown from 2,000 in 1995 to almost 20,000 today.
The NPA report does not address the legality of a bank refusing credit to a lawfully operated enterprise based on the nature of their business, but notes that some banks do not lend to payday lenders based on the “reputational risks associated with the industry”.
The Community Financial Services Association (CFSA), which represents the payday industry, took strong exception to the NPA report, calling it misleading and distorted. The CFSA website explains why consumers often prefer a payday loan.
The payday advance is a convenient and practical short-term credit option. Payday advance companies service the heart of America’s working and middle class population. Our customers come from hardworking families who have relationships with mainstream financial institutions.
By using payday advances responsibly, consumers can effectively deal with unexpected financial emergencies. It provides a sensible alternative to costly bounced check and overdraft protection fees, late bill payment penalties and other less desirable short-term credit options. With a payday advance, you can bridge a cash crunch between paydays, without incurring revolving debt or drawn-out payments.
Although the payday advance is a convenient and less costly credit option, you should evaluate the costs and benefits of all your short-term credit alternatives…
The explosive growth of the payday loan industry reflects the financial stresses and dire credit needs of many borrowers. If consumers did not need payday loans, the industry would not exist. High interest payday loans are probably an unwise choice for most consumers but provide credit that may otherwise be unattainable.
With unemployment currently running at 10%, it should be noted that the payday industry provides jobs for thousands of people. Listed below are the number of full time employees of some of the major payday companies listed in the NPA report.
|Payday Lender||Number of Employees|
|First Cash Financial||4,200|
|Source: Yahoo Finance|