“If someone makes you a loan that’s illegal, either because they don’t have a license or they violate usury laws, you’re not under any obligation to pay it back,” said Norman Googel, an assistant attorney general in West Virginia.
Payday lending traditionally happens in seedy storefronts, often in low-income neighborhoods and around military bases. Not any more! Eager to get in on the next big subprime lending bubble before it bursts, big banks are brushing up on their loan shark chops and opening payday lending divisions.
So what’s the problem, here? Well, payday loans from banks typically carry annual interest rates as high as 365%. That means if you took out a $10 loan, it would cost $46.50 to pay it back. It doesn’t feel so bad because payday loans are supposed to be short-terms loans, but the typical payday loan customer uses payday loans often enough that he or she is actually paying that kind of interest.
Banks are especially interested because they tend to hold the payday loan customer’s deposits, as well. Payday loan customers wind up paying more in overdraft fees, and are more likely to lose their bank accounts. In short, it’s bad news for consumers.
The Center for Responsible Lending is watching this trend, and has more information about big bank payday lending.
The same banks that used to make—or finance—the subprime loans that sent the world economy into a nosedive are now making and financing payday loans. Now they just use TARP funds and cheap loans from the Fed.
Payday loans are still subprime loans, but the risk is built into the enormous interest rates, which average 455%. The mafia offers better interest rates. Actually, the mafia is probably just operating payday loan storefronts now. Wells Fargo in particular is knee-deep in payday loans. It directly finances a third of payday loan branches in the U.S.
In order to make those 455% loans, banks like Wells Fargo and US Bank are able to borrow money from the Federal Reserve at .5% or less. (Wait, does that mean they can really average a 454.5% profit, not counting defaults? Holy shit.)
(Video from Showdown in America.)
A commenter alerted me to the fact that the article linked below has been changed, apparently because the story was fake.
On a radio interview this week, Dolly Parton took Senator Bob Corker (R-Tenn.) to task over his opposition to a bill that would lower the interest rate payday lenders may charge from 400% to 36%:
For a dad and a mom trying to raise some kids on a military paycheck, a 400 percent interest rate is not just dumb, it’s un-American.
Dolly Parton gets it.
Dolly Parton Takes On a U.S. Senator | The Boot (thanks, Donna!)
Payday loans are small, short-term, high-interest loans. Most are less than $400, with a term of two weeks or less. In exchange, the consumer generally pays $15 for every $100 borrowed, or a 360% APR. (Even high-interest credit cards generally charge less than 30% APR.)
Most consumers roll over the loan several times, incurring an additional fee each time. For example, a $300 payday loan rolled over for three months will cost an additional $270 in interest payments.
So why do people use payday loans?
Possibly because there are few alternative for payday loan customers, if any. This is true, although some credit unions have found ways to lend to the same clientele at more reasonable rates. Still, as long as payday loans remain legal and the market fails to provide a widely-available, viable alternative, it looks like consumers will continue to use them.
(photo: slideshow bob)
Last week, the House Subcommittee on Financial Institutions and Consumer Credit held a hearing on H.R. 1214, the Payday Loan Reform Act. AFFIL and our Partners are calling this the “Payday Lender Protection Act.” It’s the first bill that AFFIL has ever officially opposed (PDF link). Unfortunately, the bill enjoys a lot of support and the full House could vote on it soon after they return from recess.
H.R. 1214 would allow payday lenders to charge $15 per $100 borrowed – which for a two week loan amounts to an annual percentage rate of 391%. Over 80% of AFFIL members and 48% of the general public think 36% interest is too high, let alone 391%. Of course, a 36% cap is the best we can hope for, and would be a big improvement over the status quo. (See this post about Senator Durbin’s “Protecting Consumers from Unreasonable Credit Rates Act” for more info.) Keep reading
There are two bills (HF0914 & HF1471) pending in the Minnesota legislature. HF0914 would eliminate payday loans entirely. HF1471 would impose some regulations on payday lenders and adds a private right of action for consumers, with attorney fees and costs.
Minnesota Public Radio has more on why payday lending is under scrutiny and at risk of becoming outlawed in Minnesota:
The website of the Predatory Lending Association* is chock-full of great information for payday lenders, such as racial profiling tools, tips on lending to members of the military (no, 20 payday loan stores by a military base are not too many), and a working poor finder, which uses Google Maps to help predatory lenders find concentrations of working poor to target. (You can even overlay the military and working poor maps for extreme targeting!)
There is a lot more information there that is helpful to predatory lenders, but that consumers might find interesting, as well.
Apparently the money changers are back in the temple.
In a paper to be published this spring in the Catholic University Law Review, professors Christopher Peterson and Steven Graves find a surprising correlation between the geographic density of payday lenders and the political clout of conservative Christians. The more conservative Christians a state has the more payday lenders. See my earlier piece on payday lending in Utah
Usury: the Christian thing to do.