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Big Banks Helping Payday Lenders
December 17th, 2011
Wells Fargo, Credit Suisse among biggest backers of profitable low-finance firms
At the exact time that the ‘Occupy San Francisco’ encampment at the base of Market Street was busy expressing their outrage at big banks and high finance, it remained business as usual at some of the city’s less glamorous financial establishments. High-interest, unsecured “payday” loans are readily available at 32 establishments along Market Street and in low-income communities around the city. Most people with bank accounts qualify. These stark storefronts, where hard-pressed consumers line up to speak with clerks behind Plexiglas windows and apply for high-cost payday loans, may seem unconnected to Wall Street.
No names and no brands
But while their names and brands are nowhere to be seen, banks and rich investors based here or in distant financial enclaves like Manhattan or Zurich provide funds to or own stakes in some of San Francisco’s largest payday lenders. These include Money Mart, with eight stores, and California Check Cashing Co., with five.
Bank syndicate
In March, Wells Fargo & Co., the largest bank based in San Francisco, acted as the administrative agent of a bank syndicate that provided DFC Global Corp., the owner of Money Mart, with a $200 million revolving credit, according to SEC filings. Essentially a giant credit card with a March 2015 expiration date, this deal provided DFC with money to lend and pay expenses, and a war chest to fund possible acquisitions of other companies. Most of San Francisco’s 32 licensed payday loan stores are located in busy commercial areas, such as along Market and Mission streets, exposing passers-by to offers of fast cash at high prices.
Credit Suisse
Another large bank has provided key financial backing to San Francisco’s largest payday lender. Credit Suisse, a Swiss investment bank, acted as the lead underwriter for a public offering of shares in DFC. The payday lender raised $117.7 million in that transaction, according to securities filings. Credit Suisse pocketed $6.8 million. Credit Suisse is also the lead underwriter of a pending initial public offering of shares in Community Choice Financial Inc. The company was created in April, when Ohio payday lender CheckSmart merged with California Check Cashing Stores, which has five storefronts in San Francisco and 141 statewide.
Golden Gate Capital
This San Francisco investment management company with an office on the 39th floor of the Embarcadero Center, received a $16.7 million dividend from an April merger and will remain a major shareholder in Community Choice, according to a preliminary prospectus filed with securities regulators. Representatives of Community Choice, Credit Suisse and Golden Gate Capital did not respond to requests for comments.
A Quarter of Americans Have Turned To Payday Loans
November 12th, 2011
Research Shows that Online Payday Loans are One of the Fastest Growing Segments for Lenders
It’s all to do with emergencies: New tires for the car. An unexpected trip to the emergency room. An afterhours call to an electrician to fix a blown circuit in the house. These are just a few of many examples of what can and does happen in an average month to many people. For those who are living paycheck to paycheck, meaning a significant number of Americans, these situations are not only stressful, they can also figuratively break the bank.
Budget
Unbudgeted expenses use up money that was earmarked for groceries or other living expenses, and if payday is not in the immediate future, it can be pretty difficult to make it until the next paycheck comes in. Traditionally, people needing extra money would head to their local bank to ask about a loan, which would involve a lengthy and time-consuming application process. In the case with all lenders who handle payday loans, certain restrictions do apply: for example, applicants must be typically 18 years or older with a checking account, a phone number, and a steady income of usually at least $500 to $1,000 a month. For people who meet the qualifications, payday loans tend to go very smoothly. Compared to a traditional bank, a payday lender has no interest in why a borrower needs the money.
Collateral
A bank will often require collateral and the reasons for the loan. Even then a bank can decline a loan request. A payday lender isn’t as difficult to work with and won’t ask about a borrower’s reasons for needing a loan. For clients who would like to try for a payday loan, but are feeling unsure about the process, statistics have shown that they are in good company. As of 2009, a federal government study showed that about 25 percent of Americans had consulted a payday lender or similar service in the past year.
Banks Muscling In On Payday Loan Territory
October 26th, 2011
Look before leaping into high interest loans says consumer credit counseling agency
According to the St. Louis Post-Dispatch several St. Louis area banks have moved into the payday loan business, including U.S. Bank, Regions Bank and Fifth Third Bank.
Requirement
A requirement of the banks is that the person taking out the loan has a checking account with them and has direct deposit and automatic withdrawal for the loan, said Thomas Fox, community outreach director for Cambridge Credit Counseling Corp., a nonprofit agency. The banks are competing with storefront payday loan and check cashing services, charging somewhat lower rates. They charge an upfront fee for a small loan of $100 to $500, which usually is scheduled to be paid off in one to three months.
Take counseling first
Fox suggests contacting a nonprofit consumer credit counseling agency before taking out a payday loan from a bank or a payday loan establishment. “Our goal is to empower people to take control of their finances and find ways to help themselves,” Fox said. “We do a full financial analysis, help them restructure debt, find alternatives.” To contact Cambridge, call 1-800-235-1407. To contact other nonprofit credit counseling agencies, see the Association of Independent Consumer Credit Counseling Agencies website, or call the AICCCA at 1-866-703-8787.
“Advance” loans
Often the payday loans cycle customers over month after month with loan after loan. The banks, which call them “advance” loans, are a bit better but still charge high rates, Fox said. “The banks will charge about $7.50 for a $100 loan,” he said. “It doesn’t sound like much, but when you annualize it, that’s 261 percent interest. That’s less than the payday loan places, but it’s still extremely high.”
Center for Responsible Lending
According to the Center for Responsible Lending, turnover customers make up 76 percent of a payday loan’s business. The customer often can’t meet payments at the end of the month and is forced to take out another loan. “The banks typically will cut you off from more borrowing after a couple of months, so they are attempting to control that,” Fox said. The banks also limit how much a person can borrow, he said.
“One in four of the borrowers is on Social Security,” he said. “That says something right there.”
Utah Credit Union Drops Payday Loan Business
October 23rd, 2011
Everyone including the big banks and the Indian tribes are eyeing the market
Mountain America Credit Union, a Utah business, has dealing in payday loans after features in news reports. It had been offering its members a “MyInstaCash” loan that topped out at an 876 percent annual interest rate for a $100, five-day loan. The unsavory practice was revealed in an investigation by the nonprofit online reporting site iWatch News.
Payday Loans
Payday loans are basically short-term, unsecured loans which are usually due when the borrower receives his or her next paycheck. Consumer groups call them predatory and say lenders charge exorbitant interest, often trapping borrowers in a cycle of debt that they can’t escape. Mountain America’s new “Helping Hands” loan complies with rules set by the National Credit Union Administration that permit federal credit unions to lend at a maximum 28 percent annual rate provided they follow certain guidelines, such as giving customers more time.
One of several
Mountain America, a large credit union with $2.8 billion in assets, is one of several that skirted the interest-rate-cap rule by partnering with third-party lenders that financed the loans. Customers were directed to these lenders through a link on the credit unions’ websites. Those lenders would then turn over a finder’s fee, or a cut of the profits, to a separate business, set up by the credit union.
Not just Credit Unions
Credit unions aren’t the only institutions that are finding it hard to resist the allure of the sky-high interest rates payday loans generated. Banks and even Indian tribes are getting into the act. Big banks began muscling their way into the business last year, charging an average 365 percent APR, a study found. The report from the Center for Responsible Lending finds that, on average, a bank payday loan is repaid within 10 days, eats up 44 percent of a borrower’s next deposit, and often creates the need for a subsequent loan. As a result, borrowers stay in debt an average of 175 days, paying over $900 in interest to borrow $500 for less than 6 months.
Indian Tribes
The entry of American Indian tribes into the business is an even bigger frustration to regulators’ efforts to curtail payday lending. Because they are sovereign nations under their treaties with the US, Indian tribes are immune to state interest-rate caps and regulations imposed on the payday loan industry. They can even operate in the 12 states that have banned payday lenders outright.
Not the Indian tribes
It’s not, of course, the Indian tribes themselves who are opening storefront and Internet loan operations. Instead, existing lenders “move” their headquarters to an Indian reservation, usually in name only, and share their revenue with tribal leaders.
Banks Streaming Into the Payday Loan Industry
July 23rd, 2011
Will the competition reduce or raise interest rates?
A new report from the Center for Responsible Lending shows that two years after the recession officially ended and one year after the creation of a landmark financial law meant to prevent another financial crisis, predatory lending practices remain a part of mainstream American banking.
Short-term, high-interest loans
On Thursday, the CRL, a nonprofit research organization, published a report saying that some mainstream banks are offering payday loans; short-term, high-interest loans that can take customers months to pay off. Payday loans have long been offered by non-banking establishments, such as shops that cash checks and money orders. But in recent years, well-known banks have also started offering them.
How it works
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.
Not the first
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.
The big banks
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.”
The Center for Responsible Lending
According to the CRL 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.
Who’s borrowing
Social Security recipients, whose financial situations can be especially precarious, make up nearly a quarter of payday-loan borrowers, according to the report.
Non-banking establishments
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.
Center for Public Integrity
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.
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