Payday lenders, owners of the ubiquitous check-cashing store and scourge of the working poor, have a new partner when it comes to making sure people pay their outrageous, often illegal interest rates: the big banks.
A story in today's New York Times, outlines how payday lenders, now illegal in several states and closely regulated in others, have moved both offshore and to the Internet to continue offering dangerous short-term loans with interest rates that sometimes exceed 500 percent.
When a borrower doesn't pay on time, the big banks, including JPMorgan Chase, Bank of America and Wells Fargo, allow the lenders to withdraw payments from the borrower's bank account. These payments often exceed the amount in the account, leading to overdraft fees and a huge payday for the banking giants. The Times writes,
For the banks, it can be a lucrative partnership. At first blush, processing automatic withdrawals hardly seems like a source of profit. But many customers are already on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars.
While states like New York have made payday lending illegal, lenders have migrated online, basing themselves in havens like Belize, Malta, and Costa Rica. Offering quick approval with no credit checks, the lenders lead borrowers into an almost endless runaround while the big banks siphon their savings, and, in the case of one borrower interviewed by the Times, begin to take away child support income. Because they are based offshore, the lenders aren't beholden to the laws of the borrower's state.
On top of that, the large banks involved have denied some requests for borrowers to stop the withdrawals from their accounts, even though federal law protects that request. Consumer advocates are focusing on the role of the banks in order to stop the predatory practices of the payday lenders, however the Online Lenders Alliance, the lobbyist organization for the lenders, are promoting proposed legislation that would grant them a federal charter.
Big banks must rely on these types of scams to just barely stay afloat because as the Bloomberg editorial staff pointed out earlier this week, they're basically broke without huge taxpayer subsidies.