Why Payday Lending is Still Thriving
Despite bans on the practice in 15 states, payday loan companies have thrived, finding a powerful ally in major banks like JP Morgan Chase and Wells Fargo. That is the finding of the Pew Charitable Trusts in the second edition of their Payday Lending in America series.
Many of the the payday loan companies have found ways around the bans, moving their operations online in friendlier states, or to places like Malta and the West Indies where they can avoid caps on interest rates.
According to the report, nearly 12 million Americans take out payday loans each year, and the average borrowers end up indebted for five months, paying $520 in finance charges for loans averaging $375. Most borrowers are desperate for the quick cash, and 58% have ongoing money troubles, rather than temporary emergencies.
While 55% of these borrowers are white, CNN points out that the demographic groups that are most likely to take out a payday loan include African-Americans, people earning less than $40,000 per year, divorcees, and people without four-year college degrees. For states without a ban on the practice, companies establish storefronts in neighborhoods whose populations fit these descriptions, preying on the most vulnerable, least financially educated customers.
In states with a ban on physical storefronts for the practice, online payday loans are thriving, often carrying even higher fees and interest rates than their brick and mortar counterparts. Whatever the source, all of these loans promise quick cash with no credit checks, and a two week repayment window, which seems relatively painless, until customers discover that the loans have been continously renewed and accompanying high interest rates and fees are being automatically withdrawn from their bank accounts.
This is how the big banks get involved. They don't originate the loans, but do allow lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. According to Josh Zinner, consumer advocate and co-director of the Neighborhood Economic Development Advocacy Project quoted in the New York Times, “Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate.
Even borrowers that are able to repay often find that their supposedly safe banks have authorized the payday loan companies to renew the loan and continue withdrawls, even after the customers have canceled them. The New York Times notes that customers must contact the online lender at least three days before the next loan withdrawal. Otherwise, the lender automatically renews the loans at least monthly and withdraws only the interest owed, even though, under federal law, customers are allowed to stop authorized withdrawals from their account.
Subrina Baptiste and Ivy Brodsky, two women interviewed in the Times article on this practice, tried multiple times to close their accounts. Baptiste received two loans from online payday services with interest rates of over 500%. Not only do these high interest rates violate New York State law, but when Baptiste asked Chase to stop the payments, she was told to contact the lender. The account was finally closed three months after she asked to stop the withdrawls, though not before she incurred extensive fees. Brodsky also used an online lender, and tried to close her account in March 2012. The bank kept it open for two more months, long enough to rack up overdraft charges and other fees.
Pew found that there is also intense support for more regulation; borrowers favor it by a 3 to 1 margin. But further protection from the practice, and in particular from the major bank's collaboration, may have to come at the state level. The Times notes that Minnesota's Attorney General has already settled with one company, and Illinois is starting a similar investigation. The fight to regulate this industry will be a long one, partly because of different laws in different states, but also because, as Arkansas's Attorney General points out, it's hard to fight Internet firms without a physical home.
At the same time, the Online Lenders Alliance is lobbying for legislation that would create a charter for the entire industry. It remains to be seen how much congressional support there is for such a bill, or whether, even it passes, whether legislation means more power for regulators, or giving legitimacy to a service that fifteen states have decided shouldn't exist in the first place.
