By Charlene Crowell

(NDG Wire) In a tight recessionary economy, business expansion and profits are usually in a downward cycle. But according to a report released just a few days ago, the payday lending industry has found a ‘golden goose’: major banks. As the new report states, “Ultimately the big banks that borrow at near-zero interest rates from the Federal Reserve are not far removed from the payday companies that lend money at 500 percent.”   

Entitled The Predators’ Creditors, the report traces connections between the largest payday lenders and Wall Street banks. Report findings span financing arrangements, leadership ties, investments and shared practices. It is a joint publication from the National People’s Action (NPA), a network of community power organizations across the country that work together for economic and racial justice, and Public Accountability Initiative (PIA), a nonprofit, nonpartisan watchdog organization that publishes investigative reports.   

In a recent Los Angeles Times interview, George Goehl, NPA executive director spoke to the developments that led to the new report.

“Americans have seen their assets dwindle and dwindle. We cannot have the big banks that we helped bail out actually play a strong role in continuing to strip wealth away from ordinary Americans.” 

The report found that while small businesses and individuals have struggled to get affordable loans, a significant portion of 2008 taxpayer bailouts to large Wall Street banks were used for the benefit of payday lenders. In fact, a few big bailed out banks that also heavily finance major payday lenders received $105 billion in TARP (Troubled Asset Relief Program) funds. In just one year, 2009, payday lenders paid these banks $70 million in interest. That amount was according to the report, a “sign of how much banks are profiting by extending credit to these companies.” 

While the report notes that not all banks lend to the payday industry, there are strong financial connections with many of the nation’s largest banks such as Wells Fargo that was found to lend more to payday loan companies than any other big bank. Other banks cited in the report were Bank of America, Credit Suisse, JP Morgan Chase, Fifth Third, Union Bank of California and US Bank.

Creditors’ Predators also found that major banks and their subsidiaries have begun investing in the industry. According to the report, as of June 30, 2010 Wells Fargo had a $52 million investment in Dollar Financial. Banks also benefited other large payday lenders such as Advance America, Cash America and EZCorp.

Additionally, the report details how several current and former executives at major Wall Street banks hold leadership roles with some of the largest payday lenders. The board of Advance America, the nation’s largest payday lender, includes multiple bank executives. And Advance America was not alone. Goldman Sachs was a 10 percent owner of Dollar Financial Group at the time of its initial public offering (IPO). Before the company’s IPO, two senior Goldman Sachs executives were also board members.   The report suggests that these multi-layered relationships strongly influenced the payday industry’s growth.

If one considers the dual developments of financial deregulation coupled with generous bank financing the rapid payday lending industry growth becomes more understandable. In 1995, there were 2,000 payday stores nationwide. Today, there are 20,611 stores nationwide, as common as McDonald’s and Burger King Restaurants.  

For Uriah King, CRL’s vice-president for state policy, there is also a broader economic question to consider. .

“Is it really helping our economy when the federal government is lending at less than one percent and struggling families are borrowing at over 400 percent?”, asked King.  “How in the world are those consumers going to lead us out of the potential double dip recession?

Predators’ Creditors reached a similar conclusion. “Instead of wading further into the business of predatory payday lending, big banks need to stop financing these lenders and instead lend to businesses and individuals that create wealth, rather than destroy it”, concludes the report.  

According to the CRL’s independent research, also cited in the new report, very seldom are payday borrowers able to fully repay the small dollar loan within two weeks. As a result, the profitability for payday lenders is repeat business or ‘churning’ the practice of quickly taking out a new loan after an earlier one is repaid.  

Additionally, CRL has also determined that many of the worst payday abuses are almost exclusively in southern states where median incomes are modest and minority populations are significant. The states with the highest number of payday stores per household are: Alabama, Louisiana, Mississippi, Missouri, South Carolina and Tennessee.   

To date, a total of 16 states and the District of Columbia have limited payday interest to double-digit rates: Arizona, Arkansas, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont and West Virginia.

 Charlene Crowell is the Center for Responsible Lending’s communications manager for state policy and outreach. She can be reached at: Charlene.crowell@responsiblelending.org