Around this time of the year, consumers turn to payday loan businesses to borrow enough money to pay for their credit card bills, cover their monthly expenses because of a lack of a paycheck related to the holidays and a broken household appliance due to the polar vortex that is being inflicted upon Canada and the United States.
On top of payday loan outfits experiencing tremendous business, they’re also setting up shop in low-income areas where people live, work and shop. Despite industry studies highlighting that a large majority of customers pay their loans on time and are satisfied with their decision, officials have been complaining that companies take advantage of the poor through high interest charges.
There are a lot of misconceptions about the payday lending industry and also an immense amount of information that was not known about the business. Adam Rust of Reinvestment Partners published a report last month titled “Connecting the Dots: How Wall Street Brings Fringe Lending to Main Street” that looks at payday loan franchises, including where the source of the money comes from, how they make their money and how much loans are being issued.
“This report draws a clear line between regulated financial institutions that hold millions of Americans’ deposits and the fringe lenders that routinely threaten their bank accounts,” Rust said in an interview with Consumer Affairs.
According to Rust’s research, payday lenders borrow money from major financial institutions, including the Bank of America and Wells Fargo, and pay a little more than six percent, while charging customers triple-digit percentages.
He discovered the findings in his report by listening in on quarterly conference calls and perused documents that companies have filed in the past couple of years with the Securities and Exchange Commission (SEC).
One page of his report shows a chart and it lists the various connections that Wells Fargo has. For instance, the fourth largest American bank helps fund Cash America, Liberty Tax, Jackson Hewitt, Advance America, First Cash Financial and many other payday and car title lenders, pawn brokers and rent-to-own enterprises.
It isn’t just Wells Fargo, however, that is involved in the payday lending industry. According to Rust, nine of the 10 banks affiliated with payday loan companies are national banks regulated by the Office of the Comptroller of the Currency (OCC). Approximately $5.5 billion in term loans and lines of credit are issued by financial institutions.
“I think it would impact the scale of financing they would be able to tap,” Rust explained. “With a reduced supply of funds and different terms I think they would end up paying more for it.”
In his conclusions, Rust noted that he would like to see policymakers apply pressure on banks to refrain from financing these sectors. There are also recommendations that payday lenders can charge less interest and make profits – many states are passing legislation capping interest rates.
“I think the evidence out there suggests that’s pretty hard,” Rust added. “The business model is troubled because the payday lenders have to work under the assumption they’re going to have significant loan losses. They’re setting aside lots of money with the expectation that an awful lot of these loans are going to go bad.”
There aren’t any official numbers, but the payday loan industry is valued at between $2 and $5 billion in places like Canada, the U.S. and Great Britain.