Who are the companies lending money to the payday loan lenders? They are the banks, of course. They are certainly not lending to families and small business. In fact, these are the same banks who were bailed out by the government. There are published reports where you will find quotes from these very bank lenders calling the payday loan industry a “bottom feeder” industry. So why are they doing business with them? For the huge profit. These banks are by no means hurting, but are making great profit at servicing this industry. Bank of America claims they treat “payday lenders as a discouraged industry.” But when their doors are closed is that really true?
These same banks have become slow to provide home loans for families and lend to small businesses, but instead have provided the financing for payday lending companies with whom they claim to look down upon and have distant dealings with.
This week in the Seattle Times, Bank of America stated “We treat payday lenders as a discouraged industry” “We have limited appetite for doing business with them.” But according to the chart below, you can see where a good portion of the money is going.
In their defense, banks, including B of A have begun to impose stricter rules for compliance . They do appear to try to choose reputable payday lending companies, including some large publicly traded companies that have good compliance, consumer disclosure and collections practices. Their claim is that they ‘strive to do business with only the most responsible of these lenders.”
When banks refuse to have reasonable lending terms for families and homeowners many have gone to nontraditional financial institutions, such as payday loan companies, for short term personal loans. In many cases the lending fees are high because of the banks finance fee to the lender. For many, these are the only financial institutions that are easily accessible are check cashers, pawn shops and payday loan centers.
So why deal with “bottom feeders”? Simply put, the banks are under scrutiny from the government and are losing normal streams of revenue that was enjoyed in the past because of new financial regulations. They have a strong need for new ways to make money and lending to payday lenders is one great resource for banks. Their comments about the industry being so distasteful, and how their appetite is limited in doing business with lenders really is a joke. The payday lending industry has brought them a great avenue for new revenue and they are enjoying it as the payday lending industry continues to move full speed ahead. It cannot be ignored that the payday lending industry is extremely lucrative especially where banks come in. For example, a normal $500 payday loan from the banks would come with an APR of about 287 percent.
‘Kevin Connor of the nonpartisan Public Accountability Initiative found that banks have extended $1.5 billion in credit over the past few years to publicly traded payday loan companies. They estimate available credit to the industry overall is as much as double that when privately held payday loan firms are included.’
Reports estimate that there are over 22,000 payday loan stores nationwide which make $30 billion in loans each year.
The banks borrow from the Federal Reserve at low rates, but last year the banks collected $70 million in interest payments from payday centers during the year of 2009 alone. At best their negative connotations on the industry that is helping sustain them is really all about reputation.