Today’s New York Times features an illuminating, and depressing, article about the growing scourge of internet payday loans. Payday loans, in which sleazy operators exploit poor people by sucking them into loans with outrageous interest rates, have long been a scourge in many low-income communities. Some states have finally begun to crack down on these predatory lending practices, but bottom-feeding lenders have discovered a loophole: they’ve begun to set up shop overseas and offer loans over the internet. This enables them to evade state laws which put a cap on interest rates.
The Times reports that in 2011, internet payday loans made up 35 percent of all payday loans, and that by 2016 that share will grow to 60 percent. The Times article relates a number of horror stories about these loans, including one woman who took out internet loans with annual interest rates of 730 percent and 584 percent. Those rates are far above the rate cap set by law in the woman’s home state of New York, which is 25 percent.
The focus of the Times story, however, is not only the issue of overseas lenders skirting state and local laws, but also the role that major banks like JPMorgan Chase, Bank of America and Wells Fargo play in enabling these abusive practices. Payday lenders would not thrive without the major banks, which enable the lenders to automatically withdraw payments from their customers’ accounts. Indeed, the Times reports that these banks allow the payday lenders to automatically withdraw funds even when their customers have demanded that they stop the withdrawals.
So what do the major banks get from participating in payday loans? It’s simple: it’s all about the overdraft fees. The automatic withdrawals frequently result in overdrafts, and that can add up to big bucks in overdraft charges for the banks. The Times article relates one particularly nightmarish story of a woman who visited her local Chase branch and closed her account — or at least, she thought she closed it. But it remained open, and Chase ended up charging her $1,523 in overdraft fees. Overdraft fees running into hundreds or even thousands of dollars a year are not uncommon. The payday lenders are by no means the only bloodsuckers here.
What can be done to end these outrageous abuses? There are efforts afoot in Congress to curb these practices. Last year, Senator Jeff Merkley introduced a bill that would force lenders to obey the laws of the state where the borrower lives, instead of the state or country where they’ve set up shop. Merkley’s legislation would also make it easier for borrowers to cancel automatic withdrawals. State officials have also been going after internet lenders that make loans in states where they are banned, but they’re having a hard time holding these companies accountable. Arkansas’s attorney general points out that the internet “knows no borders… [T]here are layer upon layer of cyber-entities and some are difficult to trace.”
In light of this growing problem, I’d also like to draw attention to an interesting suggestion David Dayen wrote about in Salon earlier this week. Noting the ginned-up “austerity crisis” being faced by the U.S. Post Office, Dayen proposes “kill[ing] two birds with one stone” with an idea that would
make money for the Postal Service and level the financial playing field for some of the most vulnerable Americans. Namely: We should allow the Postal Service to return to the practice of offering simple banking services.
As Dayen notes, millions of Americans are either unbanked (they have no access to the financial system) or underbanked (they rely on alternative providers like cash checking places or payday lenders, which frequently are exploitative and unscrupulous). But many countries empower their local post office to offer citizens basic banking services. Such systems have been successful and wildly popular, so why not here? Dayen says that this type of system, if enacted in the U.S., could shield low-income consumers “from the most predatory practices and extend saving options to all reaches of society.”
It sounds to me like this is an idea whose time has come.
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