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February 24, 2013 12:12 PM Internet payday loans and the major banks that enable them: a growing scourge

By Kathleen Geier

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.

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

Comments

  • Eric Wilde on February 24, 2013 2:00 PM:

    I really like the idea of government administered micro-lending.

    As a skilled worker, I could put this to good use starting my own company. It speaks to the entrepreneur.

    As a humanist, it speaks to my policy objectives of opportunity for all and for those down on their luck.

  • DavidNOE on February 24, 2013 2:30 PM:

    Lots of luck getting anything like that passed until you have Democratic supermajorities in both houses of Congress and a Democratic president, and even then what are the odds that the Supreme Court wouldn't find it unconstitutional? A situation where poor people are miserably exploited is a feature, not a bug, for the GOP and its masters.

  • c u n d gulag on February 24, 2013 3:00 PM:

    What DavidNOE said!

    And it's not like ripping of poor and middle class people is something new.
    Or blaming them, either!

    Look at what our fine banking and financial institutions did leading up to the Bush Depression.
    And then the Republicans blamed the poor people for signing mortgages they couldn't afford, but that the banks KNEW they eventually couldn't afford.

    It's much easier to blame the people who didn't know what they were signing, than to blame the ones who held out the papers to be signed, and knew what was in them.

    Most of me hopes the thing never comes to pass what the other part of me wants:
    Guillotined heads on pikes.

    But if it happens, I'd like to live long enough to see it - just not being there live, thank you.
    Or...
    Hmm...

  • Anonymous on February 24, 2013 5:11 PM:

    I'm not at all surprised to see Senator Jeff Merkley involved in this. As Speaker of the Oregon House (his job before US Senator) he passed bipartisan legislation to limit the interest rate of payday loans in our state. So of course he's protecting his own constituents from the internet lenders.

    How shameful for those big banks to take further advantage of the poor. I wish folks would close their accounts with them. I am not a customer of theirs purposefully but our new mortgage was sold by the small bank we used to Wells Fargo which makes me very unhappy. We can refinance with another entity at some point but have no control over where our mortgage ends up. Very frustrating.

  • nancy Cadet on February 24, 2013 7:15 PM:

    It' s important to expose and regulate these fraudsters out of existence. Big banks again!
    So why is our US Justice Dept going after Lance Armstrong rather than these guys?

  • smartalek on February 25, 2013 6:19 AM:

    "'The industry is not in a position to monitor customer accounts to see where their payments are going,' said Virginia O'Neill, senior counsel with the American Bankers Association."

    ...except, of course, when the customers' payments are going to internet poker or other gambling sites, proscribed groups ("Friends of Hamas," anyone?), or anyone else our current, past, or future administrations might decide not to approve of.
    Hard to tell which is the higher level of stupid -- what they are, or what they clearly think we are?
    This is apparently one of those famous 96% of liars, I mean lawyers, who give the rest a bad name.

  • Kevin (not the famous one) on February 25, 2013 3:48 PM:

    c u n d gulag @ 15:00
    - just not being there live, thank you.

    I've thought about that briefly and somebody would have to monitor the deed. Because these zombies will be back to rip us off again, they never die. They are to big to die/fail.


    Anonymous @ 17:11
    You'd need some sort of specialized addendum that causes the note to be void/toxic upon the assignment, sale or delegation of the note. And good luck with that!

    nancy Cadet @ 19:15
    So why is our US Justice Dept going after Lance Armstrong rather than these guys?
    Any individual is easy and doesn't have a chance. Our public servants are owned by these guys so relief from onerous terms will never happen.

    Morgage
    verb
    to place under advance obligation; pledge: to mortgage one's life to the defense of democracy.

    Old French mortgage, equivalent to mort dead (

  • Monica on February 26, 2013 2:36 AM:

    These people are just hilarious. It has been long time since I stopped paying attention to what all our highest authorities say. They are really good at promising things but so bad at actually keeping them. As for a paydayloan industry, I personally do not care if they exist or do not. I have taught myself to stay away from this business no matter what. They are not the root problem: unemployment and low wage jobs are the problems which lead people to cash advance stores. I am not denying the fact that some go there simply because they have very poor money management skills. So yeah, payday loans cannot be a problem, they are the consequences.

  • Reginald Conway on March 07, 2013 11:01 AM:

    There are a few things that could have been better researched going into this piece. For example, the state of California has already acted on some of this. Even if an offshore lender tries to get you into the debt trap, they are not legally allowed to make you a loan without a lenders' licence number and you owe them no interest.

    To prove this theory, I actually recently went to MoneyMutual.com and petitioned for a loan. A company shortly contacted me offering me 1000 dollars (I had said I only need 300, the minimum, but they want to put the pressure on). After the first finance fee of 45 dollars, I informed them they were not legally licenced to lend in the state of California (they also had a desist and refrain but I didn't even have to go there), so they were only allowed to collect 255 more dollars.

    They attempted to withdraw an extra 390 dollars from my bank but after a quick stop payment (BofA waived the fee), they contacted me with a payment plan of 255 dollars sent by money order whenever I like.

    I of course don't recommend this course of action to anyone, but it is nice to know that at least in the state of California these internet lenders who operate offshore and are not licenced are completely out of luck.

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