In the heady and panicked months following the financial crash of 2008, the US government bailed out a handful of the United States’ biggest financial institutions. Among those were the investment banks Goldman Sachs and Morgan Stanley, which together received bailouts and loans totaling over $100 billion.
Among the terms of the bailout was that they both become bank holding companies, which meant they had the authority to own banks. While this may seem like an expansion of influence, the move has actually placed the previously independent investment banks under new regulation and supervision. It also opened the door for the companies to enter further into consumer lending than they could have as traditional investment banks.
This summer, news broke that Goldman Sachs would be taking advantage of its “bank holding company” designation to branch into the online loan market. According to The New York Times, which reported the story on June 15, the bank will be moving to offer loans of a few thousand dollars through a yet-to-be-launched online portal.
The consumer base will be significantly different the bank’s usual clientele – “the powerful and privileged,” as The New York Times called them.
But offering lower-cost loans to a broader group of people may not be as far from Goldman’s usual dealings as it seems at first. In fact, some loan industry advocates say online loans can often be predatory and underregulated – just like the pre-2008 housing market.
“Goldman was one of the prime movers behind the selling of mortgage-backed securities,” said Liz Ryan Murray, policy director for National People’s Action, a network of local organizing groups that are running a campaign against predatory lending.
Online loans can often be predatory and underregulated – just like the pre-2008 housing market.
Though the bank itself hadn’t directly seeded high-interest mortgages into communities of color around the country, like Countrywide or other banks that offered mortgages directly had done, Goldman Sachs had profited from selling subprime mortgage-backed securities – and from betting on the failure of these same products. “That was one of the reasons the [financial] crisis really took off,” Murray said.
“Goldman Sachs certainly doesn’t have a track record of responsibly offering products to consumers, and their impact on the housing market for regular people has been devastating,” Murray added. “We can’t really look at this for a lot of optimism.”
The online loan market has been a significant growth industry. Like many other tech versions of traditional products, the basis of the industry is to tap into a market that’s already available but without the overhead costs associated with, in this case, a storefront lending operation.
“We define an online loan as a loan where the application is taken online and the funds are dispersed online, without a person having to fax any documents or appear at a storefront,” said Tom Feltner, director of financial services at the Consumer Federation of America, a Washington, DC-based consumer watchdog group.
That’s where the big differences between online and in-person loans end – they are differences in form, not in substance. In both storefront and online operations, how transparent a lender is about interest rates and repayment options can vary widely.
Predatory Lending Practices
The personal loan business – where money is received in a lump sum, with fixed monthly payments – can encompass both long- and short-term credit products and are often marketed heavily to financially vulnerable consumers.
The most infamous of short-term or installment lending products are payday loans, which are sold to consumers as quick-fix borrowing but often carry interest rates upward of 300 percent and use tactics frowned upon by the Consumer Financial Protection Bureau, including using vehicles as collateral or failing to underwrite for affordable payments.
Neither Goldman Sachs nor the Consumer Financial Protection Bureau replied to requests for comment.
Online loans don’t necessarily avoid predatory practices. “There’s very little differentiation in price between a storefront and online loan,” Feltner said. Instead, the rates offered by loan companies depend both on an individual bank, and on broader regulation.
Djuan Wash knows all too well the unseen pitfalls that a payday loan can create. In 2013, Wash, 31, left his job working in career development at the Los Angeles Film School to move to Wichita, Kansas, and care for his ailing mother.
Where Goldman Sachs’ new lending venture will fall in the landscape of predatory – or potentially helpful – loans remains to be seen.
Wash wasn’t a stranger to using payday loans occasionally to fill gaps in his monthly budget – he’d borrow $100 here, another $100 there, and pay them back before they caused him any significant trouble. This is typical of payday loan customers – the loans are targeted at people getting by from paycheck to paycheck.
But the spring of 2014 turned out to be different. Only months after Wash moved to Wichita, his mother passed away. Grieving and unemployed, he turned to payday lending. “I was on unemployment and needed to get some money, and I didn’t want to go to family, so I borrowed $500,” he said.
But it took longer than he expected to get a next job, and like millions of other Americans, Wash quickly found himself facing wage garnishment and interest payments at more than double his loan. Eventually, owing more than he had ever taken out and unable to pay the ballooning interest payments with no income, Wash was sued by his lender in July 2015. When he spoke to Truthout, Wash had found a position as the director of communications at Sunflower Community Action, a group affiliated with National People’s Action, and his lender was garnishing his wages at 25 percent.
“I think a lot of people are aware of the negative consequences of payday loans, but they are in situations where they don’t have anything else to turn to,” Wash said. “It is really a terrible situation.”
His experience – of wage garnishment, significant interest payments and little or no responsiveness from the lender – isn’t unusual. On June 25, the Consumer Financial Protection Bureau published over 7,000 narratives of consumer complaints against financial corporations. Among those are complaints against online lenders, primarily those that deal in payday loans, alleging that a lender purposefully rejected a person’s card, didn’t take changed financial circumstances into repayment consideration and collected loans with significant details missing.
The Challenge of Regulation
Where Goldman Sachs’ new lending venture will fall in the landscape of predatory – or potentially helpful – loans remains to be seen. Liz Ryan Murray of National People’s Action points back to the increased regulation offered by the bank holding company designation. The primary regulation used by the Federal Reserve when overseeing bank holding companies is regulation Y, which establishes the minimum ratio of capital to assets that a bank may hold and creates rules for the oversight of potentially risky investments.
She also notes that oversight of payday lending is moving forward. The Consumer Financial Protection Bureau announced in March that it would be considering a regulatory framework for payday loans, which could include stipulations that a lender must determine whether a person can repay the loan before offering the money and must limit the number of loans an individual borrower could take.
Tom Feltner’s ideal set of rules would include the creation of a competitive marketplace for loans – something that he says may be a positive impact of Goldman Sachs entering the loan industry – along with loan companies using an objective measure to asses whether someone can afford to pay back their loan.
As for Djuan Wash, he’s nearing a payment of over $1,500 on his original loan of $500, and he is still paying. “If I had to do it all over again I certainly wouldn’t have taken out a loan,” Wash said. “They don’t give a damn that I can’t pay my bills because of their [wage] garnishment.”