How Big Banks Finance Billions in Predatory Payday Lending

One of the more pernicious forms of predatory lending is payday lending, which involves firms giving usually low-income workers very short-term, high-interest loans in order to help them pay for necessities until they receive their next paycheck. While this may sound like a valuable service, the interest rates on the loans are so high that many borrowers get caught in a cycle in which they’re constantly taking out new loans to cover the new bills that they can no longer afford, due to having paid back the last loan.

In fact, the Center for Responsible Lending has found 76 percent of payday loan volume (and $3.5 billion in annual fees) is due to “churning,” which is repeat borrowing by customers who paid off their loan, but because of the interest, require another loan before their next paycheck. And according to Credit Slips’ Nathalie Martin, a professor at the University of New Mexico, the nation’s biggest banks are, in a big way, financing this predatory lending:

Major banks provide over $1.5 Billion in credit available to fund major payday lending companies.

– The major banks funding payday lending include Wells Fargo, Bank of America, US Bank, JP Morgan Bank, and National City (PNC Financial Services Group).

– All together, the major banks directly finance the loans and operations of (at minimum) 38% of the entire payday lending industry, based on store locations.

The major banks indirectly fund approximately 450,000 payday loans per year totaling $16.4 Billion in short-term payday loans.

– Wells Fargo is a major financier of payday lending and is involved with financing companies that operate one third (32%) of the entire payday lending industry, based on store locations.

All of these above mentioned banks received TARP bailout funds in 2008-09 and have benefited from accessing capital at exceptionally low interest rates from the Federal Reserve.

About 120 million payday loans are made annually in the U.S., with an average interest rate of 455 percent. One of the tasks of the new Consumer Financial Protection Bureau will be to get a handle on this sort of lending, once the Bureau gets past Republican obstruction, and it seems like chasing down payday lenders is going to lead the CFPB right to the front doors of some of the nation’s financial behemoths.