Monday, November 02, 2009

Big banks turn to high interest payday-loans to wring American consumers for last bit of lucre

(Online Journal) -- You remember how Wall Street was going to reform itself? Stop with the loans to borrowers who couldn’t pay them back and so on. Well, before you can say subprime lending bites it, some of Wall Street’s oldest games are back with some brand new names and games, for consumers, corporations and investors, sort of an equal opportunity casino, where everyone gets screwed.

For instance, some of old Wall Street’s good old gamers, Bank of America (BofA), Citigroup and JPMorgan Chase, have unveiled some lines of credit tied to those complicated, unpredictable things called derivatives. Not to be outdone, Wells Fargo and Fifth Third are rolling out payday-loan programs for cash-poor consumers, just making it paycheck to paycheck. Imagine that. What will they think of next? Well, others are pitching new, highly risky “structured notes” to small investors. Ain’t that swell?...

Let’s look at some of Wall Street’s new names for the old games. Lenders generally tie corporate credit lines to short-term interest rates. But now Citi, JPMorgan Chase and BofA, to mention a few, are tying credit lines to both short-term rates and the nefarious credit default swaps (CDS that brought down AIG Financial Products which insured them). These are high-risk and intricate derivatives that are supposed to behave like “insurance,” paying off the owners if a company defaults on its debt. Of course the “Too Big To Fail” three declined to comment on resuscitating these lime-pits. But trust them to try them...

At the other end of the borrower rainbow, big banks are offering another pot of controversial gold: payday loans, whose interest rates can zoom as high as 400 percent, yes 400 percent. In the past, the market was characterized by small non-bank lenders (loan sharks), mainly operating in poor urban areas and offering customers advances on their paychecks (and broken kneecaps if they didn’t pay back the vigorish and/or the loan). But now big lenders Fifth Third and U.S. Bancorp started offering the old games (loans to the strapped), while Wells Fargo works to promote its payday-loan program. In fact, more big banks are jumping in the market as a flurry of recent usury laws broke the smaller players’ backs...Cont'd...LINK

2 comments:

Chris Mullen said...

I really dislike having to use these payday loans, but it is sometimes necessary. I would rather pay the fees than sit in the dark if I don't pay my power bill!

Anonymous said...

Although your odious tone may be convincing, you clearly failed to do your research on either the payday loan industry, comparable business models or demographics of the average customer. Unfortunately, "consumer advocates" such as yourself and the Center for Responsible Lending have to distort the truth and hang onto misrepresentations in order to prove a point. If it takes extreme exaggeration to make ALL lenders appear in a negative light then maybe your argument isn't all that strong. For starters, no lender, by law can charge a 400% interest rate, however, lenders are required by law to represent their product in terms of an Annual Percentage Rate even if it's only a one week loan. That certainly doesn't make sense to me but that's the way it is. So, if an individual takes out a one week loan with an APR of 400%, they would have to take the loan out every week for an entire year. This is the scenario in which a 400% APR is applicable. Everyone would be quoted the above APR even if there's a 6 loan limit in their particular state. Lenders attach a higher APR to these loans because they are higher risk and have to anticipate the losses associated with offering loans without credit checks. My opinion would be that if you've never been in a situation in which to have ever needed to use such a product then you really shouldn't have the right to claim that you know what's best for people who are in a bind. I'm an advocate of educating people on their choices and letting them make their own decisions. We're in the predicament that we're in now because there seemed to have been a universal lapse in disclosure within the financial services industry. It's not because people don't have the capacity to make their own decisions.