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The Guardian: Banking while poor: how banks profit from predatory payday lending

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The Guardian

By Sadhbh Walshe

I have a friend who is quite rich. Like a lot of rich people, he’s very careful with his money, by which I mean that he’s constantly shifting it around to make sure it’s maximizing its potential.

Sometimes, all this shifting about will mean his checking account will be overdrawn and his bills that are on direct debit should, in theory, not be paid. This, he laughingly assures me, “will never happen”. His bank will not only cover his error, but they will apologize to him for the inconvenience.

Such is the privilege of banking while rich in America. Banking while poor, however, is a very different matter.

Money will still be shifted around – but not in a way that benefits the account holder. It’s no secret that bankers love to enrich themselves off the backs of their poorest customers – the subprime mortgage scandal being a prime example of this. The latest scam the banks have wrapped their tentacles around is exploitative payday lending schemes that virtually guarantee their poorest customers will become poorer still.

Why bankers would want to treat rich and poor clients differently is obvious. What is less so is why, in the post taxpayer bailout era, bankers still appear to be making their own rules.

The New York Times reported recently on how the major banks are enabling payday lenders to give out short-term loans with interest rates sometimes in excess of 500%. These kinds of loans are banned in 15 states (and should be immediately banned in all 50), but thanks to the banks’ facilitatory efforts, lenders have been able to bypass the regulations that are in place. That enables them conveniently to withdraw payments automatically from customers’ accounts even in states where the loans are outlawed. Customers who try to stop the withdrawals, or even close their accounts, more often than not find themselves banging their heads against a wall – all the while, getting poorer.

Needless to say, the kind of customer who takes out a payday loan is not someone with pennies to spare to pay fees and fines they had not anticipated. The Pew Center on the states has compiled several studies on how payday lending works and found that over 69% of borrowers take out a loan to cover day-to-day expenses rather than one-of-a-kind emergencies. The average loan is $375 and the entire loan plus interest is due to be paid back within two weeks. The thing is, if you are so broke that you have to borrow a couple of hundred dollars to keep yourself going until your next (meager) paycheck, then naturally, it will be impossible for you to pay back the entire loan plus interest within that two weeks.

The lenders know this, of course, and that is why they structure the loans in such a way that will maximize their profits when the debtor is unable to pay on time. According to the Pew Center’s Alex Horowitz, the average borrower can only afford around $50 from a two-week paycheck to pay towards a loan. In these cases, the loan will be extended and interest fees and/or any penalties will be automatically withdrawn from the borrower’s bank account. Over the course of a year, the borrower will typically repay the original loan four times over. And that is before the banks get their cut.

The Neigborhood Economic Development Advocacy Project (NEDAP) has brought alawsuit against JP Morgan Chase on behalf of two borrowers who allege they incurred excessive bank fees on top of the interest and fines imposed by the lenders. The plaintiffs, Subrina Baptiste and Ivy Brodsky, both tried to have their bank stop the withdrawals, but were allegedly told by Chase that they would have to contact the lender, even though federal law allows the customer to stop any automatic withdrawals. Brodsky went to her branch and tried to close her account, but according to her deposition, Chase left it open and she ended up incurring $1,523 in bank fees, for extended overdrafts and insufficient funds. In Ms Baptiste’s case, Chase allegedly charged her $812 in fees and recouped $600 from her child support payments to defray those charges.

Responding to the New York Times’ reporting at an investors’ meeting this week, JP Morgan’s chief executive, Jamie Dimon, called his bank’s involvement with the practice “terrible”. He pledged to reform Chase’s business relationship with payday lenders.

The banks would like people to think that they have no part in this sickening scheme beyond processing fees their customers should be aware of. As it happens, they are not only involved at the back end of these shady deals, but also up front and somewhere in the middle. A report issued by the National People’s Action titled “How the Biggest Banks are Bankrolling the Payday Loan Industry” details the cosy arrangement between payday loan sharks and their respectable allies in the banks. They found that while “some banks do not lend to payday lenders due to ‘reputational risks’ associated with the industry”, several of the major banks do. In addition to lending to the lenders, some banks make payday loans of their own, called direct deposit advances, with the entire loan, plus interest, due (and duly withdrawn) on the borrower’s next payday.

So, the banks are mean and nasty and we know they are mean and nasty, but the question is why we let them get away with it. Well, their paid-off friends in Congress have a lot to do with that. Nobel prize-winning economist Paul Krugman wrote recently about how Senate Republicans, in particular, are doing everything in their power to kill off the Consumer Financial Protection Bureau, despite the fact that – or, more likely, because – it is one of the few good things to have been emerged from the 2008 financial crisis. It must be clear to everyone by now that banks will never behave morally as a matter of course and that tough regulations and penalties are the only way to keep them in check.

Until we have those in place (and don’t hold your breath), all I can suggest is that if you need a loan, try to borrow from a friend. And unless you are loaded, don’t assume your banker is one of them.

Editor’s note: This article has been amended to reflect two corrections: the N in NEDAP stands for ‘Neighborhood’, not ‘National’, and Ms Brodsky’s first name is Ivy, not Iva.