Wednesday, December 12, 2007

Where’s The Garlic When You Need It?

In what is sure to become the new profit center for “legitimate banks”, many are now salivating at the check cashing/payday loan market. These customers were forced to go to the blood suckers at the payday loan offices because the legitimate banks had shunned them or did not have branches in their neighborhoods. Well, now that the market has ballooned into a 10 billion dollar a year enterprise guess who wants to reach out to these poor underserved consumers? The same banks that were under serving them, talk about the ultimate irony. The good news is that you escaped the werewolf; the bad news is you did it by running into Count Dracula’s castle and its after dark.

WASHINGTON — After years of watching check-cashing stores and payday lenders steal potential customers, banks and credit unions are beginning to offer the same services and products, but in more affordable and responsible ways.

The movement comes as federal bank regulators focus their attention on the estimated 73 million Americans who are underserved by the nation's banking industry.

The hope is that mainstream financial institutions can convert the check-cashing customers and payday loan-seekers of today into the sought-after depositors and low-risk borrowers of tomorrow.[1]

Here is where it gets good, the banks and Feds would have us to believe they are doing this to drive the costs of these services down. I’m sorry, but when have banks ever reduce the costs of their services? They are tired of letting the other loan sharks make a killing and now they want to muscle in and legitimize the fleecing. Using the excuse that the current purveyors of these services are overcharging, these legitimate banks relying on their lobbyists and legislators will low-ball the competition or buy them out and have total access to these billions of dollars. Unfortunately for the current industry it won’t be hard; they have done everything in their power to undermine themselves. They have been charging exorbitant fees, they have treated their customers like crap, and they have resisted any changes to their business model.

In what has to be the most insane marketing campaign I have ever witnessed they are now running an ad by the “Community Financial Services Association Employees” stating that they are now going to make their rates understandable to their customers, no more small print. I don’t know how you can hide 400% annual interest in fine print, but I guess you can. Why is it whenever an industry gets in trouble they come out with these “feel good” ads about how they are just trying to help out the community? These people are predators, pure and simple. They prey on the low to middle income in an effort to keep them in the high cost borrowing cycle.

For those that don’t know the program, it works like this. People who ordinarily are not able to qualify for bank or credit union loans, (eventhough many have accounts at these institutions) they go to these payday or title loan places (which usually double as check cashing centers) where they are offered small cash loans. The consumer will apply for the loan and upon approval will present the lender with blank personal checks that will be deposited on the day the borrower is paid. Here is the kicker, the annual interest on these loans average about 400% of the principal; because the lender only talks about the two week rate the consumer is usually unaware of the astronomical rate charged. The borrower can continue the loan at the maturity date by simply paying the interest of the loan. This is how the cycle begins, the borrower rather than paying off the principle will continue to pay the interest over and over or will pay off the loan only to have to take out another loan because they cannot afford the loss of income.

But today, Mary Cheh brought three former payday loan employees who said they were in business to hook low-income wage earners into a cycle of debt. This is Mike Donovan. He resigned yesterday a Check 'n Go District Manager.

Mike Donovan, Former Payday Loan District Manager:

“The average Check 'n Go customer in Washington, D.C. is continuously in debt to the company for over a year. We train our sales staff to keep customers dependent. The repeat borrower is vital to our business model.”

Bill Harrod was a payday loan manager for 10 months and says he was trained to target a specific community.

Bill Harrod, Former Payday Loan Manager:

“My company was deliberately targeting minority people for a continuous loan process that they would never, ever get out of. “

And Cameron Blakely is a former payday loan store manager.

Cameron Blakely, Former Payday Loan Store Manager:

“Our borrowers were like indentured servants. They work, they work, but each payday we claimed a piece of their paycheck. Every paycheck.”

The Community Financial Services Association, the payday loan association, says today's allegations do not represent the experiences of millions of customers and employees in payday stores across the country.[2]

These types of predatory loan practices are not unusual, but are indicative of this industry. Once again wealth cannot be gained by low income workers because the cost for their services is always higher than the public at large. They pay more for everything from food due to a lack of grocery stores, check cashing due to a lack of banking services, and transportation due to credit difficulties.

While I am no fan of these types of lenders, I am not naïve enough to believe that bankers will come in and make it all better. The problem is that they see an opportunity to take advantage of a consumer that will not complain or call their legislator. This is the same industry that is front of Congress regularly for high interest and bad loan practices on credit cards and other service fees. Now we are to believe that they won’t bring that same greed to an industry that has been allowed to bleed communities dry? This is a travesty, the consumers will still be fleeced but by “legitimate banks and credit unions”, that ought to make them feel better.

There is a system being deployed in many Third World countries where low income or even poor people are given small cash loans at interest rates that are low to help them start up small home businesses or for education. There is even a program at Kiva Org. where you can help provide the proceeds for these loans. They call them micro-finance loans and they are given to people to help them begin the process of rebuilding their lives. They are being utilized all over the world, except here. Here we have low income people being fleeced by greedy corporations, in another instance of transfer of wealth from the needy to the greedy. Where is the garlic for these blood suckers when you need it?

[1] http://www.mcclatchydc.com/226/story/22683.html
[2] http://www.nbc4.com/consumer/14100234/detail.html

6 comments:

Anonymous said...

Bravo!

I have seen a few of these "the banks are coming to save us articles" with no one to say "but what big teeth you have grandma"!

The difference between rich and poor, the rich have more options.

Thanks for bringing common sense to something. 'Cause in Amerika, common sense was soldout a long time ago...

gogirl said...

I agree with most of what you have to say. The fact is that banks and credit unions turned their backs on the small check cashing and loan customer in the 1980's after banking deregulation allowed these guys to forego offering these products in lieu of higher profit fee based products, like overdraft protection, NSF fees, late payment penalties on credit cards, etc. Everybody has a bad bank story, usually having to do with bad service or hidden fees.

What I will disagree with you on is the comment that because payday loans are short time loans customers don't know the interest rates. Payday loans have flat-one time fees (usually around $15 per $100 borrowed), interest doesn't accrue, and the fee is paid up-front. The borrower herself writes the amount of principal and fee on her own post-dated check in order to even get a loan. So, if what you're saying is that people don't know the cost of a payday loan and are somehow "dupped into taking out a loan", I disagree.

If you're saying borrowers don't know what that a $15 fee on $100 over 14 days = triple digit APR, I also have to disagree. Federal Truth in Lending laws require that disclosure in a separate box on the front of every payday loan agreement.

If you're saying that people don't think about the cost of short term credit in terms of APR, I will give you that. It's abstract and unevenly applied. For example, banks don't have to disclose their $25-$35 ODP charges on let's say a $48 check for the day it was overdrafted as having an APR in the thousands. Think about that!

Borrowers understand the actual dollar cost of credit. Commentators should really understand what an APR means, and what it doesn't. And we all should understand our own credit scores and the effect that has on the price we pay for credit. Thanks!

Forgiven said...

I disagree gogirl,

The majority of people targeted by these lenders are not credit savy and many are so happy they can secure a loan the rate could be 1,000% and they still would take it. It is a predatory practice any way you slice it and you can't excuse what they are doing...

gogirl said...

Well, forgiven - define "predatory" and then we can have a discussion.

If you think triple digit APR is "predatory" then you need to include overdraft protection, credit card late fees, mortgage lending and practically every form of credit that currently exists in the market and even some that are subsidized by charities or offered by credit unions (that, by the way, can manage lower prices because they don't pay federal or state income taxes.) You might have overdraft for example, and think it's a far smarter choice than those made by those stupid payday borrowers.

Sure, you feel better about yourself - but have a look at the fees you're paying to maintain a checking account. Then add on the fees you are charged if a check overdrafts (same thing as a payday loan - the bank fronts you some money until you get paid). You'll find you're paying far more than those poor, unsavy payday borrowers.

If you think that selling products to people who aren't "savy" is predatory, then you are really on a slippery-slope. I've never seen a "only-smart people need apply - please take an IQ test first" policy at my bank; perhaps they have higher standards at your bank.

I also think you need to be careful about labeling other people "dumber than thou" - it's elitist and I doubt you can prove it. If you've conducted a scientific study that concludes that the "majority" of borrowers are "unsavy" or desparate for credit at any price, please let me know, I'd love to read it.

"Predatory" really doesn't mean anything. It is however, quite an inflammatory, emotional response. Define your terms and then people can judge for themselves whether you're right, or I am.

nygenxer said...

Ignoring for a moment that higher edcucation should be free, the terms for student loans are even worse.

You can NEVER rid yourself of student loan debt by bankruptcy. They will garnish your wages, social security benefits - forever - at interest and penalty rates that Tony Soprano would be ashamed to charge,

There is no statute of limitations on murder, rape or student loans.

Anonymous said...

Most people who use check cashing services are those without bank accounts because a bank has messed up their credit history by piling on overdraft fees etc. Somehow it takes 5 days for my paycheck to show up in my bank account, but 3 hours after I write a check to the power company they money's gone from my account. Also this is a new way for these banks to "find" the people they say owe them money

 
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