WHY BANKS & CREDIT UNIONS HATE PAYDAY LOANS

By | Jul 24, 2008

I was at a dance party in Newport Beach, California the other night (Yes, my girlfriend was a dance teacher so there I was) and the subject of what I do for a living came up.

Now, when I’m in the haughty suburbs of Newport Beach my typical response to the question of, what I do for a living is usually, “I’m in the sub-prime financial services industry.” Probably just like you, I’m not in the mood to defend myself for making money with payday loans. And I know after working on the “front lines” or the “counter” as we say, that we really do help a lot of people. However, I still cringe a bit when this subject comes up. Not as much as I used to but I still get the shivers.

So of course, being in Newport Beach on the “left-coast”, there had to be some kind of consumer protectionist with a desire to attack me. (Actually, I really think he was simply jealous because I am a better dancer than he. I swear he was watching me out of the corner of his eye as I did the West Coast Swing.)

Now this guy was not your typical Center for Responsible Lending (CRL) sympathizer! He knew enough of the “facts” to try to give me a hard time.

But, luckily for me, and the rest of us in the payday loan industry, I had the benefit of recently reading:

“Predatory Reporting” on Payday Lending?
Donald Rieck,
Do payday loans sink people into inescapable debt, forcing them to pay many times more the original borrowed amount in interest?

Now this IS ONE REALLY WELL WRITTEN and, more importantly, WELL RESEARCHED article on the REAL FACTORS affecting the attackers of our industry. It’s a bit lengthy but you really should check it out in it’s entirety:

A few highlights…

A Factiva search of newspapers across the country shows that there were over five thousand negative payday loan stories last year

.NO SURPRISE HERE!

A study by Veritec http://www.veritecs.com (a government contractor that provides program management to state agencies which regulate the payday loan industry) concludes that the Center for Responsible Lending (CRL) attacks on our industry are totally erroneous. After examining payday loan usage in Florida and Oklahoma, Veritec concluded that the data “simply does not support the CRL conclusion about fees paid” and the need to outlaw payday loans.

A consumer using the option of skipping a credit card payment, rather than using a payday loan, triggers an average late payment fee of $35, according to indexcreditcards.com. “Over-the-limit” fees for credit cards average $36 and the consumer’s credit rating is damaged typically causing the credit card company to increase the APR on future uses of the card.

Another method is check kiting http://en.wikipedia.org/wiki/Check_fraud . But NSF fees average$28.23, according to bankrate.com. Moebs Services, an economic research firm, estimates that NSF fees account for 18% OF THE NET OPERTAING INCOMEOF BANKS AND 60% OF CREDIT UNIONS OPERATING INCOME! That is unreal!!

NO WONDER BANKS & CREDIT UNIONS HATE PAYDAY LOANS!

So, when consumers use payday loans to avoid these bank and credit union fees they cremate the net income of banks and credit unions!

Another option to payday loans is for the consumer to purchase “overdraft protection.” However, The Woodstock Institute, a nonprofit group that promotes economic development in lower-income and minority communities, estimated that theAPR for bounced check “protection” averages 2400%.

Sheila Bair, while chairman of the board of directors of the Federal Deposit Insurance Corporation (FDIC), during a speech stated “the ‘enormous’ fees earned on these programs discourage credit unions and banks from offering payday loans. Since they reap such enormous revenue from overdraft protection and bounced check fees, credit unions and banks have a vested financial interest in limiting consumer options and having payday loans removed from the marketplace.” She warned that customers were “catching on” and turning to payday loans for their “cheaper product.”

Even more astounding, the Center for Responsible Lending (CRL), which has focused their tremendous resources against the payday loan industry, is headed by CRL founder and Self-Help Credit Union CEO Martin Eakes! Forbes.com published an article titled “Subprime’s Mr. Clean: Martin Eakes’ Campaign to Straighten Out Subprime Lending Has Some Wrinkles.” The article makes the point that Eakes’s leadership of a credit union creates a conflict of interest with regard to CRL’s activities. The article quotes noted economist Donald Morgan:

“Who then benefits from payday loan bans? Credit unions, for one, notes Morgan. He says interest rates on overdrafts charged by credit unions and banks can exceed 2,000 percent, dwarfing the high interest rates on payday loans. Credit unions, he adds, have been especially hurt by payday lenders cutting into their overdraft fees.”

Forbes.com notes that in North Carolina where payday loans are outlawed, CRL and Eakes were “instrumental in outlawing payday loans.” Forbes.com also notes that Self-Help assets have 10X from $114 million in 2003.

CONFLICT OF INTEREST?HELL YES!!!!

Additionally, a study by Morgan and Strain’s evaluated how households fared in Georgia and North Carolina after payday loans were prohibited:

“Compared to households in states where payday lending is permitted, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation- reduced payday credit supply, increased credit problems- contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced check “protection” sold by credit unions and banks or loans from pawn shops.”

Easing restrictions on payday loan limits actually seem to IMPROVE consumer financial difficulties. Witness Hawaii, where payday loan limits were increased from $300 to $600.Borrowers problems with debt and the Hawaiian rate of bankruptcy fillings actually DECLINED!

And regarding the effect of banning payday loans on the incidences of bounced checks, Morgan and Strain note:

“On average, the Federal Reserve check processing center in Atlanta returned 1.2 million more checks per year after the ban (on payday loans). At $30 per item, depositors paid an extra $36 million per year in bounced check fees after the ban.”

So, it shouldn’t require Sherlock Holmes to figure out just who really hates payday loans and why they fight us so hard in the name of protecting the consumer!It’s never been about the consumer. It’s about the MONEY! You know the old saying, “Follow the Money.”

Do you think that banks and credit unions may even be funding organizations like CRL?

HELL YES!!!!

Do you think the media and the journalists will figure all this out?

Hell No!!!

Oh, and do you think I was able to DESTROY that consumer protectionist guy at the dance?

HELL YES!!!

Please read the full article at:

http://www.stats.org/stories/2008/how%5fbad%5fpayday%5floans%5fjuly18%5f08.html

And please forward our Newsletter to journalists, regulators, legislators and anyone else interested in helping consumers to maintain choice in the financial products they have access to!

The Payday Loan Guys,

The Trihouse Team
Trihouse Payday Loans
702-889-9555
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19 Comments so far
  1. […] Samuel Young wrote an interesting post today onHere’s a quick excerpt […]

  2. […] Original post here […]

  3. Payday Loans July 24, 2008 2:38 pm

    Payday Loans are great! They can be repaid quickly, require minimal paperwork and get you the cash you need. Banks hate payday lenders because they offer a great alternative.

  4. Wesley July 24, 2008 7:33 pm

    That’s one of the most insightful payday loan articles I have seen! Well done!!
    It makes sense! “Follow the Money.” Banks and credit unions don’t like payday loans because of the competition.

  5. Steve July 25, 2008 4:47 pm

    Payday lenders really don’t make any money. $3.8 million (http://www.inrich.com/cva/ric/news.apx.-content-articles-RTD-2008-07-25-0220.html) to “educate the public” in Virginia must have been really hard to come by. Not to mention payday lenders have had some pretty shabby conferences, awful African mahogany office space and terrible travel accommodations.

    2006 Conference in La Quinta, California
    http://www.cfsa.net/downloads/2006_Conference_Brochure.pdf

    2008 Conference at Marriot Resort & Spa in Las Vegas
    http://www.cfsa.net/downloads/CFSA%20Attendee%20Broch%2011.19.07.pdf

    2009 Conference in Orlando, Florida
    http://www.cfsa.net/conference_information.html

    http://www.jonesmanagement.com/airways.htm
    http://www.jonesmanagement.com/our_office.htm

    I really wish I could help, but it seems that the website to “empower local people” in Virginia to support payday lending isn’t accessible to the public: http://www.vafinancialchoices.org.

    I feel really bad for the payday lenders. How do I sign up?

  6. admin July 26, 2008 1:43 am

    Steve,

    You missed the really fantastic convention in the Bahamas on Paradise Island at the Atlantis Hotel! It was unreal!!

    Oh, and the Credit Union Convention was in the same hotel. Do you think all those overdraft fees may have paid their bar tab?

  7. Jer July 30, 2008 9:40 pm

    This payday loan industry STATS Report should be forwarded to every regulator, legislator, payday loan operator and “consumer protectionist – I know what’s best for everyone” do-gooder on the planet!

  8. […] paydayloanindustryblog.com Payday Loan Industry News & Developments a Resource « WHY BANKS & CREDIT UNIONS HATE PAYDAY LOANS […]

  9. faxless paydayloans August 7, 2008 2:57 am

    A payday loan is a short-term loan to cover your spending needs. It is secured against your future paycheck. These loans have grown in popularity for years, and now this is the main tool of assistance to get you out of that sticky situation or get you that new luxury toy.

  10. bloggingzoom.com August 10, 2008 6:54 pm

    Why Banks and Credit Unions Hate Payday Loans…

    Article describes the real reasons banks, credit unions and so-called consumer protectionists hate the payday loan industry. Follow the money! It’s not about protecting consumers. It’s about the cash! 18% of a banks NET PROFIT and 60% of a credit uni…

  11. […] Bottom line, when the car requires repair, or the lights are about to be turned off, or you need cash to pay for a presciption, or, or, or… The payday loan product fills the need. And it has certainly been proven that a $15 fee per $100 loaned is still a better deal than bounced check charges or overdraft fees.Why Banks Hate Payday Loans […]

  12. Payday leads September 19, 2008 5:43 am

    You hit the nail on the head. Payday loans are much, much cheaper than bounced check fees or overdraft protection fees.

  13. steves September 30, 2008 6:10 pm

    Savings achieved by states that enforce interest rate caps

    Connecticut $64 million

    District of Columbia (new cap) $12 million

    Georgia $147 million

    Maine $25 million

    Maryland $97 million

    Massachusetts $119 million

    New Jersey $150 million

    New York $345 million

    North Carolina $153 million

    Oregon (new cap) $65 million

    Pennsylvania $234 million

    Vermont $12 million

    West Virginia $36 million

    Total $1.5 billion

  14. steves September 30, 2008 6:13 pm

    LET’S SAY YOU NEED A $300 LOAN
    With many bank or credit union loans, or even credit card advances you pay
    $3 every 2 weeks or less!
    That’s 26% APR!
    After 20 weeks, you’ve paid
    $30
    If you borrow from a
    payday lender,
    You pay at least
    $45every 2 weeks!
    That’s 390% APR!
    After 20 weeks, you’ve paid
    $450

    AND YOU STILL OWE THE ORIGINAL $300 LOAN!
    No partial payments are allowed on most
    payday loans. You pay it off or pay the fee.
    That’s the trap.

  15. admin October 1, 2008 12:15 am

    Steves,

    Can you explain “Savings achieved by states that enforce interest rate caps”?

    Sorry man, I don’t get it.

    Savings? On what? Compared to what? What does this mean? Where did these stats come from?

    Appreciate it!

  16. […] any complaints, it’s the so-called consumer protectionists, who have their own agendas, and competitors such as banks, credit unions, installment lenders and credit card […]

  17. Ben Martineau January 3, 2013 11:56 am

    I take issue with the referenced article’s aggregation argument. Donald states that “the borrower has gained access to $2925 in capital” and questions “But if the nine interest payments are aggregated into an annual total, why shouldn’t the nine loans also be aggregated as well?”

    This is a fallacy. The borrower never had access to more than the original loan amount. With an argument like this a lender could say a loan is rolled over every week or every day and inflate the “access to capital” to levels that are just untrue.

    The other arguments held more water than this one. I write not as an opponent to payday lending(I own a small title loan business) but so that readers of the article do not adopt this argument as one of their pillars when defending the industry (as Jer had to at his dance recital).

  18. Michael Brown of CAB Consulting February 18, 2013 9:46 am

    Jer – as always – you are bringing the truth! Our industry really has a lot of ammunition on the banks. I am wondering why we aren’t spending more time on the offensive. The stats are simple, banks go way beyond payday APR’s. And, don’t forget, banks don’t even want our customers. On the regulatory and legislative front this should be at the forefront of the industry message.

  19. Payday Loan Industry February 18, 2013 11:37 am

    Agreed Michael! We need a collaborative approach employing OLA, CFSA, FISCA and the local organizations to “sing our song.” Unfortuneatly, the national payday loan organizations have agendas that don’t always mesh with one another. Meanwhile, the little guys are busy trying to run their stores, comprehend all the compliance and licensing regs, protect their rmployees jobs, perform their civic duty and sleep at night. Jer@TrihouseConsulting.com

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