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February 26, 2013


We know from Part I of this essay and other blogs I have written that the big banks are back to their old tricks; that they will, in one way or another, worm their way into participation where piles of money can be found, whether privatization of government programs such as social security, education via vouchers, or, as here, the funding and facilitating of storefront and online payday lenders. Wall Street never met an asset it couldn’t or wouldn’t securitize (see the recent catastrophe where pools of mortgages were used as collateral for the funny paper they peddled all over the globe, paper that was based on bubble and not collateral value). I suppose online and storefront payday bonds are next to be called “securities;” be sure to buy some if offered.

Fortunately, there are some state regulators who are awake and who are not bound by the strictures to which federal regulators are bound (i.e., rules and regulations constantly in a state of being weakened by K Street lobbyists for Wall Street and the big banks). New York, for instance, has a 25% limitation on interest that can be charged borrowers, and Ben Lawsky, head of the New York State Department of Financial Services, is now investigating how banks enable online lenders to skirt New York law and make loans to residents of that state in excess of the statutory maximum allowable. Several people with direct knowledge of the situation say that the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are investigating as well, though I don’t know whether the feds have any enforcement teeth if they find wrongdoing beyond cease and desist orders, if that, so we look to the states for enforcement.

The big banks are now essential actors in this payday loan business, as pointed out by Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, who stated “Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate.”  No big banks, no payday lenders.

I have a feeling but no evidence as of yet that the storefront and online payday lenders are fronts for the big banks who advance the funds to be lent and take a healthy cut of the profits from these hugely profitable loan portfolios, doing everything they can to be sure the storefront and online lenders collect on their loans – but suspicion is not evidence. I hope state and federal regulators can turn up evidence of precisely what the business arrangements are as between the big banks and these usurers.

Given the monopolistic practices of big banks, I would not be shocked to find that the big banks are (sub rosa) using the storefronts and onliners as fronts to make loans at astronomical rates of interest that the banks could not do as banks because federal regulators would never allow either such ridiculous rates of interest and/or such poor underwriting risks to land on the big banks’ books. Of course, when you are making loans at up to 500% rates of interest, you can swallow a high default rate and still come out with huge profit ratios, but here again, I caution my followers that the foregoing is based upon suspicion, and suspicion is not evidence. I will be very interested to know what evidence state and federal regulators turn up in their investigations in this particular connection.

It is possible that the relationship between the big banks and these Shylocks is not that of interlocking entities with common interests but rather that of independent entities who occupy different niches along the lending spectrum, but I think that doubtful, given the banksters’ history of overkill.

Big banks honor agreements between these lenders and their (the bank’s customers) to set up automatic withdrawals from their customers’ accounts in repayment of the loans. Processing automatic withdrawals, as noted by the New York Times, “hardly seems like a source of profit. But many customers are already on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars.” The Times also notes that “Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.”

Unfortunately for the payday lenders, there are 15 states now that will not permit them to operate at all. As a result of that and an increasingly inhospitable atmosphere in states that do allow such lending, many lenders have gone offshore with their operations. Where do they go? They go to Belize, Malta and the West Indies, among other places. One such lender, a former used-car dealership owner, who runs a series of online lenders through a shell corporation based in Grenada, outlined the benefits of operating remotely in a 2005 deposition, testifying that moving offshore was “lawsuit protection and tax reduction.”

It is more than that. The obvious purpose of all such moves offshore is to avoid regulation, litigation, IRS scrutiny, and any legal obstacle to the ability to make such online loans even in states where such loans are illegal. It is noteworthy that big banks are honoring withdrawal orders by such online lenders even in states where making such loans is illegal. A senator from Oregon has proposed a statutory solution to this mess: He proposes that the law of the residence of the borrower be the applicable law to be followed rather than the law of the lender’s “home office.” I think that is a good idea. Why indeed should the law (if any) of Grenada or Bermuda be the one the courts may apply here simply because of the lender’s pretended “legal residence?” Everything connected with such loans is happening here, not in Grenada, where nothing is happening. Authorities there have no interest in the outcome(s) of loan litigation here.

The payday lenders and, I suspect, the big banks are feeling the heat from the senator’s proposal, increasing regulatory attention, and (I hope) bloggers like me. This industry is parasitic at best, feeding upon the poor and others who are living hand to mouth at interest rates on loans that are stratospheric and unconscionable. A recent response and proposal of the industry to the heat is indicative (as reported by the New York Times): “Now the Online Lenders Alliance, a trade group, is backing legislation that would grant a federal charter for payday lenders. . . The group’s chief executive said that a federal charter, as opposed to the current conflicting state regulatory schemes, will establish one clear set of rules for lenders to follow.”

I prefer the senator’s proposal – a federal statute. As for the claimed “conflicting state regulatory schemes,” that is not a problem. We have many states with many different laws; we have many industries over this country who must live up to state law (truck licensing, speed zones, insurance regulation etc.).

Different states may have different interests to protect in predatory lending practices. (Wyoming is not Manhattan.) What the trade group is suggesting is for their convenience, not that of fleshing out of a state’s particular policy on the industry within its borders. So state policies vary; so what? So do speed limits, when you can drink, grounds for divorce. The list is endless.

I am again waxing suspicious over such a suggestion the industry is putting forth. I suspect that the banksters are behind such an idea and for good reason. If you can take the states out of the mix and only deal with the feds under a federal charter, then you can unleash your K Street lobbying corps to do battle with the congressional committee and agency in charge of granting and enforcement of such charters and fashion them to suit your own purposes, but all to the very great detriment of those borrowers constantly on the edge of bankruptcy who would be adversely affected beyond belief.

When do they get a break from the banksters and used car salesmen who turned into online lending predators?  Historically, Christians and Islamists were forbidden to charge interest at all, after which a limited rate was allowed and anything over that was usurious. Things have changed. For the worse.

What are we going to do about it?  GERALD  E

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