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Payday Loans Allow Major Banks to Cash in

Fifteen states ban payday loans, but a growing number of lenders have, of course, found a way around those bans, often with the assistance of major banks, including JPMorgan Chase, Bank of America and Wells Fargo.

Payday loan companies have set up online operations in states where the practice is still legal and have outsourced business to foreign countries, including Belize, nations in the West Indies and Malta. The firms have spread the locations around to avoid statewide limits on interest rates.

The banks don’t issue the loans, but they help the lenders to withdraw payments automatically from customers’ bank accounts – in some cases even after the borrowers ask the banks to stop the withdrawals and/or close the accounts.

According to the Center for Responsible Lending, “payday loans are small loans marketed as a quick, easy way to tide borrowers over until the next payday. However, the typical payday loan borrower is indebted for more than half of the year with an average of nine payday loan transactions at annual interest rates over 400 percent.”

Representatives for several community organizations wrote the Office of the Controller of the Currency-National Bank Examiners in November, urging that Wells Fargo’s direct involvement in payday lending “have a significant negative impact on its upcoming Community Reinvestment Act (CRA) evaluation.”

The CRA was designed to ensure that financial institutions “meet the banking needs of the communities they are chartered to serve, including low- and moderate-income neighborhoods and individuals.”

Wells Fargo’s involvement with payday loans is contradictory to that process, Scott J. Wilson, the examiner in charge, indicated.

Wilson wrote that the bank called the loans a “direct deposit advance service,” but it had a high annual interest rate of 270 percent.

The bank deposited the loan amount directly into the customer’s account and then repaid itself the loan amount, plus the fee, directly from customers who had direct deposit of wages or public benefits. Wells Fargo would advance the pay in increments for a fee of $7.50 per $100 borrowed. If direct deposits were not sufficient to repay the loan within 35 days, the bank repaid itself anyway, even if the repayment overdrew the consumer’s account, which then triggered the notorious overdraft fees.

According to the Center for Responsible Lending’s website, a growing number of banks are making predatory payday loans at annual interest rates of 365 percent.

Because of the banks’ role in helping lenders process the loans, they have managed to help payday operators do an end-run around the protections that banks are encouraged to provide their customers.

Five U.S. Senators have asked the OCC, the FDIC and the Federal Reserve to stop the banks under their respective jurisdictions from making predatory payday loans. Consumer groups, including Americans for Financial Reform, have written the FDIC and banks asking them to end the practice.

But the practice is spreading.

According to the CRL, at least four big banks have started making the triple-digit interest loans, which are virtually identical to the predatory payday loans that trap borrowers in long-term, high-cost, harmful debt.

What sounds like a quick and easy way for working folks to bridge temporary shortfalls could well send them to financial ruin.

The New York Times report on Sunday cited the case of a Brooklyn woman who borrowed $400 from one lender and $700 from another in 2011. The loans carried annual interest rates of 730 percent and 584 percent, respectively. Her bank charged her $812 in overdraft fees and deducted more than $600 from her child-support payments to cover them – even after she asked the bank to revoke the automatic withdrawals.

Her bank closed her account three months after she asked.

Another woman thought she had closed an account to keep the payday lenders from taking her money, but the bank kept the account open for two more months and charged her $1,523 in insufficient fund fees, overdraft fees and service fees.

Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, which works with community groups in New York, told The Times the banks are at the heart of the solution.

“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” he said.

Jackie Jones, a journalist and journalism educator, is director of the career transformation firm Jones Coaching LLC and author of “Taking Care of the Business of You: 7 Days to Getting Your Career on Track.”

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