(Courtesy rinkjustice on Flickr)
On a cold October morning at a suburban hotel ballroom in Chicago, a representative from payday lender ACE Cash Express took to the stage to give a carefully worded presentation about payday loans and how they could be used responsibly as part of a customer’s financial toolkit.
As a sponsor of the 2011 Financial Blogger Conference (#FinCon11), the company’s spokesperson spent the better part of 20 minutes describing how their absurdly-high-interest but easily obtainable loans provided a way for “chronically underbanked” (read: poor) Americans to borrow money between paydays for expenses and emergencies. Banks oftentimes refuse to lend money to their customers because of poor credit or small borrowing needs, so companies like ACE were an integral part of the community, he argued.
During the audience discussion afterwards, an unidentified female personal finance blogger stood up and asked the speaker, (paraphrased) “Why would we ever want to pitch your predatory lending products to our readers?”
Her question was met with thunderous applause and widespread approval from the audience. Needless to say, with such a contentious audience, the company and its representatives left the conference in short order.
It seems like these payday lenders are the elephants in the room. Lenders argue that their short-term loan products shouldn’t be used as a long-term financial solution. But, in fact, their loans are design to be abused. Due to their high interest rates, many customers have to take out a second or third loan in order to pay off the first loan. It starts a vicious borrowing cycle that puts its users on an express train to financial hurtsville.
Thanks to revolving door customers and a lack of alternative sources to borrow money from in this down economy, the payday lending industry continues to grow by leaps and bounds. And according a new investigation by the SF Public Press, payday lenders are also flush with cash to grow their operations with thanks to an infusion of funds from big banks.
It seems that banks like Wells Fargo and Credit Suisse are loaning money to these payday lenders, hand over fist, in the form of a line of credit. Think of it as a gigantic credit card that companies can spend any way they like. Not surprisingly, big profit margins seem to be the main motivator behind the credit line.
(Courtesy of danisabella on Flickr)
“DFC’s credit line, which can be raised to $250 million, carries an adjustable interest rate set 4 percent above the London Interbank Offered Rate. In the current market, that means DFC pays about 5 percent interest to borrow some of the money it then lends to customers at nearly 400 percent,” said the SF Public Press.
Rephrased, Wells Fargo could earn up to $12.5 million annually in interest charges paid by DFC on up to $250 million borrowed. In turn, DFC makes up to a 181% net return annually off of the backs of its customers. Broken down another way, for every $1 that DFC borrows, Wells Fargo makes five cents each year. For every $1 that DFC lends out to its payday customers, it makes back $1.81 annually.
But it doesn’t stop there. Wells Fargo also holds shares in DFC. Using data from the SF Public Press and readily available stock data, we were able to calculate that Wells Fargo owns a possible 2.5% stake in DFC. In addition, “Credit Suisse, an investment bank based in Zurich, acted as the lead underwriter for a public offering of shares in DFC. The payday lender raised $117.7 million in that transaction, according to securities filings. Credit Suisse pocketed $6.8 million,” said the SF Public Press.
When you boil it down, Wells Fargo is able to be in the business of predatory/payday lending indirectly, without dirtying their name, brand or image. They’re making money as both a lender to and shareholder of DFC. In turn, DFC is making an exorbitant amount of money by sticking its customers with hard to pay off payday loans. And with these kinds of profit margins, you have to wonder when Occupy Wall Street protestors will start crying foul over these seemingly unethical bank practices.