Payday Lending Has Gone Mainstream

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Most of the public scorn for payday lenders is heaped on mom and pop storefront operations — and the national chains that do nothing but payday loans: publicly-traded companies like Advance America, EZ Corp, and QC Holdings. These companies make small cash loans to generally low-income consumers — and charge a fee of, perhaps, $20 for a 2-week $200 loan. The companies say that these fees are necessary to cover their overhead, while critics contend that these operations are loan sharks that trap consumers into cycles of debt with triple-digit interest rates.

But inspired by those companies above-average returns on equity, it seems good old-fashioned  — or, at least old-fashioned — banks are getting in on the act. too. The Center For Responsible Lending reports that many banks are now making loans to customers based on their direct deposit checks. The loans are then repaid in full once the direct deposit clears, which often leads customers to take out another loan. According to the CRL, “The bank payday loan rates mean consumers are paying over $900 in interest to borrow $500 from the bank for less than 6 months.”

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The annualized interest rates often work out to around 365% — and Social Security recipients comprise one-quarter of all these borrowers.

Much like the government crackdown on for-profit colleges — which has a stated mission of ignoring the many non-profits engaged in similar activites — it seems that the low-hanging fruit of payday lenders may be taking priority over cracking down on the equally egregious practicies of traditional lenders.

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One irony here is that big banks have always been involved in the payday lending business — just not directly. As Consumerist reported way back in 2007, the lead bankers that provide the financing for the payday lending industry include Bank of America, Wells Fargo, and JPMorgan Chase.

Something, perhaps, for the new Consumer Financial Protection Bureau to take a look at.