Who Are The Banks Lending To? Can You Really Believe What You Hear?

Who are the companies lending money to the payday loan lenders? They are the banks, of course. They are certainly not lending to families and small business. In fact, these are the same banks who were bailed out by the government. There are published reports where you will find quotes from these very bank lenders calling the payday loan industry a “bottom feeder” industry. So why are they doing business with them? For the huge profit. These banks are by no means hurting, but are making great profit at servicing this industry. Bank of America claims they treat “payday lenders as a discouraged industry.” But when their doors are closed is that really true?
These same banks have become slow to provide loans till payday for families and lend to small businesses in Florida state, but instead have provided the financing for payday lending companies with whom they claim to look down upon and have distant dealings with.
This week in the Florida Today, Bank of America stated “we treat lenders – discouraged industry” “and we have limited appetite.” But according to the chart below, you can see where a good portion of the money is going.
In their defense, banks, including B of A have begun to impose stricter rules for compliance.
When banks refuse to have reasonable lending terms for families and homeowners many have gone to nontraditional financial institutions, such as payday loan companies, for short term personal loans. In many cases the lending fees are high because of the banks finance fee to the lender. For many, these are the only financial institutions that are easily accessible are check cashers, pawn shops and payday loan centers.
So why deal with “bottom feeders”? Simply put, the banks are under scrutiny from the government and are losing normal streams of revenue that was enjoyed in the past because of new financial regulations. They have a strong need for new ways to make money and lending to payday lenders is one great resource for banks. Their comments about the industry being so distasteful, and how their appetite is limited in doing business with lenders really is a joke. The payday lending industry has brought them a great avenue for new revenue and they are enjoying it as the payday lending industry continues to move full speed ahead. It cannot be ignored that the payday lending industry is extremely lucrative especially where banks come in. For example, a normal $500 payday loan from the banks would come with an APR of about 287 percent.
Reports estimate that there are over 22,000 payday loan stores nationwide which make $30 billion in loans each year.
The banks borrow from the Federal Reserve at low rates, but last year the banks collected $70 million in interest payments from payday centers during the year of 2015-2017. At best their negative connotations on the industry that is helping sustain them is really all about reputation.

How to set up a budget

Believe it or not, as we reported in a previous article, 65% of Americans do not have a personal budget. A budget is an essential tool to get a handle on where your money is being spent.

Here is a guide to get you started:

Keep track of your spending. This may seem obvious, but many of us spend small amounts of money here and there, and then wonder at the end of the month where our money has gone. Keep track of everything you buy for two complete months. For credit card bills, itemize what you have purchased.
Log your spending the good old-fashioned way with pen and paper so you can take it with you when you’re out shopping and easily record what you’re buying. It sounds tedious, and it is, but hang in there. It will help you in the long run.
Categorize your spending. At the end of the two months, divide what you have spent into categories and by daily, monthly, quarterly, seasonal and annual expenses. Don’t forget items that may have not been included in the two months holiday gifts, car insurance payments, taxes, magazine subscriptions, etc. A good list of categories to include can be found here.
Total your monthly income. Include tips, child support, alimony pay, public assistance or bonus pay. Only include net income (after deductions) and be sure to multiply your payments (for example, if you are paid twice-monthly at your job, be sure to multiply each paycheck by two) as necessary.
Set goals. Obviously, you aim to pay all your bills in a given month. Determine if you are overspending and how much you can cut back in each category. Decide what you can live without so you can begin setting aside an amount to save. Be realistic – you don’t have to give up going to the movies every week as long as you are cutting back in other areas to meet your goals. Decide what is essential and what is not. Don’t make your goals too rigid or you’ll drive yourself crazy.
Determine your budget. Once you’ve tracked where you’re spending money and what expenses you incur each year, you can decide where you will cut back and how you will spend differently to meet your goals. Take each category of your spending and set a new spending limit. Make sure your monthly expenses are fully covered. If you prefer to have a spreadsheet to organize your spending, a comprehensive review of free online budget tools can be found on the web site budgetsaresexy.com.
Stick to your budget!
Several years ago the U.S. Securities and Exchange Commission published a report on Saving & Investing and gave the following illustration:

If you buy a cup of coffee every day for $1.00 (an awfully good price for a decent cup of coffee, nowadays), that adds up to $365.00 a year. If you saved that $365.00 for just one year, and put it into a savings account or investment that earns 5% a year, it would grow to $465.84 by the end of 5 years, and by the end of 30 years, to $1,577.50.

Many consumers struggle to pay bills on time each month, much less set up a savings plan. However, if you decide to give up that $1 coffee (or $4 latte!) as part of your budget plan, you can build savings over time, spending money where it matters. So, start budgeting today!

Financial reform update for payday lenders

This Winter on December 21, the Consumer Financial Protection Bureau (CFBP) will open its doors. This agency was created as part of the Dodd-Frank financial reform law, and will have the power to regulate payday lenders. With the creation of this new agency it is no surprise that payday lenders have more than doubled their spending on federal lobbying in the last year, according to a recent report from The Center for Public Integrity.

In addition to increasing funding and lobbying efforts, some payday lenders have moved their headquarters to Washington. Employees and political action committees of payday lenders are also contributing 80% more to federal campaigns since 2016, matching the behavioral giving pattern from the industry itself.

With increased legislation and oversight, the industry will adapt in order to be able to continue to conduct business as usual. Payday lenders also serve a valuable purpose and serve a segment of population that relies on such financial services. These businesses are spending money on lobbying to ensure that regulators understand the role this industry plays and the financial needs it meets.

While many companies legitimately aim to represent their customers well and continue to meet their financial needs, as well as protect their profits, some payday lenders have sought ways to go around recent legislation and shield themselves from government oversight. In order to skirt consumer-lending laws, some payday loan lenders are uniting with Native American tribes. Others are operating online payday lending sites from headquarters located offshore.

In the example of the tribal-affiliated lenders, consumers have complained of excessive interest rates, some reported at over 1200%. Collection tactics are overly aggressive. Because state governments have little authority over tribes, these companies are getting away with bad business practices. Often times the companies have postal boxes with tribal addresses, but in reality have no other connection to the tribes themselves. According to a special report on debt deception from The Center for Public Integrity, lawsuits in California, Colorado, West Virginia and New Mexico claim these lenders should be immune from lawsuits and regulation because they are tribal enterprises, even if they serve non-Native customers living nowhere near Indian lands.

Elizabeth Warren, the presidential assignee to oversee the launch of the CFPB has stated that payday lending will be a high priority for the agency. She aims to balance the needs of families that need short-term solutions for small loans, while minimizing the debt that can come with these types of services.

For additional information on the CFPB and its activities, please visit the web site here.

Payday loan news

If you live in Texas, you will be interested in recent legislation submitted by Representative Vicki Truitt, R-Keller, and chairwoman of the House Pension, Investments and Financial Services Committee, who this week introduced a package of legislation reported by the Star-Telegram. The legislation would require lenders to register with the Consumer Credit Commissioner, which could deny an application based on criminal record, as well as require lenders to file annual reports. Her main goal is to punish and eliminate unethical lenders.
While many legislators seek to eliminate or strictly limit the pay day loan industry, Rep. Truitt aims to bring moderation to preserve the industry, while also mitigating risk for greater emergence of offenders who seek to take advantage of borrowers. The legislation would put pay day and car title lenders under the authority of the Office of Consumer Credit Commissioner. Her compromise effort might be tough to pass due to recent attempts and subsequent failures in previous legislative sessions, but she is working hard to negotiate with industry representatives and consumer advocates to find a middle ground.

Two other Senators have also recently stepped forward with legislation to regulate the industry. Senators Wendy Davis, D- Forth Worth, and Royce West, D-Dallas have put forth legislation they say will close an existing loophole that allows pay day lenders to bypass traditional restraints that govern other lenders, with the intention to curtail exorbitant charges that can reach annual interest rates and fees of over 500 percent.

While there is a coalition of backers to the aforementioned legislation that includes support from a variety of organizations, the Consumer Service Alliance of Texas, which is connected to lenders that operate pawnshops throughout Texas, opposes the bill. Lenders have insisted that if regulation is too strict, they will be forced to leave the state, which Rep. Truitt points out will only bring increased corrupt actors to fill in the need for pay day loans and other similar services. For this reason, she is seeking a middle ground to unite both sides, as well as enforce new regulation that would benefit and protect the consumer.

For more information on the bill introduced by Rep. Truitt and to track its stages, you can find updates here.