Bankers’ Hours column: Nation’s banking system could run payday lenders out of town
Payday lenders are the very bad boys of the financial industry. They lend money to people who have no other options, at an interest rate that virtually assures that the borrower will be a customer for a long time, because interest accrues almost faster than a borrower can repay the debt.
A recent Wall Street Journal article cited interest rates at these lenders that range from 200% to as high as 500%. One case study in the article involved a lady who works as a caregiver at a facility that helps take care of disabled people. She needed $1,500 to fix her car so she could get to work. Couldn’t find it, so turned to a payday lender. She got the money, but at an interest rate of 398%. After she made monthly payments totaling $1,100, she found that the loan balance had decreased by only $43.
Did she want to pay a rate of almost 400%? No, of course not. Did she need to get her car repaired? Had to.
Colorado has cracked down on these lenders, but they’re still out there online. Since the 2016 election, the Consumer Financial Protection Bureau (CFPB) is doing little to curb egregiously high rate lenders. However, there’s pressure to get the payday people off the backs of those who are the ball bearings of the economy but have no backstop to cover bills like car repair, medical expenses and temporary job loss.
But there’s a catch. These high rate lenders will say, “We provide an essential service for those who have no other alternatives.” And they have us there. Too often the correction of a perceived abusive practice or service leaves many stranded, with no rescue in sight. The Dodd-Frank legislation, as implemented by the CFPB, effectively bars a hard-money mortgage lender from making a short term loan on an owner-occupied home despite many instances where a homeowner could benefit from the loan. Don’t throw away the crutches if you can’t provide a wheelchair.
Borrowers who use payday people are too low to go to other lenders. Their credit scores and income don’t come up to the standard that would result in cheaper money. Yet the majority of these borrowers are the foundation of the service industries; their functionality is fundamental to the country’s economy.
The government doesn’t have to step in to fix this. The nation’s banking system, commercial banks, thrifts and credit unions could run the payday lenders out of town if they chose. Question is, should they, and would they? It’s pro bono work that could ultimately generate a nice return on investment. It would be tough for small banks to do anything individually, given staffing and regulatory issues, so the best structure might be a consortium of institutions forming an entity to bring financial nourishment to the credit starved.
It might not take much to get the idea rolling: maybe just a guy like Jamie Dimon, CEO of Chase, saying, “This is something we could do, and should do.” It might not take long for other mega-bank CEOs to saddle up. Unfairly maybe, but banking Goliaths haven’t exactly been in good repute so far in the 21st century. Some marketing maven could salivate over the vision of the Three Amigos — Chase, Wells and US Bank — riding into town and clearing the saloon of scruffy “500 raters.”
And what about the credit unions? The Navy Federal Credit Union is one of the largest financial institutions in the world. There are thousands of vets who deserve a $5,000 loan at less than 500%.
Like I said, those forced to borrow from payday lenders and their ilk are the same folks that grease the gears of capitalism: day care workers, hospital orderlies, janitors and dishwashers.
Too often we tend to forget how indispensable these workers are to the rest of the world.
Should the human species finally run its course with just three specimens rattling around on the planet, it’s a certainty that one person would be cleaning up after the other two.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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