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Payday lending critics bark up the wrong tree

While CFPB searches for solutions, big banks hidden role becomes clear

December 18, 2013

Mortgage rates have been continuously climbing since the first mention of a potential Fed tapering in May. But having interest rates teetering close to 5% does not even scratch the surface of the problem when studying some of the record-breaking interest payments shocking borrowers.

In other words, a 5% interest rate on your mortgage is nothing like the sky high interest rates charged by payday lenders.

As HousingWire recently reported from a Consumer Financial Protection Bureau field hearing in Dallas, lenders are providing loans in the $850 to $10,000 range. Some of them include annual interest rates that rise as high as 342% in certain cases.

But a recent article in the Washington Post dug a little deeper to find the original source of these payday loans. The shocking answer: big banks.

It starts with some history: Back in the 1980s, the Main Street emergency lenders were fairly small and largely independent businesses. But then they started consolidating, looking for access to capital markets in order to deepen their liquidity and finance expansion. Cash America went public in 1987, and others followed; banks took notice and started investing in what was becoming a lucrative, highly replicable franchise. The result is that while pawn shops and payday lenders charge high interest rates to borrowers, banks lend them money at standard business rates.

The article noted that top banks like Wells Fargo (WFC) and Bank of America (BAC) fund a significant amount of these loans, and consumers are jumping into action to stop these high-cost lenders.

As a result, Reinvestment Partners, a non-profit that advocates for the underbanked, is going to the point of asking the Office of the Comptroller of the Currency to ban the pratice of financing high-cost loans.

But is this the right answer?

Albeit, the rates payday lenders offer are ridiculously high but is the correct step banning payday lenders altogether?

Borrowers need the loans for a reason. Take away the fast cash system, and borrowers will be left dry.

The OCC is designed to help banks. As noted in a recent OCC press release, one of the responsibilities of the OCC is to help financial institutions identify potential risks to ensure they are aware of their responsibilities to address these risks within their overall risk management program.

However, the CFPB is in existence for the borrower. At the recent CFPB meeting, Director Richard Cordray attentively listened to each consumer’s concerns regarding arbitration clauses in financial services contracts, with a majority of the complaints revolving around payday lenders.

But the reality is these loans have become standard, offering certain borrowers a bridge loan to cover food, medical expenses and other necessities. It's the interest rates that pose the biggest problem.

While Reinvestment Partners is trying to stop the practice altogether, it may be overreaching and failing to see the forest through the trees. Afterall, payday lenders have been around for a while offering loans that some consumers do say they need.

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