Mainstream Banks Conspire with Payday Loans Agencies to Rip Consumers Off |
|
In recent years, there's been explosive growth in the number of payday loans outlets in the United States. Large metropolitan areas have an outlet on every corner. Even the smallest country town has a payday loan outlet. These establishments, which charge exorbitant interest rates, focus on short-term loans to low-income people. For example, in New Orleans, payday loans outlets lend their customers $201 and require a personal check for $246 in return. The $201 repays the loan, and the $45 covers fees. The loans are usually for 14 days or less. If the customer's check doesn't clear, the outlet processes a second loan for $246 plus a processing fee. This can then escalate to where the original $246 rolls over more than once, with additional fees and interest that accumulate with every roll back. This sudden growth is connected to the traditional mainstream banks abandoning the lower-income communities and communities of color. They instead, prefer to profit by financing predatory check cashers and payday loans lenders. Rather than provide banking services, traditional banks provide millions of dollars to predatory lenders. Thus, payday lenders and mainstream banks are complementary faces of the current financial system. A new study by a California organization has exposed how bank financing has supported the growth of these high-priced lenders of payday loans. Financed by major banks, lenders of payday loans and check cashers are pulling more than $5.7 billion in fees out of California's low-income neighborhoods like West Oakland or Pacoima or National City, every year. Banks are scarce in these areas and fair-priced alternatives are even scarcer. Residents are, therefore forced to rely on check cashers charging two percent or more and payday lenders charging 500%-900% APR to meet their needs. The study also revealed that this is not isolated to California alone. In fact, in Fresno and Sacramento Counties, 60% of the check cashers and payday loans lenders are supported by major financial institutions. This is the case in Alameda, Los Angeles and San Diego Counties as well. The lack of competition from mainstream finance and huge profit opportunities have meant that the number of check cashers lenders of payday loans have increased from 2,000 in 1996 to 22,000 in 2004. The study reveals how some of the largest banks, including Bank of America, Union Bank of California, U.S. Bank, and Wells Fargo Bank, are financing the operations of these check cashers and payday loan lenders. These, agencies for payday loans and check cashers set up shop, in neighborhoods that have been abandoned by mainstream banks. They, thus expand a two-tier system of high-priced consumer finance plaguing the lower income communities of the country. Those worst affected by this include women, military personnel and African Americans. In fact, payday loans harm communities by offering expensive financial services to those who can least afford it. They prey on communities that have few resources and few alternatives. In addition, check cashers drain money away from neighborhoods with virtually no reinvestment back into the community. And all these activities are financed by the mainstream banks. But they don't do it openly. The mainstream banks keep away from these neighborhoods under the pretense that it is economically unsound, for them, to have a branch in a low-income community. In addition to those mainstream banks listed earlier, West America Bank, Banco Popular, Hanoi Bank, Saehan Bank, and Merchants Bank also finance check cashers and payday lenders. This is not only unfair but wrong as well. And since many of these consumers don't have access to lower-cost credit from traditional financial institutions, there should be other choices open to them. And this is where credit unions can help. Credit unions can bring payday loan customers into the fold by offering better services. The services should include savings products to help those living on their paychecks to build savings and create a margin of financial safety. They could also promote consumer education initiatives to help current and potential members address credit problems, set savings goals, and adopt good personal finance management practices. Other credit union alternatives to payday loans can be Interest-free emergency loans. These loans, should be, ideally less than $500 and funded by money set aside for the purpose and carefully monitored for default. Another alternative is micro loans. These small loans can be repaid over several months through deduction of the amount from the payroll each month. The documentation required, is minimal unless the borrower wants a higher amount. There should also be the facility to provide those consumers who repeatedly borrow, with financial counselors, to help them manage their finances better. |
