Banks targeted for profiting from making ‘payday’ loans


Banks have come under fire recently for charging triple-digit interest rates on short-term loans.

The bankers say they are meeting a need.

Consumer advocates, however, say banks are gouging their most vulnerable consumers.

“It’s a more aggressive move by banks to do what anyone else calls ‘payday loans,’” said Uriah King, vice president of state policy at the Center for Responsible Lending.

The bank loans have all the defining characteristics of a payday loan — short-term, triple-digit, annualized interest rates with balloon payments and collateralized access to the borrower’s bank account.

Many of the loans charge $10 per $100, which King says amounts to a 120 percent annual interest rate.

State lawmakers have been deliberating legislation this year that would limit the interest rate a lender could charge for a payday loan to 36 percent. It also would ask voters to approve the change in the next election.

Jenifer Waller, senior vice president of the Colorado Banking Association, defends the banks, saying that such loans only become a problem for consumers who use them repeatedly.

“Unfortunately, payday lending does meet a need,” Waller said. “People can get into trouble — and they need cash for emergencies.”

She stressed there are limits on who gets these loans.

For example, Wells Fargo makes such loans only to customers with established checking accounts and recurring direct deposits.

“Although it’s an expensive form of credit, it’s not intended to solve longer-term financial needs,” Wells Fargo spokeswoman Cristie Drumm said.

Customers are “encouraged” to properly manage their accounts, she said.

“Our service can help customers when they are in a financial bind,” Drumm added.

Regulators, King said, are taking a look at the issue.

“I feel confident that these products are not long for this world,” he said. “I suspect the federal regulators will crack down on it.”

Already the number of short-term loans per household over a 12-month period has been capped at six. King, however, says that’s not enough.

“Based on our experience with payday lenders, (these bank loans) are a recipe for a debt trap — they’re marketed to borrowers who live paycheck to paycheck,” he said. “It doesn’t take too much thought to realize if they have all this debt, it will take more than a few days to (ever get caught up).”

Fed eyes speculative bubbles

Federal Reserve officials at their March meeting stressed the need to make sure record-low interest rates don’t feed new speculative bubbles in stocks or other assets.

At the same time, some officials said the Fed’s pledge to keep rates low for an “extended period” doesn’t mean a fixed period of time. Rather, it depends on the strength of the economy, according to minutes of the closed-door meeting released Tuesday.

Many analysts have taken the pledge to mean rates would stay at record lows for roughly six months to help underpin the recovery.

The Fed officials argued that the pledge won’t stop the Fed from boosting rates if the economy showed signs of picking up substantially or if inflation took off.

On the other hand, the pledge “could last for some time” if the economy took a turn for the worse.

Private equity

U.S. private equity fundraising dipped to $17.6 billion raised by 97 funds during the first quarter of 2010, an 8 percent drop from the same period last year, according to a report from Dow Jones LP Source.

The report said $19.1 billion was raised by 75 funds during the first quarter of 2009 and $65.9 billion was raised by 108 funds during the same period in 2008.

“The fundraising total is negligible, but the story behind the numbers is telling,” said Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst. “Many commitments made during the first quarter were to funds early in their fundraising process unlike the same period last year when many closes were holdovers from 2008. We are seeing that limited partners are willing to put what they have to work, though they may not have much to invest.”

Leveraged buyout and corporate finance funds claimed the majority of capital put into private equity funds. These funds raised $9.7 billion for 39 funds, a slight increase from the $9.6 billion raised for 27 funds during the same period last year. The buyout category hit this number without the benefit of a closing from a mega fund, a fund of more than $6 billion.

Rebecca Tonn can be reached at or 719-329-5229. The Associated Press and Dow Jones contributed to this report.


  1. SC

    While I do not necessarily like the practice, I still do not believe that the government has the right or responsability to regulate everything. The alternative for these individuals is to write a bad check. This causes additional issues and fees. Fees that are charged by both the bank (who stands to be a loser in this situation), and the merchant (also a possib le loser). I believe the merchant can charge up to five time the check amount (500% interest) plus applicable fees for recovery. You tell me which is worse?

Comments are closed.