Fast cash is a few clicks away for Minnesotans at the popular CashNetUSA website, where a two-week loan for $100 carries an annual percentage rate of about 390 percent.
To many critics, the terms are outrageous and usurious. But they are typical in the world of high-cost short-term consumer loans, or payday lending, and legal in Minnesota.
In fact, the business is supported by some of the nation’s largest commercial banks. A syndicate including Wells Fargo & Co. and Minneapolis-based U.S. Bancorp provides CashNetUSA’s parent $330 million in financing, government documents show.
Commercial banks, including Wells Fargo in San Francisco and U.S. Bank, are a significant source of capital for the country’s $48 billion payday loan industry, extending more than $1 billion to companies such as CashNetUSA parent Cash America, Dollar Financial and First Cash Financial, according to research by Adam Rust, research director of Reinvestment Partners, a nonprofit consumer advocacy group in North Carolina.
The financing relationship is largely invisible to the public, although bank regulators are well aware of it, as are consumer advocates who view payday lenders as predatory and have criticized banks for helping fuel a controversial industry. Federal regulators moved in recent weeks to tighten their oversight of the payday loan industry, but the underlying financing of the industry has gotten less scrutiny.
“What I hear less about is how it actually works, what makes it possible for payday lending to exist,” said Rust, who writes the blog Bank Talk. “It could not exist on the scale that it exists right now if not for Wall Street investments. I just think it’s the other end of the story.”
The banks argue they’re just doing business.
In a prepared response, Wells Fargo said that the lending is a small percentage of the bank’s commercial loan portfolio, and that it exercises “strict due diligence” to ensure its customers “do business in a responsible way and meet the highest standards.”
“We put our payday lending customers through this process regularly, as often as every three months and at least annually,” Wells Fargo spokeswoman Peggy Gunn said. “In fact, we put our payday lender and check cashing clients through an additional level of scrutiny — a separate, distinct compliance and credit process that includes on-site visits in most cases and a review of their business practices.”
U.S. Bank said the money service companies it deals with have to meet the bank’s strict underwriting standards. It’s diligent in reviewing them to make sure they comply with regulations, a bank spokesman said.
Fort Worth, Texas-based Cash America International Inc. declined to comment.
Via term loans and lines of credits, commercial banks provide low-cost capital to payday lenders, typically charging about 4 percent to 5 percent, said Robert Ramsey, senior analyst at FBR Capital Markets & Co. who covers publicly traded payday companies.
Payday lenders in turn can use the money to lend to consumers at triple-digit rates. They also use it for such things as acquisitions and financing periods of rapid growth.
“It’s the primary source of debt and financing that the companies use,” Ramsey said.
The “credit facilities,” as they are called, are buried in Securities and Exchange Commission documents of publicly traded payday lenders and the terms are subject to frequent changes.
If publicly held pawnshops, rent-to-own retailers, buy here-pay here lenders, tax preparers offering refund anticipation loans and debt collectors are added in, the banks have extended more than $4.5 billion in lines of credit and term loans to fringe consumer finance companies, according to Rust, who is working on a report about the financing.
Wells Fargo is the leading provider, according to Rust’s research.
It’s not the only hand banks have in the payday world. A number of banks, including Wells Fargo and U.S. Bank, make expensive payday loan-like deposit advances to customers, products that bank regulators are now cracking down on. Banks also facilitate fast-cash loans as most online borrowers elect to have payday lenders deposit money directly into their checking accounts, and collect payments from the account, said Tom Feltner, director of financial services for the Consumer Federation of America.
Some borrowers have faced challenges with their banks when they’ve tried to revoke that authorization and stop collection, Feltner said.
Industry supporters argue the fast-cash industry helps millions of people bridge unexpected shortfalls and make ends meet, and that triple digit APRs are justified by the increased risk. The market has flourished, particularly online, despite mounting regulation.
But there is mounting research backing up what consumer advocates have argued for years — that payday lending too often traps borrowers in unaffordable repeat loans they can’t repay. The Consumer Financial Protection Bureau last month issued a report on payday loans concluding that they may be marketed as short-term fixes, but a sizable number of people take out repeat loans because they can’t fully repay an earlier one.
Minnesota, considered a hybrid state when it comes to regulating short-term lenders, limits payday loans to $350 and caps the annual percentage rate on a two-week $100 loan about 390 percent, according to the Pew Charitable Trusts.
There’s nothing illegal about the credit facilities payday lenders have with banks, Rust said, and they don’t threaten bank stability. But the Office of the Comptroller of the Currency (OCC), which regulates many of the banks involved, could rein in the payday industry if it pressured banks to exit, he said.
Liz Ryan Murray, policy director at National People’s Action in Chicago, which published a report about bank funding of payday lenders a few years ago called “The Predators’ Creditors,” said her group has provided the information to bank regulators in meetings. The basic reply, she said, has been “We can’t really tell them where to put their money.”
She said she hopes the actions federal bank regulators took recently to clamp down on the deposit advances banks make “is a sign that attitude in changing.”
An OCC spokesman said the bank-payday funding relationship “is an issue on the radar.”