Commercial banks say that they’re just doing their job.
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.