A California consumer group is urging banks and thrifts to stop financing payday lenders and instead develop products and services that meet the needs of low-income consumers.
The California Reinvestment Coalition said in a study released last week that by providing lines of credit to companies such as Ace Cash Express Inc. and Dollar Financial Group Inc., banks are encouraging the spread of payday lenders in low-income neighborhoods.
The number of payday lending and check-cashing outlets in the United States increased by more than 1,000% between 1996 and 2003, and California has five times as many outlets — roughly 6,500 — as it does McDonald’s restaurants, the study found.
“Millions of Californians are paying much higher rates than they should, which directly impact their ability to pay their families’ basic expenses,” the report said.
Alan Fisher, the study’s author and the director of the coalition, said it has developed two products it is offering to banks to compete with payday lenders and check cashers. (One product is a checking account with no monthly service; the other is a short-term loan.) So far it has found no takers.
According to Gregory Squires, a professor at George Washington University in Washington, that’s because some banks have probably concluded that lending to check cashers and payday lenders is more profitable than having multiple branches in the low-income neighborhoods.
Citing public records, the study found that Dollar has a $60 million revolving credit line with Wells Fargo & Co.; Advance America, Cash Advance Centers Inc. has a $300 million facility with Bank of America Corp.; and Ace has a $200 million revolving line with Wells and JPMorgan Chase & Co.
“Most people look at this two-tier financial world and just think that’s how it is, and don’t really think historically about how the payday lenders and check cashers have grown geometrically,” Mr. Fisher said.
The study was equally critical of banks, which it accused of failing to meet the needs of low-income consumers, and payday lenders, which it accused of charging “usurious” rates and targeting military personnel.
But Steve Schlein, a spokesman for the Community Financial Services Association, a trade group representing payday lenders, said that without them million of consumers would have no access to credit.
“Would CRC prefer that nobody offer short-term credit in those neighborhoods, or that potential customers turn to the unregulated underground economy?” he asked.
Also, payday lenders benefit the economy by offering jobs and paying taxes, Mr. Schlein said.
The study recommended that regulators prohibit banks from financing payday lenders and mandate that banks develop products to better serve low-income consumers.
Mr. Fisher also said that, to stop the proliferation of payday lenders, more cities should consider passing laws like one Oakland adopted in October. Under that law, check cashers have to apply for city permits and limit operating hours.
Meanwhile, the Defense Department, which is concerned that payday lenders are targeting soldiers, is pushing for state laws that would cap interest rates on the loans.
For example, the department is supporting a bill pending in the New Mexico Legislature, and state officials have expressed concern that the department will take the concentration of payday lenders around bases into account as it considers future base closures.
