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How the Biggest Banks are Bankrolling the Payday Loan Industry

This report traces connections between the largest payday lenders and Wall Street
banks, including financing arrangements, leadership ties, investments, and shared practices. The following are some of the report’s key findings:

Payday loan companies depend heavily on financing from big banks, including Wells Fargo, Bank of America, and JPMorgan.

  • Big banks provide $1.5 billion in credit to publicly held payday loan companies, and an estimated $2.5-3 billion to the industry as a whole.
  • Wells Fargo finances more payday lenders than any other big bank – six of the eight largest payday lenders. Bank of America, JPMorgan Chase, and US Bank also finance the operations of major payday lenders. Bank of America and Wells Fargo provided critical early financing to the largest payday lender, Advance America, fueling the growth of the industry.
  • Publicly traded payday lenders paid nearly $70 million in interest expense on debt in 2009 – a sign of how much banks are profiting by extending credit to these companies.
  • Some banks do not lend to payday lenders due to “reputational risks”
    associated with the industry.

Many payday companies have strong ties to Wall Street.

  • Two Bear Stearns executives guided the rise of payday lender Dollar Financial, and two Goldman Sachs executives sat on the company’s board when it went public.
  • Advance America’s executives and board members have ties to Bank of
    America, Morgan Stanley, and Credit Suisse.
  • Bank of America and its subsidiaries own significant stakes (more than 1%) in four of the top five publicly held payday lenders: Advance America, EZCORP, Cash America, and Dollar Financial.

Payday financiers are major bailout recipients, and continued to extend credit to payday lenders throughout the financial crisis and following the bailouts.4

  • Big banks financing major payday lenders received $105 billion in TARP funds in late 2008. Bank of America received $45 billion, and Wells Fargo and JPMorgan received $25 billion each. Big banks continued to negotiate and amend credit agreements with payday lenders throughout the financial crisis and after the bailouts.
  • Two payday lenders, EZCorp and Cash America, used loans negotiated with JP Morgan and Wells Fargo and shortly after the bailouts to buy pawn shop chains in Las Vegas and Mexico.

Big bank financing of payday lending led to the rise of a powerful industry lobby which has successfully fought efforts to cap interest rates.

  • Several payday lenders began dominating the industry in the late nineties on the strength of bank financing. These lenders formed a powerful lobbying group, the Community Financial Services Association, which has spent $11.3 million on federal lobbying efforts since its inception in 1999.
  • Major payday lobbyists also lobby for financial institutions such as Morgan Stanley, Fitch Ratings, Visa, Blackstone Group, the Managed Funds
    Association, and the Private Equity Council. One lobbyist, Wright Andrews, was previously a major lobbyist for the subprime mortgage industry.
  • A national interest rate cap of 36% would effectively put payday lenders out of business, according to Advance America’s disclosure filings, but such a cap failed to gain traction during the financial reform process due to the clout of the financial industry’s lobby.

There are signs that the payday lending business will expand in the future.

  • Big banks such as Wells Fargo, US Bank, and Fifth Third are now offering new payday loan-style products. Called “checking advance” products, these short-term loans carry interest rates of up to 120%.
  • Some Wall Street analysts believe that the industry will grow in 2011 as financially-stretched borrowers have increasing trouble securing credit cards. The industry is also predicted to continue expanding into pawn lending and other services, such as prepaid debit cards.
  • Bank of America and Goldman Sachs are currently leading an IPO for prepaid debit card company NetSpend, which partners with many payday lenders and is owned by the owner of ACE Cash Express, JLL Partners.

Download the full report »

Released in partnership with National People’s Action (NPA).