BI: JPMorgan, Banks Back Lenders Luring Poor With 780 Percent Rates | Bloomberg

......Since emerging from rural Tennessee in 1993, payday lending has expanded beyond the fringes of the consumer finance industry. In 2003, the industry generated $6 billion in fee revenue from $40 billion in loans, according to Stephens Inc., a Little Rock, Arkansas-based investment bank.

As many as 14 million of the 105 million U.S. households used payday lenders in 2003, according to Stephens analyst Dennis Telzrow. In May, he projected the industry's revenue would increase 12 percent to 18 percent in 2004.

Four of the top 10 U.S. banks measured by assets have helped fund the rise of payday lending by extending credit lines......

Payday lenders' fees typically run at an annual percentage rate of 390 percent or higher compared with about 18 percent for cash advances drawn on a credit card.

Such high rates trap borrowers in a cycle that few can break without defaulting and facing legal judgments, Fox says. To skirt usury laws, the payday loan industry has persuaded 36 states to legalize its lending practices.

Several Western European countries permit similar loan offers; in the U.K., unlicensed "doorstop lenders" charge annual rates as high as 1,000 percent, according to the New Economics Foundation, a London-based research group.

In the U.S., payday lenders target the working poor who have bank accounts and jobs yet live payday to payday with pennies to spare, Fox says. The lenders' customers earn an average annual income of $25,000, according to a 2002 study by John Caskey, a professor of economics at Swarthmore College in Swarthmore, Pennsylvania.

...... The Community Financial Services Association of America, the payday lending industry's Alexandria, Virginia-based lobbying group, defends the practices of its 100 members. Steven Schlein, the association's spokesman, says payday lenders offer a valuable stopgap for consumers who find themselves in need of quick cash.

He says the $15 charged for a $100 "deferred presentment," as the association calls a payday loan, is half of the typical $30 penalty a bank imposes for bouncing a check. "We're offering a good alternative," Schlein says. "This product isn't a debt trap."

..... Payday lending outlets have grown to 22,000 nationwide -- from 200 in 1993 -- and these storefronts have become as commonplace in America's shopping centers as Blockbuster movie rental stores or fast-food franchises.

In California, there are 5,626 payday lending outlets, five times the number of McDonald's restaurants in the state. Many payday lenders have moved into old bank branches with functioning drive-through windows so borrowers don't have to leave their cars to get cash.......

Wells Fargo & Co., the No. 4 U.S. bank, and JPMorgan Chase & Co.'s Bank One unit in Chicago have extended a $90 million credit line to Cash America International Inc., a Fort Worth, Texas-based company that offers payday loans from 544 pawn shops and other outlets, according to U.S. Securities and Exchange Commission filings.

New York-based JPMorgan, the No. 2 U.S. bank, provides credit to ACE Cash Express Inc. of Irving, Texas; Mr. Payday of Kentucky Inc.; and Illinois Payday Loans Inc., among others, according to Uniform Commercial Code records, which show lending relationships.

Wells Fargo, based in San Francisco, has extended credit to Payday Inc. in Albuquerque, New Mexico; Payday Plus Inc. in North Dakota; and Payday Express Inc. in Omaha, Nebraska, among others, according to UCC filings. In 2000, Wells Fargo provided $140 million in revolving credit and a term loan to Advance America.

Wells Fargo was willing to lend the money at 3.5 percentage points above the London interbank offered rate, a benchmark interest rate for loans between banks, according to an SEC filing.

Payday lenders draw on those credit lines to make loans to borrowers. In an SEC filing for its initial public offering, Advance America says that losing its credit line would have a "material adverse effect" on its financial condition.

"The big banks are profiting from a predatory financial industry," says Matthew Lee, executive director of Inner City Press/Fair Finance Watch, a New York-based organization that lobbies against predatory lending. "By partnering with payday lenders, they have enabled them to sprout like mushrooms all over the country."......

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