Banks Caught Lying About the Payday Loan Industry: The Real Predatory Lenders, Part I

From what they say in the commercials and through their various positive public relations efforts, to all their talk about helping you make money on what you put in, they carry themselves as being the most helpful within the financial services industry. However, like so many things, they command you to pay no attention to the folks behind the green curtain, as to keep their real motive concealed from the scrutiny of the mainstream media. While I shall elaborate on all of this and provide evidence, let’s put it this way. “Reputable” banks tout that they are FDIC insured, with FDIC standing for Federal Deposit Insurance Corporation. However, considering routine practices of almost every bank, it might as well stand for “Find Dollars in (All) Customers.”

Walk into virtually any bank branch and you will find, besides mountains of blank deposit slips, fancy pens on chains that often never work and pots of coffee-flavored water available for the public to partake in by the Styrofoam cup full, something else that any branch is never in short supply of; bright, cheery brochures chock full of “information” on the multitude of different “services” that your friendly neighborhood branch location can “help you out with, for whatever stage of life you’re in.” Seriously, their intent, I learned, is anything but wholesome.

In fact, I have seen the change in demeanor first-hand, and I wasn’t even looking to purchase anything. A couple of weeks ago, I made a trip over to my bank in order to deposit a paper check (pretty soon destined for the same fate as the VCR), and walked over to one of the little counters. I filled out the deposit slip, signed the back of the check and proceeded, on my turn, to the next teller, of whom I struck up a little conversation with.

“So, how are you doing today, sir?” the young lady asked, verifying the check I had given her and taking a glance at my photo ID safe and sound in the center viewing window of my wallet. I told her; typically busy with my job, working hard to save some money and seriously considering, in a few years, spending those well-earned savings on the down payment towards my own house. But then, much to my surprise, this declaration which I intended as just a pleasantry incited a similar reaction as when someone on Pee Wee’s Play House said the secret word. However, instead of screaming, this initiated a long-winded sales pitch about not just “we’re the best place to take out a home loan,” but also some diatribe about their “competitive” rates on home equity loans. Only in such sectors will a question about my life turn into a blatant attempt to milk a quick buck out of me.

One other thing has happened to me in the past as well, despite the fact that I’ve gained a great reputation for being responsible, careful about budgeting and making sure to keep my checkbook balanced to the penny. Now, mind you, I am extremely careful and make sure that, upon making a purchase, I write it into my register right away. One time, I bought a latte at Starbucks, making a transaction for $4 and change. However, I didn’t have my checkbook on me and just took the receipt with me, telling myself to make sure to add the transaction to my record when I got home. I never did. However, I didn’t realize my mistake until I received a notice from my bank in the mail informing me that I had overdrawn my account by about three-something and that I had been slapped with a whopping $34 overdraft fee. Worst of all, each transaction I made in the red, I was told, would result in another $34 and I had a mere 10 days to put some money in there or severe damage would be incurred on my credit rating.

At the same time, these organizations, who sell themselves as being some of the best help that a person can get in getting their finances on track, are the first and some of the loudest folks out there on the picket line, condemning the payday loan industry as those who “target the downtrodden” and of course that favorite line, “trap them in an endless cycle of debt.” On that token, however, after extensive research, I have mounds of evidence, on hand, that not only are those false accusations that banks are making on behalf of the payday loan and cash advance industry, but also that they hide fees and are truly predatory in several of their routine practices.

If any of this sounds a little bit odd to you, consider the following. For every “service” that a bank may offer to you, there are a multitude of fees attached to each one that have the potential to cost you dearly in the end. And if not a fee, they have some loophole or other sneaky, yet perfectly legal, way to turn a profit one way or another. I found out about this just under a year back, when a friend of mine and I, at the same time, decided to finance the major purchase of a somewhat pricey piece of furniture; she, a table and chairs and me, a recliner and then an upscale mattress set. Instead of credit cards or any other kind of revolving credit, both of us opted for their “X number of months same as cash plan.” However, it was when my friend didn’t read the fine print that it cost them a lot more in the end, but my doing my homework meant that when I made the last payment, I could cut ties with the originating bank.

But, before I go a little further into this story, perhaps I should clarify something for those who might be a little confused. When hearing commercials for companies offering commodities that are, for most people, not large enough to warrant loans that extend for several years, such as a car, home or student education loan, but usually are too big to be paid in one or two paydays, they probably mention a feature called “x months same as cash,” with the x typically replaced by 6 or 12. What this means is that when you purchase something under these terms, you can repay the full amount in that many months, or before that, and you, under ideal circumstances, won’t be charged any interest. But just make the minimum monthly payment of these terms and carry the balance more than x number of months, and you’ll be stuck paying exorbitant interest upwards of 20 percent! So, for example, I bought a 600 dollar recliner and paid it off in four months. If I took more than the allotted 12 to come up with the 600, I would’ve been forced to pay 23 percent interest.

Anyways, I bought the recliner and chose the 12 months same as cash option, as did my friend. Both of us were able to pay them off inside the cutoff time; my friend in six and mine being knocked out in four. Though while when I made the final payment four months later and was done with it all, my friend made the last payment but was, out of the blue, sent a bill for an “early payment fee” and all of the interest that was in the process of accruing at the rate of 23 percent. It ended up being quite the unpleasant surprise, though if she just was to read the terms and conditions contained within the teeny-tiny print, she would’ve known, right off the bat, that it was one of the things that she opted for when she signed the loan agreement. Unfortunately, this is one term, under such agreement that is never disclosed by banks setting up such transactions. Legally, they must put this into their literature, but do so in microscopic print, as to suggest that this is stuff they don’t want you to know about.

Financing smaller major purchases carries enough hidden charges and/or penalties by themselves, but when it comes to financing a truly major purchase, namely a house, there is not only a laundry list of hidden charges, but banks’ methods of targeting, marketing and originating loans to almost anybody, regardless of their ability to pay, has not only risen, but quickly escalated to an epidemic, with statistics that are down right bleak.

According to seekingalpha.com, foreclosures on mortgage loans have increased by 121 percent over the past year, with no end in sight. Additionally, studies show that those who are hit, the vast majority of the time, are those who are scrounging and otherwise struggling to make payments that were designed specifically to get people into homes that are way out of their price range. In other words, these banks are preying on people entranced by the allure of home ownership, by using their fragile emotional state to get them into that dream home; even if it means eating franks and beans for every meal for the next thirty years, the typical duration of a mortgage loan. But then, the biggest problem is that the loan amounts are so high, coupled with “incentives” snaked in such as “zero-down financing,” sometimes eating franks and beans for every meal turns into choosing between paying the mortgage OR franks and beans, taking the kid with a cold to the doctor or picking up the tab on that last minute car repair. And, unfortunately, it’s people like those who opt for feeding their family and keeping them healthy that banks come to and salt the wounds of. And surely, this is not an uncommon problem.

In doing my investigation into under-the-radar, yet legal, predatory banking practices, I performed a Google search pertaining to “foreclosure stories,” in search of not just statistics, but the humanistic and emotional damage this epidemic has done to the fabric of our great nation. One story, for instance, found on the female-oriented blog site, Blogher.com, features author Suzanne Suzannadanna weaving her tale of falling behind as a result of learning that her and her husbands’ dream jobs in Florida weren’t so dreamy in the ways of their being unstable. At the same time, her health began to deteriorate, so life also became about putting that on hold on in favor of making sure they didn’t fall behind on the bills…too much. But then, work became less and less reliable with significant cuts in hours and naturally, paying the bills became tougher and, eventually, impossible. On the other hand, the bank didn’t care and their true colors bled through of, “as long as we get our money, we’re good.” And on this note, they became that much more aggressive until, of course, the inevitable happened.

“Funny thing about mortgages. When you’re late, you aren’t allowed to pay a little to get at least something in,” said Suzannadanna. “No, you have to pay ALL the money you owe.” And, unfortunately, this lack of flexibility and her bank’s mentality of “I don’t care about your needs, It’s all about making sure that mine are met,” meant that it would all reach a breaking point in the very near future. And it did a few months later, after learning that their bank wouldn’t even talk to them unless they threw a lot of money their way. Yet another way that the banking industry is “Find Dollars in (All) Customers” (FDIC) insured.

Now, a few paragraphs back, I told you about my buying a $38 dollar latte as a result of forgetting to balance a 4-dollar transaction at Starbucks into my checkbook. Yes, I’ll be honest, that was my own stupid mistake that, thankfully, didn’t bury me in the hole. However, there are a ton of people out there who live paycheck to paycheck and/or have no choice but to spend their checkbook’s contents down to almost nothing. But thanks to a very shady, yet completely legal way of their doing business, banks have come up with another way to prey on these otherwise downtrodden folk, do the exact same things that they wrongfully accuse the cash advance industry of doing and, in the end, roll in cash by the wheel barrow.

So, what is this practice that banks utilize to rake in the big bucks and why hasn’t anyone cried foul? It is all of the big banks’ standard policy, in the case of consumer checking accounts, to manipulate their customers’ debit transactions from largest to smallest, so that the bigger transactions take your funds first, meaning that a lot less is left over, often an insufficient amount, to pick up the tab on that lunch you had at McDonald’s, or the cup of coffee you had this morning from Starbucks. And what’s the result? Each transaction, valued at just a few bucks ends up running you the transaction plus the NSF fee per occurrence. If it sounds a little crazy, consider this real example that happens every day.

Seekingalpha.com, on one of their articles, provides a table illustrating an example of just how this predatory practice works in milking huge sums of money from their unsuspecting customers. Honestly, I was a little skeptical at first when someone was telling me of such a practice, let alone how much more damage it can do than if transactions clear in the order of their inquiry time, but nevertheless, the chart shows a person, who begins with a balance of $4,000, posting 5 debits of varying amounts in the order of their inquiry.

The person, on this day, spent $1.95 at Starbucks at 6:41 in the morning, $16.80 at the post office at 12:14 in the afternoon, $8.45 at Subway at 12:43, $1,075.52 to a mechanic at 1:15 then made a mortgage payment worth $2,952.75 at 3:45. Unfortunately, by the time the person paid the mechanic, they only had $2,897.28 remaining in their account, but she posted a mortgage payment of $2,952.78, making an overdraft of $55.50. This turned into $89.50, with the $34 overdraft fee.

The damage is much more pronounced, however, with how the banks really do it, messing around with the order of your inquiries so the big ones clear first. And here’s the proof; the same person who begins with $4,000 one day makes the same debits at the same times. But when the mortgage posts first, then the mechanic, the trip to the post office, Subway then Starbucks, everything except for the mortgage payment is returned. As a result, the bank’s sleazy maneuver causes that person’s transactions to bounce 4 times, bringing the negative total, including 4 overdraft fees, to $191.50. The difference totals to a whopping $102 which will ultimately end up in some bank executive’s pocket without any remorse for taking advantage of the downtrodden. Is that an example of being a good corporate citizen? Didn’t think so. Nobody is calling them out on the carpet, however, because of their usual rebuttal of, “well, the mortgage is the most important thing to clear, or the rent payment, so that is why we take the big ones first.” If only someone did stand up against such a maneuver.

Now, you might think that, before learning of the shady practice with processing debits, that bank overdraft fees are just little things that give banks of various sizes a few extra bucks for little extraneous things, such as refilling the pens that never work or putting out cookies and coffee-flavored water for all of their customers; sort of like paying the pittance of overdue fees to your neighborhood or school library for failing to return a book you checked out on time. If you’ve believed this to be true, think again.

Following the visual proof that the bank’s practice of manipulating order of pending transactions, the author of the Seeking Alpha article I found provides the results, on this token, of their own investigation into sleazy bank practices. They found that a substantial amount of the profits made by the 10 biggest banks, such as Washington Mutual, Bank of America and Wells Fargo, are generated by fees and/or penalties; especially those made when someone overdrafts. As a matter of fact, another study found that in the ten biggest banks in America, 54 percent of their total revenue comes from fees and penalties that they impose on their customers. But wait, there’s more!

Within the Seeking Alpha investigation, it was found that Wells Fargo, processes half a million (500,000)(!) overdrafts per day…PER DAY! Additionally, 3/4 of all of such occurrences are a direct result of this routine industry practice. And if doesn’t sound insane just yet, let’s put it into perspective yet again. Let’s say that your bank processes 500,000 overdrafts on every given day. At $34 per instance, that totals to $17 million generated through this avenue alone per day, translating into an annual gross profit of a “modest” 4.65 billion dollars. If this isn’t taking advantage of the poor and/or downtrodden, I really don’t know what is.

Now, should you go to the bank or give a ring to a representative in one of their call centers in search of answers as to why you knew you over drafted once, but want to know how it is you got zapped five times with overdraft charges, the answer is always goes something like, “don’t spend your account down to nothing.” “Or, if you find yourself having to spend down to nothing, we can help you out with overdraft protection.”

Overdraft protection is an insurance of sorts that banks offer to their customers. For the price, it is trumpeted as prevention from having to pay all of those pesky fees and penalties each time that you bounce a check or bring your account into the red. The big thing, however, is that it is not just pricey, but on the fast track to rip off territory. Donald Black, in his article “How Bad Are Payday Loans,” debunks the myth that the fee or “interest rate” charged on having “bounce protection” on your account is a good deal. In an investigation, he figured out that if you take out the “protection” for an entire year, the APR on your account would total to 2400…not 24.00, but twenty-four hundred percent. Sorry, I just wanted to make sure that nobody read that incorrectly.

Such a statement can be made not just in regards to such practices bringing more financial woes to the downtrodden, but also to the blatant, out front targeting of groups that are traditionally less affluent; traditional college students and the elderly.

Studies show that, according to Jim Rendon of Smart Money, banks see college campuses as a “gold mine.” Why, you might ask? Well, for a plethora of reasons, but one of the big ones is that college students are some of the biggest purveyors of all things new, fast, easy, within immediate reach and that eliminate the need to go several towns over just to do everyday things. After all, wouldn’t it be cool if the same University ID you use to show proof of attendance and check out materials from the library for class projects doubled as your ATM or check card? Or wouldn’t it be cool to not have to worry about carrying cash or your ATM card for all those things you might not necessarily need, but deserve? Wouldn’t life be so much easier with a student credit card?

Obviously, enough students think this and banks have wasted no time seizing the opportunity. In fact, over 120 American universities, says Rendon, have cut deals with banks to issue student ID cards that double as their ATM/check cards. And nobody cries foul, however, because the schools make millions from these deals, sometimes getting in on the action when students make purchases with the multi-function ID cards. And, of course, it is great, because schools have more money to make student life better for all, though the means of which they acquire it is questionable. They also are doing the same with credit cards, often being the only ones willing to “take a risk” on new customers. The problem is, though, that they don’t view it as a risk, considering that they can take in revenue from interest rates of 20 percent or more from each one of these folks coming to them in search of revolving credit.

And then there’s the fact that most college students aren’t the most “on solid ground” of bank customers, purchasing meals with the food plans paid for by their financial aide, living on Top Ramen and macaroni and cheese and hungry for a blowout sale on laundry soap and DVD movies at the campus grocery and book stores. And with less money, you also will run into a few students, now and then, who aren’t the most responsible of spenders or credit card users. This can easily translate, just by irresponsibility and banks’ order of transactions practice, into millions raked in from late and overdraft fees, credit card over the limit fees and so on. And when you seek to capitalize on a person’s lack of financial know-how, coupled with the fact that they don’t have that much to throw around in the first place, what do we call that? Say it with me; “predatory.”

After college, you get a job, hopefully in your field, you make a great salary to live and/or raise a family on and do so for the next several decades. And when that time expires, you, as an elderly person, retire and live out the rest of your life on a fixed income determined by the money you made while you were working. And in the past generation of these folks, who worked to make life for the members of this generation great, new technologies, “innovations” and other things that we consider to be part of our lives in this day and age, are things they’re not too keen on.

For instance, I, personally am not exactly an active participant in the whole “digital music revolution” thing. I mean, I understand that nowadays, there are a thousand and one ways to learn about, search for and purchase music. On the other hand, I grew up purchasing CDs and refuse to cease doing so, considering that this is what I’m used to, regardless of how many of my hipper brethren go digital, carry everything on mega-capacity media players and yearn for the days of food in pill form. And just like me, with my preference for CDs, studies show that the elderly have an overwhelming preference for a method of payment that, to this generation is in the same boat as the audio cassette, the Macarena and the Ford Festiva; the personal check.

In all their years of working, the personal check has been the one and only way that the now elderly acquired all of their goods and services. But unfortunately, it seems as if fewer and fewer retailers, on a weekly basis, phase out the personal check as an acceptable form of payment, in favor of the debit or ATM card. Banks, in all of their public relations statements, claim that it is to make an easy transition into different times, where one is very hard pressed to find a place, even in the largest of cities, which still accepts checks. The move, they claim, is also in light of the staggering number of bounced and bad checks that people try to pass and the money it costs everyone to clean up the mess.

But what they don’t want you to know is that with checks out of the picture, everyone, of course, is forced to use a debit card to make all of their purchases. And, as mentioned prior, this then means that everyone is subject to, yep, you guessed it, the bank’s predatory practice of manipulating the order of your transactions which, in the past, was impossible to do with paper checks. And for an elderly person who lives on a low to moderate fixed income and, possibly, keeps very little or almost nothing in their checking account at any given time, not being in the loop about the difference between clearing check transactions and point-of-sale (POS) transactions truly can drive them down into a “never-ending cycle of debt.”

The main point that I am aiming for here is not only do the major banks charge their customers fees for every little last thing and do everything they can to make profits of meteoric proportions off of the woes of the downtrodden, but they never disclose any of such practices, for the most part, to the general public. In fact, these banks, who, if you remember, make more than half of their profits off of nickel and diming their customers in the form of fees and penalties, don’t want you to know about. This is because if the general public got wind of this disturbing truth, it just may lead to government action which, quite possibly, could regulate many of them out of business. Because, as has been expressed, fees and penalties are the pulse of the big banks, but it you take that away, their hearts stop beating.

And now, you also should understand, with all of the evidence set forth, the benefits and therefore the case for the no fax payday loan industry. The process for obtaining one is quick, easy and painless, with all fees disclosed up front and no hiding. This way, you know exactly what you’re doing long before you receive your funds and you’re aware of your rights and responsibilities as a client.

For all of the reasons and more outlined above, banks condemn America’s cash advance companies and beg the government to regulate them, even out of business, for the simple reason that if people have an alternative to insane late and overdraft fees, it takes a huge dent out of the banks’ already humongous profits; and this isn’t just hear-say. In fact, Georgia housed the industry for several years, but banned it completely in 2004. After the fact, the number of bankruptcies filed and the revenue brought in to banks by way of late and overdraft fees skyrocketed; 1.2 million more bad checks processed by the Federal Reserve Check Processing Center in Atlanta, than the previous year, to be exact, translating to $36 million more made on over draft fees alone, when the fee is the average $30 per infraction. And with some banks, where the over draft charge is a little higher, that means so is the bankroll that flows to them from the pockets of their customers. But if the government got a whiff of these dirty practices, the banks and their fat pockets would be on the chopping block in an instant.

Now you know why members of the payday loan companies and many citizens work, tooth and nail, to keep the industry afloat. It’s not just to keep thousands of jobs in all of our states, which is important, but also to maintain your right to seek out quick and safe assistance when your funds are low. And surely, in the words of Mr. Spock, having it any other way is just illogical.