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Wall Street Mega-Banks Employ 'Undercover Brothers' to Rip Off Minorities with Payday Loan Scams

The big banks are using middlemen to exploit lower-income people without tarnishing their own brands.

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Nor is it a matter of second-guessing the borrowers' choices. The key words are are "rigged game," "asymmetrical," and "entrapment." First the banking industry forecloses borrowers' other options (the rigged game). They have no alternatives left once they contact a payday lender. What comes next is a classic example of what economists call an "asymmetrical transaction," where one party has more information than the other. The payday lenders and their big-back financiers understand how the cycle of entrapment works. Most borrowers don't (it's not well-known by the general public), and quickly fall into a spiral of repeated cash flow problems caused by the cost of borrowing - which in turn leads to greater debt. They're trapped into a downward spiral of indebtedness that their exploiters have not only studied, but rely on in their business models.

Everybody loses

It's not just borrowers who lose out in the payday system. The money they give to these institutions in interest payments is taken out of the general economy. Every dollar of interest paid to a payday lender (and its big bank backers) is a dollar that's not spent for food, or clothing, or other goods that stimulate the economy and provide jobs.

Fixing a rigged system

There's a solution for low-income people who have short-term borrowing needs: Provide them with access to credit on reasonable terms. That will either require the big banks to step up - which is reasonable to ask of institutions that benefit from low-cost Federal Reserve money and implicit future government help - or a government program to support credit unions and other low-cost and trustworthy alternatives.

Payday lenders need to be cut off from the lifeline of Wall Street money that's fueling their growth. Fortunately, the big financial institutions are beginning to feel the heat. A report in the Los Angeles  Times suggests that big banks are showing a certain  cooling of passion toward their payday lender partners. But the pressure on them must be unrelenting. Citizen action will help (here's  a good place to start).

A coordinated program should end the payday lenders' lifeline to easy credit - a lifeline that stretches all the way from the Federal reserve to the "loan store" on a poor neighborhood streetcorner. Other forms of lending should be promoted, along with with effective financial education and advisor programs.

It's time to stop letting the big banks use this rigged game to take advantage of minority Americans and everybody else who walks through their doors, while hurting the economy for everyone else.


This post was produced as part of the  Curbing Wall Street project. 


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