Wall Street Mega-Banks Employ 'Undercover Brothers' to Rip Off Minorities with Payday Loan Scams
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All the major banking institutions say the right things about race and equality. They all have diversity programs. A few financial industry leaders, like Robert Rubin and Jamie Dimon, even support socially liberal causes. Yet the banking industry covertly uses payday lenders as a "front," a way to prey on minority neighborhoods without getting their hands dirty.
It's a classic Rigged Game: The banks deny normal credit to lower-income people, then profit from usurious forms of alternative credit (or as it's known in economic circles, "fringe banking"). Fortunately, efforts to draw attention to these practices are beginning to have having some effect.
Race and lending
Payday loans hurt all their customers, of course, not just minorities. But studies have shown that payday lenders disproportionately exploit minority neighborhoods with loans that are issued at an average annual interest rate of 455%. The average number of loan each borrower takes out is nine pre year, according to one study, as these high rates lead to a cycle of indebtedness. The loans are secured with the borrower's next paycheck, so only people with jobs qualify. It's a vicious circle, designed by the banking industry to maximize profits at the expense of the economically vulnerable.
This pillaging is taking place against the backdrop of an ever-increasing racial/economic divide. A Brandeis University/Center for Responsible Lending study showed dramatic increases in the economic gap between white and African-American households, as the difference in their financial assets quadrupled between 1984 and 2007.
And that was before the economic crash of 2007. The meltdown drove many low-income wage earners even deeper into debt, and the unavailability of loan modification programs traps them there. The banks also caused the crash and are ensuring that loans can't be modified, which takes the Rigged Game to an even higher macroeconomic level.
Payday lenders: Big banks' predator drones
Payday lenders were originally storefront operations, but more and more belong to highly-profitable chain operations. The payday industry has grown exponentially, thanks to Wall Street funding. As a report from National People's Action and the Public Accountability Initiative demonstrates, big banks - many of them TARP recipients - are fueling their growth with "financing arrangements, leadership ties, investments, and shared practices." One lender, Advance America, was given $40-50 million in credit to build their business before they had even opened a single location.
By acting as silent partners to the payday lenders, the big banks can exploit lower-income people group with a very unpopular form of lending without tarnishing their own brands. Payday lenders are Wall Street's predator drones, a tool they're able to deploy without putting themselves in danger. That has to change - and it is changing.
Advance America: Caught in the act
What did Advance America do with that money? We know they used some of it to open stores in North Carolina that violated state law, by charging 450% interest at a time when 36% was the legal maximum. (They never admitted wrongdoing, but agreed to pay $ 18.5 million to settle a class action suit against them.)
Advance America's actions were "your tax dollars at work": It received large chunks of its startup capital from Bank of America, which received $45 billion in TARP funds. Its other major investors were Wachovia and Wells Fargo. Wells Fargo received enormous tax breaks for its acquisition of Wachovia, as the result of a special IRS ruling during the banking crisis. Wachovia and Wells Fargo have also been deeply involved in the laundering of drug cartel money, which means they've profited by promoting yet another social plague.