WaPo on High-Cost Banking

The Post,which has done good work previously on the high cost of poverty, weighs in with a look at efforts to reign in the most abusive practices at the low-end of the financial-services industry, check-cashing, payday loans, and the like.

The story puts the number of the “unbanked,” the people who have no choice but to use these services, at 40 million and notes that the much-discussed Consumer Financial Protection Agency would have jurisdiction in this now-neglected area (it’s now regulated, not well, by the states). Legislation in the House would prohibit triple-digit interest on short term loans and the like.

What I found most interesting were private-sector responses. Wal-Mart, we learn, is cutting its price for check-cashing to a maximum of $3. (The Post should have told readers what the standard price is; it’s 1.4 to 4 percent, according to Reuters.)

What’s more, payday loan industry protestations to the contrary, some financial institutions manage to provide short-term credit on small loans without charging usurious rates.

North Side Community Federal Credit Union in Chicago, manager Ed Jacob said, introduced a six-month, $500 loan with 16.5 percent interest several years ago. The credit union has since made 5,000 such loans, and it has become one of the most popular products.

A startup in California charges 36 percent on loans from $250 to $2500. Think that’s high? compare it to the interest on this payday loan to a North Carolina construction worker:

Jeffers turned to a payday lender to get $800 for his rent. When he repaid the loan two weeks later, he owed about $1,100, meaning he paid more than 30 percent interest, or 975 percent on an annualized basis.

“All you’re thinking of is getting your money to take care of your situation,” said Jeffers, who was standing outside a check casher in the District on a recent afternoon after buying a money order to pay his rent back home. “It just seems like a lot of interest to pay back.”

It seems like it because it is. Thank goodness those aren’t securitized. They aren’t, are they?

I’m glad the Post is sticking with this topic as we move, one hopes, out of banking’s dark ages.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.