Illinois Governor Pat Quinn signed a new law that gives payday lenders the legal room to ply their trade in the state.

The new law caps the cost of making short term loans. Going forward, payday lenders can only charge $15.50 for every $100 payday loan.There is also a cap for “installment loans,” which are distinguished from payday loans by their relatively longer terms. Those loans cannot have an interest rate above 99 percent, and there is a lower cap for larger loan amounts.

That is just the kind of law that payday lenders are sure to love. It gives them cover to define their lending as legal, and they can still make short-term loans that bear an annualized interest rate of 404 percent!

PayDay Pundit, a blog produced by the Consumer Financial Services Association, is spreading the news.

The Chicago pols are going to great lengths to put lipstick on this pig. “So it’s important,” says Quinn, “to those who offer credit to follow some basic rules in the market place that protect consumers from being gouged.” Lisa Madigan says that consumers should use “extreme caution” with this kind of credit.

Bank of America’s decision to transition away from free checking means that even more Americans will opt out of a relationship with a mainstream bank. Most likely, those consumers will join the 80 million Americans that meet one of the definitions of “unbanked.”

Bank of America plans to introduce new accounts that include a monthly service fee.  Unless a customer is profitable, meaning that they keep a large checking balance or that they use other B of A Products, they are going to face the prospect of paying $10 a month just to have the ability to write checks.

Banks have put some effort into courting the unbanked, but their efforts have not been paying off. The Bank On initiative started off well in California, but it has never become a nationwide success. In North Carolina, bankers killed the Bank On program.  Community groups, whose buy-in is necessary in order to drive unbanked households into the program, refused to agree to tell their clients to use the Bank On product unless it was free of overdrafts. The banks didn’t budge. They weren’t willing to even offer one overdraft refund per year.

Regulatory reform has brought some change to those positions. Bank of America’s response is to punt. They’re not the (more…)

Green Dot is a closely held company with a set of principal shareholders that have contacts throughout the narrow universe of the prepaid debit card market. Green Dot has filed an application to buy Bonneville Bank, a small one-branch state-chartered bank in Utah. The Federal Reserve is currently reviewing that application. There has been some discussion about the role of Wal-Mart in this transaction. Will this allow Wal-Mart to effectively own a bank? That is a valid question, but I believe that there is another pressing issue that needs to be resolved.

I think that this transaction could give new vitality to the payday lending industry. By giving the owners of Green Dot the rights to an unsullied bank charter, the Fed could empower high-cost subprime lenders to dramatically increase the scope of their business. This transaction involves a small dollar bank, but it carries the potential to impact millions of households.

The unbanked and underbanked market is vast. Some estimates put the size of this group at as large as 110 million, depending upon how it is defined. Many of these households are unbanked because they haven’t honored their commitments. However, others are underbanked simply because they don’t have a substantial credit history. Thin file and no-file consumers have a hard time getting a bank account, let alone a credit card, even though they have never defaulted on a loan. It is unfortunate that (more…)

In its application to the FRB of SF, Green Dot says that its business plan for its acquisition of Bonneville Bank does not include any intent of offering credit to consumers that use its debit cards.  I hope that this is true. High-cost credit lines are the biggest problem with the cards at MetaBank. When combined with direct deposit, these credit lines provide the financial structure for a new iteration of payday lending.

I know what Green Dot says. At the same time, I don’t have peace about it. One of the things that worries me is the membership of their Board of Directors.

Michael Moritz, a Managing Member of Sequoia Capital, purchased more than 1.1 million shares of Green Dot in December 2008.  Sequoia makes early stage investments in companies, include firms in financial services. Mr. Moritz is one of the members focused on that sector. Sequoia itself has positions in Green Dot.  It also has a position in Think Cash. Think Cash provides short-term loans over the internet.  According to Think Cash, interest on those loans ranges from 87 percent to 334 percent. ThinkCash operates three firms, including Pay Day One.  Think Cash also operates Elastic, provider of emergency loans. Elastic’s loans are funded through a relationship with Urban Trust Bank.  Frank Hannah is a principal in Urban Trust Bank, along with Robert Johnson of the BET Network.  Urban Trust is also one of the financial institutions that serves the Rush Card.

I do not expect that any of the above individuals will dispute the connections that I have pointed out, and I would also doubt that they would have any qualms about the nature of this kind of consumer credit. Make no mistake about it, these people are very good at what they do. They have done it before, and I don’t see why they wouldn’t continue with their passion. These people are truly excellent at payday lending, buy here pay here lending, and other forms of high cost consumer credit. Our society has room for all kinds of excellence – Excellence in Education, Excellence in Broadcasting, even Excellence in Payday Lending.

Though they are excellent, these are not the guys that I want in the room with Wal-Mart. Wal-Mart could transform how the unbanked approach the payments system. So, if Wal-Mart is hanging out with these guys, it bears watching. If you are concerned about the finances of low income people, then this ought to get your attention.

It only takes a few banks to make an exotic form of credit take wings across the country. Four or five banks have funded refund anticipation loan lending for years. Payday lending was largely funded by just a few banks, too.  Maybe Green Dot has no interest in offering high cost short term credit through its prepaid cards. Maybe. Of course, I’m a bit skeptical. My message to the Federal Reserve would be simple: trust, but verify.

The Green Dot story is big news today. The New York Times discusses it in Andrew Ross Sorkin’s blog, Deal Book. The American Banker has its own article. The news even got picked up in London by The Financial Times.

Regional Gulf Coast banks, particularly those operating as portfolio lenders, are already suffering.Yet while most of the press on the environmental damage has focused on Louisiana, the real damage for banking is likely to be located among community banks in Florida.

Barron’s recently identified three “top” Gulf Coast banks: MidSouth Bancorp, Iberia Bank, and Teche Holding. Those would not be the only institutions at risk. Regions has always been an active partner with real estate developers in Alabama, Georgia, and Florida. BB&T had a big presence in Florida. This year, it added to that when it acquired the assets Colonial Bank. Synovus owns scores of small town banks throughout the area. (more…)