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Connecting the Dots: How Wall Street Brings Fringe Lending to Main Street

Adam R.'s picture

Posted December 16, 2013

I'm releasing a new report today which traces lending by nation’s largest banks to a variety of the companies that are regularly detailed on Bank Talk.

This is an excerpt from the release for the report.

  • The report, a one-page fact sheet, a set of quotes from the recipients of the debt, and two maps tracing loans made by Bank of America and Wells Fargo are available here.
  • My editorial in today's American Banker is here.

Please consider signing on to send a letter about this to the Office of the Comptroller of the Currency. The sign-on form (very brief) is here.

“Connecting the Dots: How Wall Street Brings Fringe Lending to Main Street,” released by the Durham, North Carolina-based non-profit consumer advocacy group Reinvestment Partners. With this evidence, Reinvestment Partners calls for banks that fund high-cost lending to exit the business. We believe it deserves increased regulatory scrutiny of the reputational risk associated with these controversial business relationships.

“This report draws a clear line between regulated financial institutions that hold millions of Americans’ deposits and the fringe lenders that routinely threaten their bank accounts, ,” says Adam Rust, the author of the report. “Offering bank loans to high-cost consumer credit companies at an average rate of 6 percent and advancing those funds to working Americans at 500 percent is not appropriate.”

The report is based on a comprehensive review of public records filed to the Securities and Exchange Commission. The report identifies $5.5 billion in lines of credit and term loans issued by the banks. 

The filings showed major banks are making loans to virtually every one of the country’s largest payday and car title lenders, rent-to-own companies, buy-here pay-here car lenders, tax refund check providers, and pawn brokers. The paper documents loans to Cash America, EZ Corp, World Acceptance, First Cash Financial, Jackson Hewitt and Community Choice Financial, among others.

Nine of the ten banks making the most loans are national banks regulated by the Office of the Comptroller of the Currency, which periodically reviews the exposure held by their member institutions to products and practices that expose them to undue legal and reputational risk. 

Some might decry the idea of divestiture on the grounds that business and morality should not mix. But bank executives err when they ignore any risk to their brand. In this case, business and morality do intersect.

“The total lending represents an insignificant portfolio of business for banks, it has an outsized and dangerous effect in Main Street America,” said Peter Skillern, Executive Director of Reinvestment Partners.  “Bank executives and banking regulators alike should see this practice for what it is – a practice that poses significant reputational risk.”

Other findings:

  • Many current or former executives of large banks now serve on the Boards of many of these high-cost consumer finance companies.
  • A slight majority of all capital utilized by the high-cost lenders is sourced from corporate debt.
  • The four banks with the greatest level of participation in this sector are Wells Fargo, Bank of America, JP Morgan Chase and Capital One.
  • High-cost lenders make it clear to their investors that they rely upon the availability of financing from large banks in order to do business. Some comments made to investors in regard to this risk mention that a loss of access to financing "could adversely affect our operations," "would have a materially adverse effect on the Company," and "adversely affect our ability to achieve our planned growth and operating results."

We call for the OCC to force their institutions to divest from these businesses.

The twitter hashtag: #StopLendingToPayday