Payday Loan Times

Two of Charlotte’s economic giants, Bank of America and Wachovia, bankroll some payday advance loan lenders - the same lenders whose operations high-ranking officials found so distasteful that they drove them from the state.

These economic ties are no secret - they’re disclosed deep in federal Securities and Exchange Commission filings - but the relationship is unknown to many consumers, some of whom would doubtless be surprised by the industry ties.

“Those are the types of loans that they won’t show in their commercials or glossy advertisements,” says Rick Jurgens, consumer advocate for National Consumer Law Center.

Jurgens first noticed the ties when he was researching some states’ public utilities relationship with the quick payday loan industry. What he found was surprising.

Advance America, the industry heavyweight, got a $265 million line of credit funded by several banks in 2004 - well after public opinion began turning against high-interest, short-term loans. The banks included Wachovia, Wells Fargo, BB&T and Carolina First Bank. Another lender and administrative agent? Bank of America.

As recently as March, according to SEC documents, the company still had access to the cash.

“Payday lenders are often not highly capitalized companies,” Jurgens says. “That’s why they use lines of credit, which is essentially like a credit card with a relatively low interest rate, to do day-to-day lending.”

Inner City Press, a New York advocacy group, found Wachovia has “an unspecified portfolio of [bad credit cash loan] lending clients,” according to the organization’s Web site. The group is also opposing Bank of America’s application to acquire LaSalle Bank, due in part to its ties to payday firms.

Wachovia spokeswoman Iris Cumberbatch would only say the bank has “a very limited number of relationships” with payday lenders. “Beyond that, I can’t say anything specific because it would violate our privacy policy,” Cumberbatch says.

Bank of America representatives didn’t return calls seeking comment.

Payday lenders haven’t operated in North Carolina since 2005, when state Commissioner of Banks Joseph Smith ruled the practices of Advance America were illegal. The state had prohibited payday lending since 2001, when a law authorizing the practice expired.

But in practice, lenders flourished by making loans through out-of-state banks, a practice often derisively termed the “rent-a-bank” model. In 2005, for instance, no fax payday loans cost N.C. residents more than $74 million, according to the Center for Responsible Lending, an industry opponent based in Durham.

“The fact that those guys are gone is a wonderful thing,” says Bruce Hamlett, service director of the economic independence program of United Family Services. “Those loans were obscene.”

Here’s how the cash advances worked here, and still work in other states: You take in a pay stub and proof that you have a checking account. You write a postdated check and in 15 minutes you come out with up to $500. It’s supposed to be paid off within a specific time frame, such as two weeks.

If you can’t pay it back by then - as industry and consumer groups’ studies show is often the case - you renew the loan and pay the interest fee again. A $100 two-week loan with a $15 fee winds up with an annual interest rate of 391 percent.

“It’s suicidal financial management,” says Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

The pay day loan industry argues it’s simply providing short-term necessary cash to people who have little hope of getting a loan through traditional banking channels. But consumer groups charge the industry traps the vulnerable and broke in a spiraling cycle of debt and, in the process, reaps profits that would shame a loan shark.

The Center for Responsible Lending found that nearly 90 percent of the industry’s revenues come from fees “stripped from trapped borrowers.” According to a November report from the center, the typical payday borrower pays back $793 from a $325 loan.

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