by Christopher Scholl
You’d think a crackdown on so-called “payday” lenders in 22 states over the last eight years would have put a lot of these usurers out of business. But the multi-billion dollar industry has found new ways, and new places, to thrive. Today, many of these firms, charging cash-strapped customers interest rates as high as 700 percent, can be found operating just out of reach of state and federal regulators—on Native American tribal lands or overseas in the United Kingdom and elsewhere.
As WhoWhatWhy has discovered, big name Wall Street and Silicon Valley investors are backing these businesses as they seek high profits by lending money to people who lack the financial savvy to understand the hole they are putting themselves in.
Payday lenders have always been a clever bunch. In the 1990s, the companies successfully persuaded state lawmakers around the country to allow “carve-outs” for huge interest rates. In other words, they got their triple-digit interest rates explicitly written into state laws. Business boomed—at least until 2006.
That year, the U.S. Department of Defense published an alarming study showing that many service members had become trapped in endless cycles of payday loan debt. Congress stepped in and passed a law capping interest rates to members of the military at 36 percent. Still a high figure, to be sure, but much lower than the payday loan industry’s average of 300 percent.
That Congressional intervention marked a turning point. States around the country followed suit. “Since 2005, no state has legalized payday loans to come into its borders, and a number of states that used to allow it, now do not,” says Diane Standaert of the Center for Responsible Lending, which tracks the industry. “The trend since 2005 has been to crack down on the payday loan debt trap most effectively through the implementation of a cap on interest rates.”
As state regulators and legislators have cracked down, some of the biggest payday lenders—such as CashAmerica, Speedy Cash and First Cash Financial—have definitely felt the squeeze. They’ve closed some of their storefronts, and loan volume is down industry-wide. But like the old carnival game of Whack-A-Mole, the same lenders are popping up elsewhere.
The Bureau of Investigative Journalism in the U.K has reported extensively on how American payday lenders are now serving up the same dubious deals…to British citizens. As Tom Warren of the Bureau reported, “Controversial payday loans companies, some charging interest rates as high as 7,000%, have experienced phenomenal growth since the start of the recession.”
You can imagine the money involved. The publicly traded CashAmerica of Fort Worth, Texas, reported in its most recent public filings that nearly half its revenue—48.9 percent—came from consumer loans. In dollar terms, that’s well above the 700-million mark for last year alone. In the U.K., the company offers loans under such names as “QuickQuid” and “Pounds to Pocket” at triple-digit interest rates. CashAmerica also offers loans in Australia and Canada under the name “DollarsDirect”.
But the migration of these payday lending operations overseas doesn’t mean that the industry has given up on the American market. Far from it. Think Finance, another Texas-based firm operating in the U.K., is among the companies that have found a new way to profit, right here at home. The company has been so successful in its new approach that Forbes ranked it second among “America’s Most Promising Companies” in 2013. Because it’s privately owned (more on that below) it’s impossible to know exact revenue figures, but Think Finance’s website touts its Forbes ranking, saying, “$200 million of revenue or more. And we’re just getting started.”
A few years ago, when Think Finance went by the name “ThinkCash,” the firm boasted that its loans were “25 to 75% lower” than traditional payday loans. Hardly a bargain, that, considering that its advertised rate at the time was 324.1% APR.
Tribal “Front” Companies?
If frontier-mentality Americans foisting themselves on the poor back in the “old country” isn’t enough, now they’re pressing the natives of the new land into the shady scheme as well.
Read the rest of the story at WhoWhatWhy.com. How Silicon Valley and Wall Street investors are involved...