We usually think of payday lenders, pawn shops, rent-to-own stores and other high-cost loan operations as alternative forms of financing for people who are short of cash. But that's merely a facade: They couldn't operate without billions of dollars in cheap capital from the nation's biggest banks.
Reinvestment Partners, a North Carolina-based non-profit that advocates for the underbanked, put out a report Monday laying out how the system works, and just how much money flows through it -- $5.5 billion, to be precise.
It starts with some history: Back in the 1980s, the Main Street emergency lenders were fairly small and largely independent businesses. But then they started consolidating, looking for access to capital markets in order to deepen their liquidity and finance expansion. Cash America went public in 1987, and others followed; banks took notice and started investing in what was becoming a lucrative, highly replicable franchise. The result is that while pawn shops and payday lenders charge high interest rates to borrowers, banks lend them money at standard business rates.
The big high-cost lenders are up front about their dependence on Wall Street credit. “We depend on loans and cash management services from banks to operate our business," said Kansas-based QC Holdings in a 2012 filing. "If banks decide to stop making loans or providing cash management services to us, it could have a material adverse effect on our business, results of operations and financial condition.”
But the banks themselves don't talk much about it -- even though many of their executives sit on the boards of the companies they keep rolling in cash. The irony is that some customers are driven to the high-cost loan industry precisely because they can't get credit through traditional channels. So the big banks benefit on both ends: They avoid taking on risky borrowers themselves, which preserves their reputations, while indirectly profiting off the exorbitant interest the Main Street lenders charge.
Reinvestment Partners isn't a neutral observer here: They think the high-cost lenders are so malevolent that banks ought to divest entirely, like they might from an abusive dictatorship, an arms trafficker or a child porn operation.
"This is the beginning of a campaign," says research director Adam Rust. "This paper is the kickoff point. Then I go and make specific entreaties to various banks, to find out why you think you're doing this, if you intend to keep doing this."
But high-cost lenders are entirely legal, and banks are disinclined to take their money out of circulation for debatable points of morality. So if that fails, Rust says he'll ask the banks' regulator, the Office of the Comptroller of the Currency to ban the practice of financing high-cost loans. That's a tall order too, given that cutting small lenders off from the capital markets would effectively put them out of business altogether -- which a regulator would think really carefully before doing.