Big banks help payday lenders offer quick cash at steep prices

SF Public Press
 — Dec 15 2011 - 6:17pm

BUSINESS: Wells Fargo, Credit Suisse among biggest backers of profitable low-finance firms

Even as the Occupy San Francisco encampment at the base of Market Street expressed outrage at big banks and high finance, it remained business as usual at some of the city’s less glamorous financial establishments.

High-interest, unsecured “payday” loans are readily available at 32 establishments along Market Street and in low-income communities around the city. Most people with bank accounts qualify.

These stark storefronts — where hard-pressed consumers line up to speak with clerks behind Plexiglas windows and apply for high-cost payday loans — may seem unconnected to Wall Street.

But while their names and brands are nowhere to be seen, banks and rich investors based here or in distant financial enclaves like Manhattan or Zurich provide funds to or own stakes in some of San Francisco’s largest payday lenders. These include Money Mart, with eight stores, and California Check Cashing Co., with five.

In March, Wells Fargo & Co., the largest bank based in San Francisco, acted as the administrative agent of a bank syndicate that provided DFC Global Corp., the owner of Money Mart, with a $200 million revolving credit, according to SEC filings. Essentially a giant credit card with a March 2015 expiration date, this deal provided DFC with money to lend and pay expenses, and a war chest to fund possible acquisitions of other companies.

Most of San Francisco’s 32 licensed payday loan stores are located in busy commercial areas, such as along Market and Mission streets, exposing passers-by to offers of fast cash at high prices. SOURCE: California Corporation Department’s database of licensed payday loan stores, summer 2011. Mapping by Hyemi Choi. 

 

ADDED SCRUTINY

Gabriel Boehmer, a Wells Fargo spokesman, said the bank would not share details about the loan. “Because of the customer relationship with Money Mart, I can’t comment on that at all,” he said.

DFC spokeswoman Julie Prozeller also declined to comment on the terms of the loan.

Boehmer said Wells Fargo does “provide credit to a variety of responsible financial services industry companies,” including some payday lenders.

The bank is “really selective” in such lending, and its “total commitments to these customers represent a small percentage of Wells Fargo’s commercial lending portfolio,” Boehmer said. “Our philosophy is that every responsible business that complies with the law has equal access to consideration for credit at Wells Fargo.”

Boehmer stressed that payday lenders and check cashers that seek loans from Wells Fargo receive “an additional level of scrutiny,” including on-site visits to review their compliance with laws and regulations and their credit health. The due diligence occurs, he said, “because these companies are so highly regulated.”

BIG MARGIN

A look at the terms of the revolving credit Wells Fargo provides to DFC, a Berwyn, Pennsylvania-based company that investors recently valued at about $850 million, shows why the payday lending business can be so profitable. DFC’s credit line, which can be raised to $250 million, carries an adjustable interest rate set 4 percent above the London Interbank Offered Rate. In the current market, that means DFC pays about 5 percent interest to borrow some of the money it then lends to customers at nearly 400 percent.

Wells Fargo, in addition to being a lender, has at least a small stake in DFC’s high-margin lending operation. A proxy statement filed by DFC before its 2010 shareholder meeting disclosed that Wells Fargo and its affiliates held 2.7 million (about 11 percent) of the shares outstanding. A filing in August by Wells Fargo showed it had cut its ownership stake in DFC to 1.1 million shares. While that stake was recently worth about $21 million, it constitutes only a tiny sliver of the $147 billion portfolio controlled by the bank and its affiliates. Wells Fargo was not represented on DFC’s board and was no longer one of its largest shareholders, according to DFC’s 2011 proxy statement.

Boehmer said he had no comment on Wells Fargo’s ownership interest in DFC.

OTHER BANKS

Another large bank has provided key financial backing to San Francisco’s largest payday lender. Credit Suisse, an investment bank based in Zurich, acted as the lead underwriter for a public offering of shares in DFC. The payday lender raised $117.7 million in that transaction, according to securities filings. Credit Suisse pocketed $6.8 million.

Credit Suisse is also the lead underwriter of a pending initial public offering of shares in Community Choice Financial Inc. The company was created in April, when Ohio payday lender CheckSmart merged with California Check Cashing Stores, which has five storefronts in San Francisco and 141 statewide.

Credit Suisse also led a group of banks that provided a $40 million line of credit to Community Choice, which will operate a chain of 433 payday loan stores that collectively posted revenue of $310 million in 2010. Community Choice hopes to raise $230 million from its initial public offering, Dow Jones Newswires reported in August.

Golden Gate Capital, a San Francisco investment management company with an office on the 39th floor of the Embarcadero Center, received a $16.7 million dividend from the April merger and will remain a major shareholder in Community Choice, according to a preliminary prospectus filed with securities regulators.Representatives of Community Choice, Credit Suisse and Golden Gate Capital did not respond to requests for comments.

 This article appeared in Issue No. 5 of the San Francisco Public Press (Winter 2011), a broadsheet, full-color local newspaper, will soon be available for just $1 at more than 50 retail outlets and through online mail order ($4).

Comments

"There's class warfare, all right, Mr. (Warren) Buffett said, but it's my class, the rich class, that's making war, and we're winning."

"There has been class warfare going on," Buffett, 81, said in a Sept. 30 interview with Charlie Rose on PBS. It's just that my class is winning. And my class isn't just winning, I mean we're killing them."

 All that has to happen to reduce the scope of payday lending is to require banks to make $200 loans to their depositors -- as required by the Community Reinvestment Act.  However, banks have shown themselves unwilling to do this -- and regulators have shown themselves unwilling to enforce the CRA mandate requiring banks to serve he credit needs of depositors.  In such an environment, payday advances are the only source of emergency credit available to low- and moderate-icome consumers.  Without other alternatives, payday advances are not 'high-cost' they are 'market-rate.'

 not suprised a rat trap is baited by Wells Fargo. These shops are great for getting your green dryed and press. They don't want the loans paid off. They want the interest and so the poor go spiraling down and if you think they send letters demanding payment your would be so very wrong.

 anonymous - I have no problem with the concept of a payday loan. let's have that out at the front. people get in trouble, have emergencies, kid breaks a leg, car needs a new transmission. sh*t happens. the problem comes when people get trapped in a cycle where they need to get a payday loan every month just to stay afloat - they need a loan to pay off the last loan on time, which means they pay even more interest, which means they need another loan, and the company rakes in the profits on all of them until they can break the cycle. some people can't break it without defaulting. that's why I have a problem with most of the payday loan operators - they prey on the weak and poor, those who are powerless to get out of that kind of situation. it's not a problem for most people, but for the small percentage who are stuck in a usurious payday loan loop, it can destroy their livelihood.

so wats your point? MSBs are very profitable to bank. Its good to know that we can all capatalize on the unbanked and those in need for cash desperately. There isnt anyting wrong with profiting off of poverty. Its sort of like getting blood out of a turnip, creativity

It's not too hard to fix.  Simply make usury illegal again as it always was before the mid 1980s when a legal loophole was instituted.    

 All the anti-payday loan articles and arguements hold exactly 0 water, and I have heard lots.Lets start with these are free, at will, and designed for adults.  This means people have options, borrow from friends family, employer, payday loan, prostitution, robbery, drug sales, etc.  Why take away a legal option?Next, rates are set by the market and market only.  The rates are high because of two things:  1.  People default  2.  There is no way to foce someone to pay back the loan - you can sue them, take their car, or garnish wages. I recently paid a parking ticket late in Oakland.  The ticket was for 66 dollars.  after I relaized I forgot to pay the next leg up was 119.  Care to calculate the APR on that mistake?  Guess what, IT IS FAR WORSE THAN A PAYDAY LOAN!  Basdically every fee under the sun is more as an APR.Until I hear a single anti-payday loan that makes any sense, this is total liberal hogwash and I am liberal myself.

 Prostitution, drug sales, and robbery are illegal because they have been deemed immoral and unsafe. The first of those two also involve consenting adults a great deal of the time. Usury also used to be illegal. Why was it ever added to the list of "legal options?"

 Mean to type *cannot* sue, garnish wages, take car, etc.This whole arguement is specious at best.  Why not go after actual issues that are not free will, totally optional services, like bounced check fees, credit report damage from late payments, bounced check fees, late parking ticket fees, etc.  The this makes me feel good crowd that fights payday lending have good intentions, but have given the issue what amounts to net negative thought cycles...what a waste of energy.