Buffett, Big Banks Have a Dirty Little Secret

Payday loans are still being offered to the most vulnerable

   
Buffett, Big Banks Have a Dirty Little Secret

Over two decades ago, billionaire Warren Buffett took a pass on investing in tobacco companies.

During the 1988 takeover battle for RJR Nabisco, Salomon Brothers CEO John Gutfreund asked Buffett whether the company should make a bid for the tobacco name. Buffett’s response: Go for it. He liked the cost structure of the business.

When Gutfreund asked if Buffett wanted to join the bid, though, things went a bit differently. “I’m wealthy enough where I don’t need to own a tobacco company and deal with the consequences of public ownership,” the brains behind Berkshire Hathaway (NYSE:BRK.A, BRK.B) responded.

A decade later, Buffett went even further. At Berkshire’s annual meeting, he said that tobacco was “fraught with questions that relate to societal attitudes and those of the present administration” and that he “would not like to have a significant percentage of [his] net worth invested in tobacco businesses.”

But while Buffett won’t invest in cigarette companies because they’re socially unacceptable, he is more than willing to get in bed with other companies that screw everyday Americans: big banks.

Predatory Lending

See, two of Warren Buffett’s favorite names are Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) … and both continue to engage in the insidious practice of payday lending.

A recent report by Center for Responsible Lending (CRL) named the two companies in an attack on six banks that still give out such high-interest loans. For those who aren’t familiar with the process, here are some details from the report:

  • Banks process payday loans exactly the same way as payday lenders like Money Mart. They deposit the loan into the customer’s account and then withdraw that amount — plus a big fee — upon the customer’s next deposit.
  • Often customers cannot fully repay the short-term loan and are forced to take out additional loans, creating an extremely long-term cycle of high-cost debt.
  • Bank payday loans cost anywhere from $7.50 to $10 per $100 borrowed and have an average term of 12 days with an annual percentage rate ranging from 225% to 300%.
  • Banks claim the loans are to cover unexpected shortfalls in cash. However, the median borrower took out 13.5 loans in 2011 (most recent data available) and was in debt for almost half the year.
  • Bank payday borrowers are twice as likely to incur overdraft fees.
  • Social security recipients represent over one-quarter of bank payday borrowers.

I know, I know … a big bank wanting to make money off its customers? How unusual.

But basically, payday lending preys on the poor.

That’s hardly a new revelation either, but given all that’s taken place in the banking industry since 2008, you would think that banks as large as Wells Fargo and U.S. Bancorp would know better than to keep offering these products as if they’re harmless to the people they serve.

Military Manipulation

For just one case study on how harmful such lending can be, consider this: Some of the worst examples payday lending abuse are against U.S. service members.

As a result, the federal government passed the Military Lending Act into law in 2007 — an act meant to protect military borrowers from triple-digit loan rates that were threatening security clearances and so on. The MLA capped the rate of annual interest at 36% — itself pretty harsh — but not quite the 225% common among payday lenders.

Unfortunately, the act left a huge opening for the banks when it banned “closed-end” payday loans only, which are defined as a single advance over a fixed term. It didn’t cover “open-end” loans, which are defined as the repeat use of credit with no fixed term. That meant banks could offer overdraft loans and direct deposit advances all they wanted.

Just last May, the Consumer Federation of America (CFA) finally revisited the issue — five years after the act was passed. In its report, the CFA suggests a $400, 10-day direct deposit advance loan carries an annual percentage rate of 274%. One day late and borrowers are hit with a $35 fee which takes the APR up to 283%.

As it stands now, Wells Fargo is able to make direct deposit advance loans at branches on bases in Utah, New Mexico, North Dakota and Texas.

That’s insane.

Time for a Change

In the past, Buffett has demonstrated that his conscience can play a role in his investments … but this dirty little secret from the banks sure doesn’t seem to matter. In just under a month, Berkshire Hathaway holds its annual meeting in Omaha. One can only hope that Mr. Buffett takes a stand that day just as he did 19 years earlier … but something tells me he won’t.

Still, something must be done , probably from Congress, so that all Americans face a cap of 36% — not just the military, and not just with certain funds. 

We need to stamp out the big banks’ dirty little secret.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/04/buffet-big-banks-have-a-dirty-little-secret/.

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