By: Edward Siedle
September 4, 2013
Some of the nation's largest banks, including Wells Fargo and U.S. Bank, continue to offer payday loans despite growing regulatory scrutiny and mounting criticism, according to a report issued earlier this year by the Center for Responsible Lending. Evidently gouging low-income borrowers into long-term debt charging outrageous interest rates of 500%, or more, is too good for big banks to resist.
Regulators have issued numerous warnings about abusive payday loan practices. Last May, the Federal Deposit Insurance Corporation said the agency was "deeply concerned" about payday lending. The Office of the Comptroller of the Currency, which oversees the nation's largest banks, said in June 2011 that the loans raised "operational and credit risks and supervisory concerns." The Consumer Financial Protection Bureau has been examining whether banks violate consumer protection laws in the marketing of these products.
Fifteen states have banned usurious payday lending to protect workers and just last week state authorities took action against certain predatory payday lenders.
Obviously, included in the portfolios of most of the nation's massive state and local public pensions (whether through actively managed accounts or index funds), are stocks of large banks which derive a portion of their earnings from fleecing payday borrowers. It may be unreasonable to expect public pensions to forego investing in major banks, or scrutinize every activity of the major banks in which they invest and object to banking practices they find reprehensible.
However, according to industry sources, in addition to large banks, some of the largest payday loan companies are publicly traded, such as Cash America (CSH), and Dollar Financial (DFC). Some other large lenders include Community Choice Financial and Speedy Cash. Other lenders, according to the industry, are backed by investors large and small, such as hedge funds, private equity companies and family offices. For example, Payday One, was formerly offered by Think Finance, a company which claims to be "privately held and backed by some of Silicon Valley's most respected venture capital firms, including Sequoia Capital and Technology Crossover Ventures."
It's more than likely that public pensions loading-up on hedge funds and private equity are, due to the lack of transparency related to alternative investments, inadvertently financing payday marauders.
Virtually all public funds that invest with alternative managers agree to reduced transparency regarding the investments held in alternative portfolios, including denying public access to such information. I've witnessed alternative managers and investment consultants advise public pensions that ignorance regarding strategies and investments is beneficial, permitting plausible deniability and avoidance of headline risk. You'll never have to admit to things which you purposely do not know.
Among publicly-traded payday lender Cash America's top institutional holders is Earnest Partners LLC, which owned $75 million of the stock at June 30, 2013. (Other major holders of Cash America and Dollar Financial stock with significant public pension clients include Vanguard and BlackRock.) According to its website, Earnest Partners manages approximately $20 billion in assets for clients around the world, including corporate pension plans, state and municipal pension plans.
According to published reports, the firm was recently terminated as a domestic midcap equity manager handling $514 million for the Ohio Police and Fire Pension. (Ironically, earlier this year Ohio's Supreme Court announced it would hear a payday lending case that could close the licensing loophole payday stores use to charge borrowers triple-digit interest. It seems Buckeyes can't decide whether to prohibit, or profit from, payday lending.)
I don't know whether Cash America stock was included in the $514 million portfolio Earnest Partners managed for the Ohio Police and Fire Pension but, given the outrageous returns related to payday lending, as public pensions migrate further into Name